Pushing a "Pull Model"
Are you ready to give away your software and fire your sales organization? It might be time to flip the current "broken" enterprise software model from a sales-oriented push to a customer-oriented pull.
By Erik Keller, Wapiti LLC
Apr. 06, 2006
"Why do software companies need a sales force?" complained Hasso Plattner, then CEO (currently the supervisory board chairman) of SAP in the early spring of 1998. "If customers just looked things up on the Web and talked to some of our people over the phone, they would figure out that we had what they needed and that would be that."
While this statement by Plattner is open to all sorts of interpretation, it may be the most succinct and directionally accurate statement of how the software industry needs to change in the coming years.
There is a huge consensus that the enterprise-software industry business model is broken; there is no consensus, however, on how it should be fixed. Common wisdom states that all software will be consolidated around a few mega players such as IBM, Microsoft, Oracle and SAP. But these mega players hardly represent the diversity of functional solutions, vertical and niche markets, innovation and business processes that are fulfilled by a growing base of companies. Yet most of these smaller companies struggle in today's market.
Given this harsh reality, it is likely then that simple tweaks will not fix today's business model problems and that a radical restructuring is required. And that radical restructuring may involve changing the metrics of corporate success so that rather than pushing products out to the market companies rethink their strategies and pull customers in.
Why is the model broken?
There are many reasons ascribed to why the model is broken: the emergence of open source, offshoring, build vs. buy, heightened competition, etc. Regardless of your favorite reason, upon examining the financial results of what I am called the "Enterprise 11" as well as that of SAP and Oracle, the systemic challenges facing both large and small software vendors are significant.
(The Enterprise 11 companies are Aspen Technology, BEA, IBS, Indus, Hyperion, Manhattan Associates, PTC, QAD, Software AG, SSA and Vignette. The choice of this market bread basket was fairly random with the desire to have the group be a representative sample both in revenue spread, profitability and target markets.)
Some interesting comparisons emerge between these players:
These comparisons lead to the following conclusion:
When a value-oriented buyer's point of view is taken, the core of this inefficiency becomes obvious. From an income-statement perspective, the cost of delivering a product and service as well as R&D are customer value-adds: buyers get something direct and of value from these costs. On the other hand, sales and marketing as well as general & administrative expenses are seen as valueless to the buyer. They represent the overhead that a vendor needs to engage the market.
Enterprise software providers have conditioned sellers that they will lavish limitless time and attention on them for any type of deal regardless of buyer budgetary outlook and size. Though buyers may not realize it, they are paying for this inefficiency via bloated overhead costs. Unfortunately, for software sellers this behavior (and overhead) cannot be changed without a massive business reorientation.
Most overhead expenses are more associated with the selling of a software license then the deployment of services to install software as well as continuing maintenance payments. Thus when you look at the income statement of software vendors from this perspective, a key measure of corporate efficiency and productivity is the ratio of overhead (S&M plus G&A) to software license sales.
Enterprise software overhead-to license ratios
Because of the rapidly growing software market in the 1990s, S&M spending was typically between 30 and 40 percent of overall sales and dominated the growth agendas of companies. Typically over two thirds of total revenue were new software license sales. Market slowdowns and saturation has flipped this model so that only one third of total revenue is from software licenses. Unfortunately, few companies have flipped their overhead model to accommodate for this change in revenue mix.
The common wisdom concerning large companies is that they cannot act quickly and are inefficient due to their size and mass. While such a statement may be true in pursuit of new markets, the opposite is true when it comes to corporate efficiencies. The fact that on average smaller software companies spend nearly two-thirds more in overhead for every software license dollar than their larger brethren puts them in a race that will be difficult to win as a publicly traded company.
While this statement by Plattner is open to all sorts of interpretation, it may be the most succinct and directionally accurate statement of how the software industry needs to change in the coming years.
There is a huge consensus that the enterprise-software industry business model is broken; there is no consensus, however, on how it should be fixed. Common wisdom states that all software will be consolidated around a few mega players such as IBM, Microsoft, Oracle and SAP. But these mega players hardly represent the diversity of functional solutions, vertical and niche markets, innovation and business processes that are fulfilled by a growing base of companies. Yet most of these smaller companies struggle in today's market.
Given this harsh reality, it is likely then that simple tweaks will not fix today's business model problems and that a radical restructuring is required. And that radical restructuring may involve changing the metrics of corporate success so that rather than pushing products out to the market companies rethink their strategies and pull customers in.
Why is the model broken?
There are many reasons ascribed to why the model is broken: the emergence of open source, offshoring, build vs. buy, heightened competition, etc. Regardless of your favorite reason, upon examining the financial results of what I am called the "Enterprise 11" as well as that of SAP and Oracle, the systemic challenges facing both large and small software vendors are significant.
(The Enterprise 11 companies are Aspen Technology, BEA, IBS, Indus, Hyperion, Manhattan Associates, PTC, QAD, Software AG, SSA and Vignette. The choice of this market bread basket was fairly random with the desire to have the group be a representative sample both in revenue spread, profitability and target markets.)
Some interesting comparisons emerge between these players:
- The Enterprise 11 has greater G&A spending than either Oracle or SAP yet generates a half or less revenue than either.
- The Enterprise 11 spends much more on S&M as a percentage of total revenue than do either SAP or Oracle.
- The G&A spending of the Enterprise 11 nearly equals their corporate profits.
- As a group, the Enterprise 11 and SAP/Oracle all derive approximately a third of their total revenue from software licenses.
- SAP and Oracle are much more alike than either would like to admit
These comparisons lead to the following conclusion:
- The Enterprise 11 is significantly more inefficient than either SAP or Oracle thus facilitating consolidation as well as the emergence of new business models.
When a value-oriented buyer's point of view is taken, the core of this inefficiency becomes obvious. From an income-statement perspective, the cost of delivering a product and service as well as R&D are customer value-adds: buyers get something direct and of value from these costs. On the other hand, sales and marketing as well as general & administrative expenses are seen as valueless to the buyer. They represent the overhead that a vendor needs to engage the market.
Enterprise software providers have conditioned sellers that they will lavish limitless time and attention on them for any type of deal regardless of buyer budgetary outlook and size. Though buyers may not realize it, they are paying for this inefficiency via bloated overhead costs. Unfortunately, for software sellers this behavior (and overhead) cannot be changed without a massive business reorientation.
Most overhead expenses are more associated with the selling of a software license then the deployment of services to install software as well as continuing maintenance payments. Thus when you look at the income statement of software vendors from this perspective, a key measure of corporate efficiency and productivity is the ratio of overhead (S&M plus G&A) to software license sales.
Enterprise software overhead-to license ratios
Because of the rapidly growing software market in the 1990s, S&M spending was typically between 30 and 40 percent of overall sales and dominated the growth agendas of companies. Typically over two thirds of total revenue were new software license sales. Market slowdowns and saturation has flipped this model so that only one third of total revenue is from software licenses. Unfortunately, few companies have flipped their overhead model to accommodate for this change in revenue mix.
The common wisdom concerning large companies is that they cannot act quickly and are inefficient due to their size and mass. While such a statement may be true in pursuit of new markets, the opposite is true when it comes to corporate efficiencies. The fact that on average smaller software companies spend nearly two-thirds more in overhead for every software license dollar than their larger brethren puts them in a race that will be difficult to win as a publicly traded company.
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