What do software CEOs predict for the year ahead? One thing is clear: change is on the horizon. Whether in operations, products, business models, pricing, or M&A, top executives describe a new reality taking hold in software business leadership.
Many of the more than 100 software CEOs, COOs and CFOs surveyed by Sand Hill Group for the new “Software CEO Outlook 2010: New Decade, New Realities” study are planning for significant growth in 2010. But some software vendors face challenges from customer organizations’ increasing adoption of cloud computing and their preference for moving away from the traditional software licensing model. In addition, the profile of the software purchase decision-maker in customer organizations is changing. Even the metrics that software firms use to track their business are evolving rapidly.
The bottom line? Software CEOs say their companies will face challenges in the next 12 months – and into the next decade — that will require adapting to the market’s new reality in order to ensure future success. This report excerpt takes a closer look at five of these “New Realities.”
1. New Growth
With signs the economy is on the upswing, and many industries still showing no sign of recovery, the 107 CEOs and CFOs participating in the CEO Outlook 2010 study showed optimism for the growth of the software industry and for their own software firms over the next 12 months. Almost half of the surveyed companies indicated their business has already returned to pre-recession levels or they expect it to reach those levels during the first half of 2010.
Most of the survey respondents, who were primarily from small to midsized software firms, believe their firms will perform the same or better than the industry as a whole. More than half of the executives believe the software industry during the coming year will perform better than the past year. A total of 42 percent stated their companies have budgeted revenue growth as high as 30 percent or more for the next 12 months (see chart).
In a webinar last month organized by the study’s underwriter, Intacct, a panel of software company CEOs and CFOs discussed the implications of the research findings. Bill Soward, CEO of Adaptive Planning, agreed that there is cause for optimism about renewed industry growth, but cautions fellow execs to monitor the recovery carefully:
“There’s reason to be cautiously optimistic. We had an outstanding first quarter as a company – far exceeding our own expectations – which is a positive sign. As we look out at the next few quarters, we see stronger demand not just for our product but many of our partners and customers are also reporting really positive results.
As we look at our business globally, we are certainly experiencing a notable recovery in the U.S., strong demand in Eastern Europe, Russia, and some parts of Asia, but not as much in Western Europe. So ‘your mileage may vary’ depending on the business you’re in. There’s certainly not one answer for all markets or all industries.
I do think that it is not straight forward from here. There is still a lot of uncertainty out there. There are still a lot of moving parts. We encourage our customers to manage closely, take it a step at a time, do ‘what-if’ scenario planning, and continue to stay on top of their game. There are a number of challenges ahead in getting through the economic recovery and so we need to be optimistic but be careful and somewhat cautious along the way.”
The study identified one significant upside of the economic recovery: more than 9 in 10 software executives surveyed said their companies will be adding headcount in the coming year (see chart).
2. New Models
Cloud computing is changing the software industry dramatically—and quickly. Although enterprises still have concerns about security issues, the survey reveals that the adoption of cloud computing—along with SaaS and on-demand models—is now driving much of the software industry’s growth.
The survey found that more than half (54 percent) of the executives believe the cloud / SaaS / on-demand models are the clear leaders as to the method by which most customers will want to purchase software during the coming year .
Cloud computing is also driving a huge amount of change in software firms’ pricing models, sales and marketing approaches and sales cycles, management reporting and internal measurement and other operational aspects of the business. Study participants stated that traditional software companies are currently investing heavily in the cloud market – both in re-tooling to build cloud based offerings and in adopting cloud-based systems for their own internal use.
The study found a significant change in customers’ software spending decisions due to the influence of a younger generation. Insights and opinions shared by surveyed executives highlighted the fact that the current generation of technology users expect software solutions to have the kinds of easy-to-use, easy-to-deploy capabilities available in SaaS, on-demand, and cloud models. These users are already becoming influencers in spending decisions and will soon be in CIO, CFO, manager, and other decision-making positions. Thus, for any software business looking to grow over the next 10-20 years, consumer-like solutions will be the predominant form of computing in the enterprise. Software firms will need to continually adapt their offerings and operations to this profile of buyers.
In the webinar discussion, Rob Reid, CEO of Intacct, discussed the internal shift in mentality involved in managing buyer needs in a cloud software company:
“In the past, the traditional model of license sales involved focusing on the solution. But internally, there was a big focus on the sales event – in other words, getting the sale done. You would go in and take a customer through your solution and then figure out how make a sale – and then figure out how to sell the maximum amount of our solution in that sale. After the sale, the software company would receive some maintenance revenue but would pretty much move on to the next customer.
The cloud computing environment causes the software company and the customer to be completely aligned to create ongoing value. If we don’t do a good job from a cloud vendor perspective, then the customer will stop paying. The recurring revenue model of pay-as-you-go really aligns the software organization much more closely with the client than what has been seen traditionally. There are lots of strategic and operational benefits which explain why people are moving to the cloud…
I predict that cloud solutions are going to grow five-times faster in 2010 than more traditional software products.”
3. New Buyers
Focusing on the needs and satisfaction of customers remains critical to vendor success – perhaps more important than ever. In fact, 37 percent of executives surveyed say meeting customer needs is the most important factor for long-term success as a software vendor (see chart).
Software executives say a new software decision maker is taking over in enterprises around the world. The new generation of technology users comprising today’s workforce expect software solutions to have the kinds of capabilities and characteristics that are available to them in their personal lives as users of the consumer cloud. They expect business applications and data to be available to them anywhere they have an Internet connection, any time of day, on the device of their choosing. They don’t have patience for lengthy IT deployments and they prefer social networking and chat over written documentation and telephone support. These users are already becoming influencers in corporate spending decisions and will soon be in CIO, CFO, manager, and other decision-making positions.
Webinar participants described the needs of today’s customers. Intacct CEO Reid said that during the recession, customers were more focused on how to get ready to grow when recovery comes. Now that the recovery is here, customers are focused on optimizing operations for new opportunity while reducing cost and risk.
Reid also said his company is seeing an intense focus on rapid time-to-value. “Customers are looking for immediate solutions – taking 6 months, or 18 months to deploy is too long.” In fact, customers very often say their reason for buying the on-demand or cloud solution is time: they feel there is enough economic uncertainty still out there that their company needs to move quickly and be more nimble. This sentiment appears to be more the order of the day than it was a few years ago.
4. New Metrics
The CEO survey found that the impact from the recession as well as the impact from the demand for new software pricing models and capabilities will affect how some of the respondents track their business.
As to which of the methods survey participants consider their single most important measurement for tracking their business, the majority (38 percent) indicated MRR/CMRR. One-third of the executives stated they prefer tracking by revenue, and 18 percent said bookings are their most important measurement. Only 8 percent stated their most important measurement is their pipeline (see chart).
In the webinar, Brian Murnane, VP Finance and Administration at BigMachines, explained more about the measures used to track performance.
“We’re a SaaS provider so new metrics are very important to us – it is a different way of doing business from what has been done historically. We’re very much engrained in the CMRR, contracted or committed monthly recurring revenue. We also look at annual contract value, or ACV, and touch on retention rates and cash flow… Another one of the interesting things about our model is that we now focus on DSO [days sales outstanding] surrounding invoicing rather than revenue because of the billing structure.
But what I see as most important is how to measure and track these metrics. The first step is generating a rigorous process and making sure you systematize that process. As a SaaS company, we use SaaS products to get into systems and integrate between systems so that we are tracking one source of ‘the truth.’ That way, you are only putting in the information once but you can track these metrics in multiple ways.”
Gary Hagmueller, CFO of Zuora, says his company is also looking at total contract value:
“We are keenly focused on CMRR, also ACV… The other thing we’re starting to track as a meaningful indicator of what our business looks like long term is and better understand revenue predictability is to ‘total contract value.’ We use it as a way to figure out how revenue is committed over the one-, two-, and three-year horizon because we’re starting to see our customers enter into longer term deals.
It is keenly important to have a single-entry, integrated approach and to produce the types of metrics that can give you a snapshot of your business in a very quick fashion. Because it really is all about figuring out what your customers want and what your customers need, iterating quickly and understanding the impact of the changes that you’re making to your product on your subscriber base retention rate and your ability to capture new customers. We need to be sure we’re doing the right thing.”
5. New Channels
The rapid growth of the cloud and SaaS models has attracted a variety of new partnership possibilities to the vendor marketplace. The next few years will certainly see growth in the indirect business of on-demand software companies. Intacct CEO Reid explained why his company is seeing an uptick in partner sales:
“In the past, there weren’t a lot of VARs or SIs who worked with cloud solutions because they said, ‘How am I going to make money?’ But because of the recession, there are an awful lot of [VARs/SIs] who have begun to take another look because of the recurring revenue stream that they can receive. As their ‘big bang’ business dried up, they wanted to create a more balanced portfolio in terms of revenue. We’re getting a lot of inquiries from VARs who want to partner with us because 1) we’ve got a great solution, 2) the marketplace is moving toward cloud solutions, and 3) the model can help sustain their business for the long haul.”
Adaptive Planning CEO, Bill Soward agreed that the role of the channel in the next era of software industry growth is evolving rapidly:
“One of the things we track is the ‘partner assist’ category. In some cases, the relationship with the customer begins when a partner refers a deal to us, we take it direct with the customer, and then the partner does the implementation. So in our books, it would show as a direct deal but the really partner deserves most of the credit. We’ve seen that percentage grow steadily: last year it was just over 30 percent and this year we’re trying to get closer to 40 percent.
I think that it has taken a while to figure out what the [SaaS channel] model is, and you have to prove that you can be successful on your own as a company before a third-party is going to build a business around your company, so you have to build a critical mass.
But I also think it is easier to tell the [SaaS] story out in the market. More and more prospective partners understand the SaaS model better than they did a couple years ago. A lot of these [VAR/SI ]companies made their money on big implementation contracts. But the days [of those projects] are passing rapidly. [VARs/SIs] are having to change their model to build a profitable business with shorter implementation times, less people and less on-site activity. They are really redefining their value for the customer. We expect the partner channel to drive more than half of our business 12 to 18 months from now.”
Click here to find out more about the “Software CEO Outlook 2010: New Decade, New Realities” report . Additional findings cover top business goals, growth drivers and challenges. Click here to hear a replay of the Intacct webinar discussing the study’s findings.
M.R. Rangaswami is publisher of SandHill.com.