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IBM’s Sam Palmisano and SAP AG’s Leo Apotheker are the two best known examples of sales professionals becoming CEOs. Does hiring sales professionals for CEO positions help companies sell faster in a slow market?

Yes – sales professionals understand the market better than anyone else in the company.

No – sales professionals do not spur innovation, so in the long run the product innovation would suffer.

What Do You Do Now?

By Ken Bender, Managing Director, Software Equity Group, L.L.C.

Mention at a cocktail party that you own and run a software company and people are still impressed – at least in places outside Silicon Valley. Software is clean, high-tech, sexy – and filled with storybook millionaires. To an outsider, you’re in the same business as Oracle, Microsoft, Google and Facebook. There’s no plant and machinery to maintain, no inventory to manage, no distribution facilities to oversee – and unlimited upside.

However it may appear to outsiders, software is a tough business. Most software entrepreneurs are bootstrapped, with little or no outside capital. There’s fierce competition and cost-conscious customers that place real pressure on prices and margins. There are underachieving sales reps and long sales cycles. There’s ever changing technology and a host of new modules to develop. There may not be plant and equipment, but fully 70 cents of every dollar you make goes to salaries, payroll taxes and benefits. There are disparate personalities to manage and personality conflicts to mediate and customers who require a good deal of attention.

Well no one ever promised you a rose garden. You’ve made some pretty good money, created jobs, nurtured careers and built products that actually solve problems and make people more productive. In the good times, when customers are spending, and sales are easier, you might even say it’s fun. But in the downtimes, when sales are slow, and cash flow declines markedly, it seems, once again, to be a really tough business.

Many software entrepreneurs, who were contemplating exit in the near future, now believe they’ve missed the boat. Some have. But for others, ironically, the prospects of sale at an attractive valuation are as good or better today than a year ago. Buyers, according to our survey, remain actively acquisitive. Most, according to the data in this report, have healthy balance sheets and lots of cash. If they deem you strategic, your chances of a successful exit are still quite good.

For other software company owners, however, the prospects for a successful exit at an attractive valuation are dimmer than a year ago, and will remain so for a time. No one knows how long. Certainly not the economists, analysts or pundits, and certainly not us. It will just have to play out.

If you’re a software entrepreneur, or an investor in a private software company that is unlikely to be seen as strategic in the current market, what do you do now? The prevailing wisdom, and the instinctive reaction of most software entrepreneurs, is to do nothing different. In times of fear, doubt and uncertainty, make no substantive changes other than those that become absolutely necessary, hunker down, and hope for the best.

Indeed, for many of the 200 software companies we met with, screened and mentored in 2008 – from a dozen countries spanning virtually every software category – there’s really no reason to alter course. Sales may have been pushed out and revenue growth may have fallen off some, but no need to panic. No need, really, to do anything different.

We respectfully disagree.

As we’ve often demonstrated, tech sector downturns typically lag economic downturns (and upturns) by a year, and we’ve now been officially in a recession for more than twelve months. Microsoft, our industry’s largest and richest company, just reported an 11% drop in second quarter profits and announced it will cut 5,000 jobs over the next 18 months. It’s the latest harbinger of things to come. We believe the decline in software spending will be substantially greater than current surveys indicate, further layoffs among most of the Software 100 are likely, an the economic downturn will take a toll on private software companies.

What can a software entrepreneur do? Plenty. First, scrutinize your P&L as though your short-term health and your longer-term exit valuation and retirement depend on it, because they do. Ask your CFO, Controller or bookkeeper to prepare an especially detailed profit and loss statement that breaks down revenue, expenses and margins for each product and each service you provide. Then, slice it by each market and submarket you serve, and by size and type of customer. On the expense side, focus especially on labor, which typically accounts for 70% of a private software company’s expenses. Two organizations deserve special scrutiny: Sales and Product Development.

For the vast majority of private software companies, sales are their Achilles heel. Most were founded by entrepreneurial software developers who, of necessity, learned how to sell, but were never especially adept at doing so. More important, many of these programmer-entrepreneurs knew nothing about how to build and run a highly proficient sales organization, develop and refine effective sales strategies, and properly onboard, train, goal, incent and manage sales managers and representatives. Years later, their companies have grown and achieved a measure of success, but their sales organizations remain inefficient and underperforming. Some CEO’s are in denial about it; many others acknowledge the fact but are loathe to do anything about it because prior efforts proved to be expensive disappointments. Maybe so. But improving sales process and performance are vital and achievable goals, and now, during the lull, is the best time to consciously address them.

Many software entrepreneurs, mindful of their developer roots, regard their development organizations as sacrosanct. It’s a bit of a paradox, because a good number of these same CEO’s lament delayed product launches and budget overruns. The skill sets and mind sets of some long-term programmers no longer match the requirements of the job, but the programmers are nonetheless retained. New development and product lifecycle management tools are eschewed as too costly or disruptive. The net result of such benign neglect? Unnecessary labor costs that have a direct and dramatic impact on EBITDA, and lost or delayed revenues. Now is the time to align your product strategy and your development team, ensuring you have just what you need – and only what you need to satisfy current obligations and to cost-efficiently bring new products to market.

Finally, turn your attention to revenue and profits. What’s dragging you down? Are there orphan or old legacy products? Can they be cut, or at least deemphasized? Though it seems counter-intuitive in a tough economy, can products or services priced too low be increased in 2009, at least to the point of reasonable profitability? Is your annual maintenance and support (M&S) under-priced (e.g., 15% – 17%, rather than the industry norm of 20%)? Have you resisted imposing annual price increases for M&S because of concern customers might leave, even though you have retention rates of 95% or more? When was the last time you actually audited concurrent user licenses, desktop licenses and server licenses, transaction fees, etc.? Are there specific products that your sales and marketing organization can tout as genuine cost savers and productivity enhancers, with a demonstrable ROI that would make move them higher up the IT priority list of your customers? If you sell indirect, is it time to clean the channel, eliminating underperformers that require resources and support but deliver little in return?

The current economic crisis is unprecedented and it may last for some time. Make the hard choices to ensure your survival. But also, prepare now for better times. Do what’s necessary today so that tomorrow, when the economy recovers and happy times are here again, you’re fully poised and positioned for accelerated growth and increased profitability.

Software Equity Group is an investment bank and M&A advisory serving the software and technology sectors. Founded in 1992, the firm has represented and guided private companies throughout the United States and Canada, as well as Europe, Asia Pacific, Africa and Israel. They have advised public companies listed on the NASDAQ, NYSE, American, Toronto, London and Euronext exchanges. Software Equity Group also represents several of the world's leading private equity firms. They were recently ranked among the top ten investment banks worldwide for application software mergers and acquisitions. For more, please visit www.softwareequity.com

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