It goes without saying that this inefficiency makes it hard for smaller companies to be more profitable than their larger competitors. For example, the overhead of the Enterprise 11 is a mere 18 percent less than that of SAP yet SAP's profits are nearly five times as much. This implies that to succeed in the future small software companies must throw out the old play book and start with a new one.

What about software as a service?
Software as a service (SaaS) is one of the new business models being thrown about. On both a licensing and deployment side it flips the risk equation. Old school is to extract a lot of money from the client and then deliver value after large up-front expenditures are made by the customer. New school via SaaS puts the seller in the initial hot seat as payments are not made until service (and value is delivered).

What this arrangement also does is to create greater long-term control and revenue management for sellers than does the classic software licensing model. Users must continue to pay buyers as long as the software is used for SaaS. Older models eliminate that requirement. SaaS companies have much more longer-term control over their customers as it is harder to swap out an enterprise SaaS provider than a licensed-based one (e.g. licensed customers can stop paying maintenance and transition to a new platform over years; SaaS contracts make such swaps much more difficult.)

This issue has started to hit the larger sellers (Oracle to a greater degree than SAP) with the emergence of third-party support companies who are skimming the maintenance cream (and corporate margins) by supporting buyers not wanting future upgrades. (A recent white paper I authored on behalf of TomorrowNow discusses these points.)

While this is a different delivery model, it has not totally changed the dynamics of enterprise software selling. Salesforce.com and RightNow Technologies, two of the most well-received companies with a SaaS delivery and revenue model, both spend nearly 50 percent of their total revenue on software sales and marketing. Thus some of the old-software model company ills are well-represented for certain new companies that embrace a different business model. It is also far from clear how far and deep SaaS can be extended into buyer organizations.

What about co-ops?
One intriguing model that has been proposed is the co-op model where much of the overhead of smaller players is collapsed and aggregated under a single umbrella. This is a different version of the consolidation play that Oracle, SSA and others are taking (who often do an excellent job in eliminating unnecessary overhead.) Instead of pure consolidation, synergistic companies that are focused in a certain functional or vertical area have been aggregated via a venture capitalist (Golden Gate Capital and Symphony Technologies are two good examples of this) who then better manages the entities and leverages their strengths. The companies are run as separate, though cooperating, entities.

Another version of this are the low-end VAR channels that are fueled by the likes of Microsoft, Novell, Progress, IBM, etc. These channels act as the low-cost mechanism by which larger companies sell their products. These channels, however, have not been effective distribution mechanisms to large buyers. While there has been proposals and speculation, there are no dominant VARs that sell a broad range of products and services to the high-end market. Salesforce.com's AppExchange and Unlimited Edition offerings is the latest attempt at a high-end aggregated offering.

What about a pull-based model?
All of these aforementioned models are predicated on the concept of push-based selling e.g. companies are approached and sold a variety of products and services. As SAP's Plattner alluded to, however, there may be a different way to sell to the market. Rather than pushing products out to the market, a new generation of companies is beginning to pull customers in via a combination of open source or "free" basic products that can be downloaded over the web as well as "for-charge" enhanced products and support.

The benefits of such a pull model is that the need to have expensive direct sales forces are minimized and are replaced by a more targeted (and economical) sales-support organization, click-based marketing, site downloads, Google hits, webinars, etc. For example, JasperSoft, a company that sells an open-source based reporting tool, has had over 1 million downloads of its software and over 10,000 corporations at this point are using the software.

JasperSoft does not use a typical direct-sales model, rather it is able to get over 300 qualified prospects per month via companies that have initially downloaded its software, find it to their liking and then seek training and service support. Other companies that are following this approach include Alfresco, an open source content management solution; Compiere, an open-source ERP company; and SugarCRM, an open-source CRM company.

All of these companies do not sell their base software but rather services and enhancements the supplement their offering. Their spending on sales and marketing is oriented in having prospects and customers approach them rather than the other way around.

Now this approach may be seen as foolhardy by those who believe that products are always sold rather than just bought. This assertion, however, must be reexamined in the light of rampant license-fee discounting as well as the fact that then Enterprise 11 spends over 90 percent of its license fee revenue on sales and marketing expenses. The reality in enterprise software is while most companies do not give away their software, they might as well, given the cost of sales as well as market conditions.

So what should you do?
If you don't believe that a radical change in enterprise-software selling is in the wind, then just sit pat and ride out the storm. Make slight adjustments to your overhead model and make your sales force much more efficient (and more than likely much more consultative). Continue to exploit the web and automation technologies to manage your channels.

However, if you are in a different camp and believe that change is in the air, consider these three measures:

• Review your overhead to license sales ratio. Enterprise software companies need to show more value and efficiency not only to their customers but to their shareholders. This ratio needs to decrease every year if you are staying with a conventional enterprise-software sales model. This implies a more tiered (e.g. junior) salesforce, combined with greater reliance on the web as well as better lead management.
• Consider giving away certain portions of your IP to create pull. Apache, Linux, JBoss and other core pieces of infrastructure took off in the late 1990s creating an open-source infrastructure stack. The same elements are in place for certain enterprise applications. Review your product portfolio and consider what should be placed into that category and market it aggressively via low-cost channels. Such giveaways, however, will create the requirement to create new service offerings and sales procedures so be ready for a fast and potentially disruptive shift.
• Look to leverage off the new enterprise software models and dynamics. No one's crystal ball is clear enough to accurately predict how all these factors will jell in the next three years. It is likely, however, that a combination of SaaS, open-source offerings, overhead efficiency, group selling and enhanced services will become the core of the future enterprise-software business model. Most companies must reconsider their business models and offerings today to be successful in the future.

Erik Keller is principal of technology consultancy, Wapiti LLC.

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