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| Home - Industry Article - Apr 04 Issue |
The Next Wave of Software Business Strategy |
By M.R. Rangaswami, Co-founder, Sand Hill Group LLC
More than 1,100 executives packed the San Francisco Marriott earlier last month for Software 2004, the first-ever industry-wide conference devoted to the enterprise software business. Dozens of speakers and panels presented their thoughts on the state of the software industry today, and where will go over the next several years. (Visit www.software2004.com to view speaker presentations and read conference proceedings.)
Overall, software business leaders are optimistic. Although the industry is maturing and changing dramatically, the presenters felt most vendors would emerge from this transition successfully if they recognize the following trends.
Software as a Service. “The software industry today is about renovation – not
innovation. It is no longer about ‘what,’ it is about ‘how,’” said opening keynote speaker, Ray Lane, general partner at Kleiner Perkins Caufield & Byers. “Rather than focusing on invention, we need to help customers renew what they already have. The software business is becoming a service business.” As the software industry grew, it focused on creating proprietary applications that did not work together. Those days have waned and will be eliminated altogether in the future. The software business has been allowed to ignore the laws of physics for too long, according to Lane. Now, vendors must work within the constraints of the new market, becoming focused on customer needs and developing products that work together seamlessly. “If we can make it a service industry, we can return the software business to its place as the largest industry on Earth.”
The Emerging New Ecosystem. All speakers agreed that software is now exhibiting the behavior of a mature industry. As a result, the software industry may merge itself down to a “Big 3” and then have dozens of second tier suppliers – multi billion dollar operations but not exactly household names, just as the auto industry did. Geoffrey Moore, author of Crossing the Chasm and managing director at TCG Advisors, presented one potential scheme for the future landscape of software vendors. Moore offered that a next-generation industry structure will emerge, anchored in services-oriented architectures that will drive the industry for the next decade. Moore urged smaller vendors to choose their allies wisely – and early. “By the time the positions are obvious, it will be too late. It is important to make bets early.”
Experimentation with New Pricing Models. Computer Associates CEO, Sanjay Kumar, described his company’s experience moving to a subscription pricing model. “If you’re not willing to live with the word ‘accountability,’ then don’t go here.” There has been a tremendously positive impact on CA’s customer service capabilities because the risk of customers canceling their contract is low if they do a good job. Many executives felt a hybrid model may emerge as the model of preference. “Term or subscription licensing enhances customer satisfaction,” says Christopher Lochhead, chief marketing officer of Mercury Interactive. “[The customer] can keep the product or let it go. At the end of the term, you can renew and upsell.”
Renewed Buzz Around Software Finance. Financiers speaking on “The Money Panel” cautiously opined that the financial markets are heating up again. Said Silicon Valley Bank CEO, Ken Wilcox, “Things are going back up – but you have to stand back a ways to see it. If you get too close, the incline is hard to see.” Companies are returning to debt financing. Investment bankers are hunting again. And valuations are not just stabilizing – they’re going up. VCs are competing to finance follow-on software deals and that means that valuations tend to depend on which firms are competing to back the startup.
Enterprise Customers’ New Mindset. “The business is addicted to velocity,” says Toby Redshaw, VP of IT Strategy for Motorola, who provided attendees with the enterprise customer’s point of view. “You have to sell velocity. We’re talking days or weeks. You need to show me a creed of returns in the next quarter.” During the bubble days, Motorola and many other large companies espoused what Redshaw referred to as the “Noah’s Ark Approach to IT” through which everyone bought two of everything. Those days are gone. Redshaw described the way that he is refocusing his spending to target new initiatives which create value for the business. That results in a lower IT budget because it moves money away from administration and support. Not only does that provide the business measurable results and improve IT’s credibility, but from a practical standpoint, it gives Redshaw back his team so that it can be deployed to a new project.
A Whole New Sales Game. “You’ve got to do things differently because people are buying differently,” says Chris Wong, executive VP of corporate strategy and development at Agile Software who spoke on the Sales & Marketing panel. “You need to shift the sales focus from price to the risk of the project not working.” Many executives agreed that the days of sales execs closing deals over golf games are over. Software companies have finally begun to sell like business consultants, leveraging marketing efforts, revamping user gatherings, retooling compensation and working as teams. In fact, the CFO or another financial officer is often involved when deals are closed to prove the financial stability of the company – especially with smaller vendors. “Viability questions are probably double what you think they would be,” says Joe Prang, president and CEO, Conformia Software.
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