Time for a New Software Model

Sales and marketing costs are dragging down the
enterprise software business. Open source offers
one way to resurrect it.

By Larry Augustin

Ask a software vendor about the benefits of open source and you’ll get a few stock answers. It’s inexpensive. R&D costs are lower. Developers are plentiful. But few vendors realize the true operational leverage that open source offers in sales and markeing.

The problem is that the traditional enterprise software business model is broken. A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control. In fact, Rick Sherlund at Goldman Sachs estimates that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts. That's up from 66 percent in 2000.

This quest for additional revenue has created an untenable cost structure for the industry — one that doesn’t serve vendors or their customers. In essence, vendors spend a lot of money to convince customers to buy, and then charge them a lot of money for the license which covers the sales and marketing costs. We’re charging the customer just to sell to them.

The open source model turns the marketing problem on its head.

Read McKinsey at SandHill.com

A new partnership with The McKinsey Quarterly means readers can access premium stories about issues impacting software business strategy via SandHill.com. Readers simply complete a one-time, free registration on McKinsey’s site to access the article.

Highly regarded by top executives, The Quarterly compiles the latest, in-depth analysis on a variety of business topics from its global network of consultants. This week, SandHill.com features three McKinsey articles on important software issues: Reducing Risks in Offshoring Projects, Building Stronger Vendor Relationships and Better B2B Selling. Watch for new stories from The Quarterly every week in Software Pulse.

MySQL, My Hero

The open source database continues to grow in the double-digits every quarter. Guy Smith of Silicon Strategies investigates the success of MySQL and finds support for Larry Augustin’s theory of open source-driven market expansion in this week’s post to the SandHill.com Blog on sales and marketing best practices.

Share your insight on the software business. Email editor@sandhill.com with your submissions to the SandHill.com Blog.

Get on the Radar

SandHill.com publisher M.R. Rangaswami meets with a variety of software industry players every week. Get M.R.’s perspective on the most compelling companies, services, products and executives in a new feature, SandHill.com Radar.

This week, meet NetSuite. It’s no secret that the company is doing well — but it’s a bit surprising exactly how well.

Do you have a compelling software player to profile? Get on SandHill.com’s Radar with an email to editor@sandhill.com.

Poll: Microsoft Refocusing?

Last month, Bill Gates sent a memo outlining a "sea change" for the software industry and urging employees to take advantage of this opportunity. Salesforce.com CEO Marc Benioff responded this week calling Microsoft a "dinosaur." Will Microsoft refocus its products in time to stay on top and take over the services wave?
Take our Pulse Poll >>

Last week, SandHill.com visitors speculated about the reason behind Oracle CFO Maffei’s departure.
Give your opinion and see the perspective of SandHill.com visitors >>

More at SandHill.com:

Oracle names another board member.
Read the most important enterprise software industry news of the week >>

Navio Systems receives $24 million.
Monitor the latest software venture capital deals >>

Microsoft buys media-streams.com.
Size up last week's software M&A deals >>

Hugh Scandrett named president & CEO of Ounce Labs.
See who’s made it to the top in our list of recent software executive appointments >>

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Parting Thought

"Confidence is what you feel until you're forced to face the facts."
— Anonymous

Courtesy of Malcolm Kusher, The Kushner Group