Posts Tagged ‘management strategy’

News Analysis: Mr. N R Narayana Murthy Returns To Infosys As Executive Chairman of the Board

Will There Be A Come Back For NRN and Infosys?

Infosys announced on June 1st, 2013, that Mr. N R Narayana Murthy (NRN), the legendary co-founder of Infosys who retired in August 2011 as Chairman Emeritus, has been appointed by the board as Executive Chairman and a director.  From the press release:

Mr. N R Narayana Murthy said, “This calling was sudden, unexpected, and most unusual. But, then, Infosys is my middle child. Therefore, I have put aside my plans-in-progress and accepted this responsibility. I am grateful to Mr. K V Kamath – the Chairman, the Board, and every Infoscion for giving me this opportunity. I intend to do my best to add value to the Company in this challenging situation.”

Mr. K V Kamath said, “The Board has taken this step keeping in mind the challenges that the technology industry and the Company faces and in the interest of all stakeholders, particularly shareholders large and small, who have asked for strengthening of the executive leadership during this challenging time. Murthy’s entrepreneurial and leadership record and the long experience he has had as a technology pioneer makes him eminently qualified to lead the company and provide strategic direction at this point in time.”

Key points from the announcement include:

  • Board seeks shareholder approval for five year term. Company shareholders must approve the appointment of Mr. Murthy as a director and Executive Chairman at the Annual General Meeting (AGM) on June 15, 2013.  The current Chairman of the Board, Mr. K V Kamath would step down and remain on the board as a Lead Independent Director effective June 1, 2013.  Mr. Murthy will take a token annual compensation of one rupee.

    Point of View (POV):
    Most expect the confirmation to be swift and non-controversial.  Infosys seeks a stronger leadership team to address challenges in both its business model as well as direct competitors.  With Cognizant and TCS overtaking Infosys on many fronts, the selection of NRN comes at a very critical juncture.
  • New Chairman’s office group to be created. The new team is designed to provide a central war room to assess the situation, propose solutions, and drive impact on strategy.  At Mr. Murthy’s request, his son Dr. Rohan Murthy will serve as his executive assistant.

    (POV):
    Sensing the magnitude of the challenge, Mr. Murthy approach to put a tiger team together indicates a realization that Infosys must solve their predicament as a multi-disciplinary problem.  The appointment of his son, Dr. Rohan Murthy, as executive assistant provides Rohan with an interesting front row seat.

Bottom Line: Infosys Needs To Shake It Up For Transformational Change

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Monday’s Musings: Understand The Four Organizational Personas Of Disruptive Tech Adoption

Pace of Innovation Exceeds Ability To Consume

Rapid innovation, flexible deployment options, and easy consumption models create favorable conditions for the proliferation of disruptive technology.  In fact, convergence in the five pillars of enterprise disruption (i.e. social, mobile, cloud, big data, and unified communications), has led to new innovations and opportunities to apply disruptive technologies to new business models.  New business models abound at the intersection of cloud and big data, social and mobile, social and unified communications, and cloud and mobile.

Unfortunately, most organizations are awash with discovering, evaluating, and consuming disruptive technologies.  Despite IT budgets going down from 3 to 5% year over year, technology spending is up 18 to 20%.  Why?  Amidst constrained budgets, resources, and time limits, executives are willing to invest in disruptive technology to improve business outcomes.  Consequently, successful adoption is the key challenge in consuming this torrent of innovation.  This rapid pace of change and inability to consume innovation detract organizations from the realization of business value.

Organizations Fall Into Four Personas Of  Disruptive Technology Adoption

A common truism in the industry is “Culture trumps technology”.  As organizations apply methodologies such as Constellation’s DEEPR Framework in improving adoption, leaders must first determine which of the four personas best fits their organization’s appetite for consuming and innovating with disruptive technologies.

The personas of disruptive technology adoption assess organizational culture in two key axes (see Figure 1).  The first is how incremental or transformational an organization looks at applying disruptive technology to business models.  The second assesses how proactive or reactive an organization is in carrying out new initiatives.  Based on these dimensions, the four personas include:

  1. Market leaders. Market leaders prefer to drive transformational innovation.  They look at technologies as enablers in disrupting business models.  They see competitive differentiation in delivering outcomes to customers. Market leaders accept failure as part of the innovation process.  They fail fast and move on.
  2. Fast followers. Fast followers prefer to react to the success of market leaders and their experiments.  When they sense success, they tend to jump in.  Fast followers do not like to fail and rapidly apply lessons learned from market leaders into their road maps.  Fast followers tend to deliver scale in the markets as a counter balance to arriving later in the market.
  3. Cautious adopters. Cautious adopters proactively deliver incremental innovation.  They tend to take a more measured approach and spend more time studying how they can improve an existing success than creating a transformational change.  Cautious adopters often come from regulated industries where security and safety are paramount objectives.
  4. Laggards. Laggards tend to procrastinate on applying innovations to their business models.  They prefer not be bothered by trends and will only react when the trends have moved beyond mainstream.  They see value in waiting as prices will drop over time as success rates increase over time.  Laggards enjoy waiting.

During the interviews and discussions with the 2012 Constellation SuperNova award participants, key questions emerged in the decision process on whether to adopt or pass on a disruptive technologies.  These questions aligned well with the four personas of disruptive technology adoption.

Figure 1.  Organizations Should Understand Which Persona Of Disruptive Tech Adoption Describes Them Best

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Research Report: Constellation’s Research Outlook For 2011

Organizations Seek Measurable Results In Disruptive Tech, Next Gen Business, And Legacy Optimization Projects For 2011

Credits: Hugh MacLeod

Enterprise leaders seek pragmatic, creative, and disruptive solutions that achieve both profitability and market differentiation.  Cutting through the hype and buzz of the latest consumer tech innovations and disruptive technologies, Constellation Research expects business value to reemerge as the common operating principle that resonates among leading marketing, technology, operations, human resource, and finance executives.  As a result, Constellation expects organizations to face three main challenges: (see Figure 1.):

  • Navigating disruptive technologies. Innovative leaders must quickly assess which disruptive technologies show promise for their organizations.  The link back to business strategy will drive what to adopt, when to adopt, why to adopt, and how to adopt.  Expect leading organizations to reinvest in research budgets and internal processes that inform, disseminate, and prepare their organizations for an increasing pace in technology adoption.
  • Designing next generation business models. Disruptive technologies on their own will not provide the market leading advantages required for success. Leaders must identify where these technologies can create differentiation through new business models, grow new profit pools via new experiences, and deliver market efficiencies that save money and time.  Organizations will also have to learn how to fail fast, and move on to the next set of emerging ideas.
  • Funding innovation through legacy optimization. Leaders can expect budgets to remain from flat to incremental growth in 2011. As a result, much of the disruptive technology and next generation business models must be funded through optimizing existing investments. Leaders not only must reduce the cost of existing investments, but also, leverage existing infrastructure to achieve the greatest amount of business value.

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Strategy: 5 Lessons Learned From A Decade Of Naught

I’ve had considerable time to catch up on reading this holiday season.  Traditionally, it’s a time for predictions, resolutions, and reflections.  But as we close out the last decade, I couldn’t help but dwell on economist Paul Krugman’s Op-Ed from December 27th titled “The Big Zero”.   He brings up good points that it’s been an “era best forgotten” and “it was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true”.  He dives deep to rant about how we’ve achieved zero economic gains and makes compelling arguments.  However, in the world of innovation and adoption of disruptive technologies, it may be safe to say that his point on “our unwillingness, as a nation, to learn from our mistakes”, seems to be less true.

In fact, emerging organizational trends in the next decade can be well rooted in lessons learned through the boom and bust cycle of the 2000′s.  Here’s my opinion on five lessons learned from the tragedy of what we call the past decade:

  • Pace of change moves from constant to constantly accelerating. Quickly evolve or die.  Organizations need to find ways to stay ahead of change or risk being obsolesced.  Organizations must organize around supporting flexibility and agility.  Disruptive technologies play a role in leapfrogging organizational models, business processes, and business models.
  • Planning switches from static to iterative. Agile is the new poster child for today’s approach.  The best plans assume constant iteration.  Organizations must expect to reevaluate and assess plans in shorter cycles.  3 to 5 year plans can’t account for or incorporate the entry of disruptive technologies.  Iterations move from years to months.
  • Viability shifts from size to innovation. Size does not equate to viability.  Success requires solving pain chains.  Mergers and acquisitions will continue out of necessity but must be done strategically.  Not only must organizations achieve an economy of scale that reduces overhead, funds innovation, and grabs the largest share of the customer budget, but they must also address pain chains by developing and delivering innovative last-mile solutions that dis-intermediate inefficiencies in existing business models.  If size gets in the way, then you must divest.
  • Success evolves from technology adoption and process improvement to business value and business impact. Benefits should only focus  on business impact.  After a decade of technology and business process centricity, organizations must start with the business value story.  Business processes must be flexible enough to accommodate the pace of change.  Technology provides an enabler but not the complete solution.  People still matter at the end of the day so make sure the incentives are aligned.  Holistic goals such as the total customer experience, beyond real time relationships, and optimal compliance will provide the business drivers for new initiatives.
  • Collaboration evolves from nice to have to essential. Plain and simple – partnerships count more than ever. No single organization can serve every market, provide every last mile solution, and deliver value in a focused manner.  Most organizations can not afford go it alone strategies.  Partnerships must be based on an understanding of what each party will not do in order to find the common ground among 4 key dimensions: product road map alignment, service and support coverage, sales coordination, and community engagement.

Your POV.

What have you learned from the past decade?  Do you feel it was for naught or were you fruitful in your pursuits?  Feel free to post your comments here or send me an email at rwang0 at gmail dot com or r at softwareinsider dot org.

Copyright © 2009 R Wang and Insider Associates, LLC. All rights reserved.

Tuesday’s Tip: How To Properly Align Team Incentives In Software Contract Negotiations

In the first step of the original seven simple steps to successfully negotiate software contracts, the key is to have the right team in place.  To refresh everyone’s memory from the March 8th, 2004 post the details for Step 1 are:

Step 1: Ensure that the right team is in place

  • Inputs:  Organizational chart and agreement on key roles.
  • Action items: Determine the key roles needed to conduct the negotiation. Business teams include the COO, Division VP’s .  Technology leaders include the CIO, enterprise architecture . Vendor management teams include the procurement experts, legal team, etc.
  • Deliverables: Responsibilities list for each role.

Having the right team in place is important.  However, dozens of readers point out the dire need to not only align incentives but improve transparency.   Some examples include views such as:

  • CIO’s. “While the CIO needs to set the technology direction, we often find two types of CIO’s – the buyer and the implementer.  Buyer CIO’s get wined and dined during the process, hob nob at events, get all the attention and perks, then leave for another company to do the same thing.  Implementer CIO’s get stuck with making the stuff all work, cost overruns, and 100′s of tradeoffs in promised capabilities and all the blame for failure.” – VP of Business Applications, Fortune 100 Company.
  • Procurement/vendor management teams. “The only thing that our Procurement VP and her staff seem to care about is the discount % and total savings.  Despite our need for a product that costs the same, we see her team favor the products that show her the most savings.  Its no wonder why vendors keep jacking up prices to create win-wins for companies like ours where procurement teams have considerable influence.” – CIO, EMEA based Financial Services Firm
  • Line of business execs. “Often the business side of the house fails to consider the indirect and hidden costs of ownership.  Some solutions are sexier but cost 3 to 5 times more to integrate, maintain, and staff up for.  These guys forget that we pick up the tab when it fails to work well with other systems” – Enterprise Architect,  North American Transportation Company

The bottom line – all incentives in the contract negotiations strategy must align with product adoption strategy

Prior to any contract negotiations, the right team should also take the time to align incentives to the overall business drivers.  Form must follow function and how the solution will be used should be paramount.  Four key criteria:

  1. Define success criteria. Start by determining what success criteria will be utilized.  Some metrics include implementation times, return on investment, savings in total account value (TAV), etc.
  2. Create transparency in objectives. Team members should lay out their incentives and how performance in their management by objectives (MBO’s) will be impacted by different scenarios.
  3. Realign incentives for maximum alignment.  Once the objectives have been determined, the team should come back with incentives that reflect performance in short, medium, and long term goals .
  4. Codify and communicate metrics.  Final metrics and incentives should be made public to all team members and performance objectively tracked by an independent committee.

Your POV.

Got additional suggestions and best practices?  Ready for the big maintenance renewal seasons in Q4? If you need assistance with your SAP, Oracle, Infor, Lawson, Microsoft Dynamics, or other enterprise software contract, send me a private mail.  We can assist with a contract negotiations strategy that aligns with your apps adoption strategy.   Please post your comments here or send me a private email to rwang0 at gmail dot com or r at softwareinsider dot org.

Copyright © 2009 R Wang. All rights reserved.

Monday’s Musings: It’s The Relationship, Stupid (Part 5) – Living In Denial

Economic Downturn Challenges Enterprise Software Executives To Uphold The Sanctity Of The Vendor – Customer Relationships

Conventional wisdom would assume that in a challenging economy, strong relationships would be a key success factor to retaining business and mitigating loss of revenue.  Unfortunately, this does not appear to be the case for many companies, including vendors in enterprise software.  Blame it on the economy, fear of depending on their people, or plain greed, but a good number of executives have taken an approach that attempts to preserve shareholder value at the expense of their vendor – stakeholder relationships (i.e.employee, customer, and partner).  Now in their defense, these muckety mucks face dire times and hard decisions need to be made.  However, they are not in a unique situation and risk jeopardizing brand value, trust, and market credibility for short term gain. Let’s look at five common value destruction strategies:

Part 5: Living in denial by ignoring stakeholders

Successful relationships often span across key stakeholders that include partners, employees, suppliers, investors, and of course customers.  Lately, management teams at enterprise software vendors have chosen to placate investors over other key stakeholders.  As a short term strategy, boards will succeed in meeting the short term quarterly whims of investors.  But in the long run, these management teams risk alienating customers, partners, and employees – a slap in the face of a prime source of funding and innovation required to meet current and post recession challenges.  Conversations with over 47 stakeholders highlight some key findings including:

  • Forcing Kool-Aid down the throat of employees. “Our customers kept telling us that we were losing credibility given the rash of aggressive sales tactics over the past few years.  An increase in pricing or maintenance would be the straw that broke the camel’s back!  Most customers chose the lowered tiered offering.  There was really no additional value in the new offerings yet we kept pushing.  Many of us complained to our management teams but the decision was already made.  We must have lost 20% in deal flow in the past 2 quarters.  The resulting backlash could have been avoided.” Customer Support Technician for Global Support Services – Big 4 ISV
  • Glossing over channel partner concerns. “They kept telling us that customers had asked for this new SME product.  Extensive customer research had been incorporated.  And, any customer let alone employee who didn’t see the value in the new offering needed to be re-educated.  Despite being late to market, the product would sell itself because of our reputation and brand.  What they failed to understand was that country managers had already discounted the flagship enterprise product to a point where it was creating huge channle conflicts with sales of our SME product.  We warned them this would happen.  They kept ignoring our concerns over the past 12 months.   Amidst such confusion, our best and long time partners now are leaving for competitors.  For those that have stayed on, our biggest challenge has been trying to help them understand their role and input into our product strategy. “ Vice President of Software Partnerships – Global Systems Integrator
  • Ignoring customer requests.  “We need more choices in our user license options.  We used to have concurrent users, then we had named users, and now they want to move us to processor based licenses.  While they have been giving us conversion credits to the new models, we feel that each approach seems to benefit the vendor and not us the customers.  We have raised this issue with the management team each year.  They continue to ignore our requests.  After our recent acquisition, we now are in a position to leave the vendor next month.  It’s all lip service and they don’t value our input or relationship enough, even though we have spent $4M in 5 years.” – Global Director for Packaged Apps – APAC High-Tech Manufacturer

The bottom line – relationships matter despite the chaos around us.

Strong relationships are crucial for success, particularly in a difficult economy.  Vendors and customers need to find win-wins in order to succeed through this current down turn.  For vendors, they need to get a better grasp on what’s top of mind with key stakeholders.  Executives should walk the halls and directly solicit feedback from employees.  Management team members need to reach out directly to stakeholders and have honest conversations.  Too often, the fear of managing up prevents a company’s execs from hearing about the issues.  Instead, they think everything is working out fine despite how much middle management has quelled the groundswell of opinion.  Once these relationships can be reestablished, stakeholders will be there to assist by providing valuable feedback, seeking advice in solving business problems, and serving as references.  In the meantime, this trust needs to be reestablished.  Its truly the relationship that will pull you out of this downturn!

Your POV

Got a success story where your vendor has put a value creation strategy based on keeping good relationships? Or got a great story on the bone-headed thing your vendor or your employer has done to destroy value in the relationship!  Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Monday’s Musings: It’s The Relationship, Stupid! (Part 4) – Stop Under-investing In R&D

Economic Downturn Challenges Enterprise Software Executives To Uphold The Sanctity Of The Vendor – Customer Relationships

Conventional wisdom would assume that in a challenging economy, strong relationships would be a key success factor to retaining business and mitigating loss of revenue.  Unfortunately, this does not appear to be the case for many companies, including vendors in enterprise software.  Blame it on the economy, fear of depending on their people, or plain greed, but a good number of executives have taken an approach that attempts to preserve shareholder value at the expense of their vendor – stakeholder relationships (i.e.employee, customer, and partner).  Now in their defense, these muckety mucks face dire times and hard decisions need to be made.  However, they are not in a unique situation and risk jeopardizing brand value, trust, and market credibility for short term gain. Let’s look at five common value destruction strategies:

Part 4: Under investing in R&D and then repackaging existing content as new innovation

Back in the heady days of the 80′s, custom dev teams faced challenges with primitive tool sets, constantly changing business priorities, and escalating costs of internal maintenance.  The cost to keep up with change seemed unsurmountable.  Consequently, packaged apps vendors offered businesses the promise of economies of scale so that the long term cost would be less.  Client would benefit from best practices in various industries.  In turn, the software vendor would provide the scale to take over bug fixes,  enhancements, new functionality, staffing, and future innovation. The promise of packaged apps appeared to solve the issues that custom development failed to address.  With Y2K in full force, everyone rushed to put their latest ERP system to beat the crunch.  Upon reflection, it may seem that we traded one set of cost for another.  Here are four customer examples as to what’s been happening.

  • Forcing clients to re-pay for the same functionality ” They delivered some supply chain planning capabilities in the old modules.  With each release and our input, the product improved.  One day they moved to an engine pricing.  When they launched XXX, they decided to come back and charge us for the new product.  We had access to 80% of the functionality already.   We had the old product for 10 years and should have been entitled to the new release after millions of euros in maintenance and our feedback.  This was the beginning of the downturn in our relationship.  Today they keep trying to sell us on their new suite and its just a repackaging of all their disparate products!”  EMEA Discrete Manufacturer,  CIO
  • Failing to deliver on promised roadmaps ” We sat on these Vendor X Customer Boards (i.e. industry peer groups) where we worked out future capabilities with some competitors, system integrators, and other technology partners.  After 5 years of talk, we still have not seen 85% of the functionality requests we put into play.  Instead, the company has focused on the low end of the market segment and in other industries.  We spent all this time talking and now we have very little to show for it.  We’ve paid over 16M in maintenance in the past 5 years.   What happened to realizing the customer input into the product design process?  Its been an outrage!  We could have built everything on our own and maintained this for the same cost or less.  Yes, we could rebuild our ERP and be more successful and cost effective and just might as the tooling has significantly improved and PaaS platforms provide potential.”  CPG,  Senior Director for Business Apps
  • Charging for technology uplifts. “After using Vendor X‘s Business Intelligence product for 7 years, we finally decided to upgrade to the next version.  We compared the upgrade and functionality wise, the new release had less capabilities than the old release.  They had built the product on a new technology platform.  While it could be more advantageous for us, we were shocked that they had the nerve to charge a replatform fee for us to use the new product.  They demanded additional money for the same functionality.  This is absurd!  We moved to Vendor Y a year later because they did not seem like they would be acquired and avoided this scenario. “  Global Financial Services,  VP Analytics and Business Intelligence
  • Responding at a snail’s pace to innovative technologies. ” I’m miffed that the large ERP vendors keep missing the boat on new technology.  Why can’t they deliver a multi-tenant SaaS offering?  What’s up with hosting and mega tenancy? We seek new cost effective deployment options and everything comes back more expensive each year.  We also can’t understand what’s so hard about improving usability.  Why don’t they just take Adobe AIR and Flex and rebuild the screens?  We don’t really care what’s in the back end!  We just need something that is role based and carries the relevant data that are people need to make a decision.  After paying these guys over 100M in maintenance in 10 years, we could have built this faster, better, and cheaper.  How come they can’t deliver better use of collaboration technologies?  At the rate we’re going, we’ll be using more SharePoint than Vendor X’s portal”  Major Oil and Gas,  Director ERP Project

The bottom line – failure to deliver on promised functionality jeopardizes hard won trusted relationships

Clients made strategic bets with key software vendors to go with packaged apps.  Many shared with them their best practices in the development and improvement of the vendor’s product.  These were trusted relationships.  In the end, vendors achieved economies of scale but under invested their profits back into the product.  Clients had a good start with some basic apps.  But with an average of 80% of all maintenance and support fees going back to profit and not the product, the client vendor promises may be too broken.

Initially, most clients took this in stride and gave the vendor some grace period in delivery of key functionality.   After a series of excuses, many vendors failed to deliver as they were distracted with satisfying investors or engaged in M&A.  In such cases, clients and vendor user groups should take action and engage in deeper conversations about what ratio of revenue goes back to R&D.  How quickly should enhancements be prioritized.  What ratio of R&D would the clients expect reinvested from license and maintenance fees?

For those clients, its time to apply some leverage on those vendors badly behaving to be more forthright with their commitment on promised roadmaps and more responsive to client enhancement requests.  Clients should be more proactive!  Clients may need to be more public.

Your POV

Got a success story where your vendor has bucked the trend and delivered more than expected.  Got a POV on how they are keeping good relationships? Or got a great story on the bone-headed thing your vendor or your employer has done to destroy value in the relationship!  Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Monday’s Musings: Total Account Value, True Cost of Ownership, And Software Vendor Business Models

Recession creates an opportunity for frank vendor – client discussion

A fine equilibrium exists between the vendor’s success and a client’s success.  Its time for the enterprise software industry to have a frank and honest conversation about software costs and vendor business models. To date, comparing cost among different vendors remains difficult as license, maintenance, implementation, and other operating costs lack easily comparable benchmarks.  Moreover, the timing of these costs span across different periods of time.  In context, the current customer outrage at some vendors over maintenance increases makes sense for those clients given arguments and assurances that they would receive a smaller upfront discount but pay less on maintenance on the back end.  When a vendor jacks up your maintenance after making that argument, well, you could expect some outrage!

Now the converse of this argument is also true. If a client got a great discount upfront and pays a higher rate for maintenance, one could argue that the costs might even out.  However, if the clients take that great upfront discount and come back to complain about maintenance fees, vendors face a significant issue.   Vendors have a right to be outraged and one could say the client is in poor form.  Yet, odds are high that the client does not understand that the discount was predicated on a predictable revenue stream for the next 7 to 10 years. In most cases, the client could care less because this is after the fact.  So we could reach a lose-lose situation when clients receive a good deal and the software vendor goes bankrupt.   Now if  vendors profit too much at the expense of the client, well, their clients will go bankrupt and we also achieve a lose-lose.

This illustrates the case why the industry needs a frank dialogue to clients about the true cost of ownership; how Total Account Value (TAV) impacts the vendor; and what ramifications exist for recession time software vendor business models.  In today’s economic climate, industry leaders need to lead in striking the right balance with customers, or face more “Le Rebellions“!

Total Account Value (TAV) should drive most licensing and pricing decisions for vendors

Whether perpetual or subscription, on premise or on demand, TAV should drive everything from discounts to maintenance fees.  With every product line, vendors should seek to maximize revenue streams. This is why business models matter.  How can you evaluate what’s an equivalent deal from your competition without a fair comparison.  Let’s take 1000 users and a list price of 4000 and see what would be equivalent between 2 common business models:

SCENARIO 1: Creating equivalency between 2 business models highlights upfront versus downstream revenue requirements

  • Vendor W’s upfront revenue maximization strategy. (i.e. modest license discount/ low rate of maintenance). 60% discount on license = 1600 per user.  Total license = 1,600,000.  15% maintenance for 10 years = 2,400,000.  Assume a free upgrade.  Total cost 4,000,000
  • Vendor R’s make it up on maintenance strategy (i.e. big license discount/high rate of maintenance). 75% discount on license = 1000 per user.  Total license = 1,000,000.  30% maintenance for 10 years = 3,000,000.  Assume a free upgrade.  Total cost 4,000,000.

As one can see, you’d need a 30% maintenance fee to make up the loss in revenue over 10 years for a 75% discount.  This doesn’t even include the cost of money (NPV)!  In the other example a 60% discount would require a 15% maintenance fee to be equivalent.   Let’s examine the reality of fully loaded costs in the market for the client or True Cost of Ownership:

SCENARIO 2: True Cost of Ownership for 2 models shows Vendor R better for customer, Vendor W better for vendor

  • Vendor R’s make it up on maintenance strategy (i.e. big license discount/high rate of maintenance). 75% discount on license = 1000 per user.  Total license = 1,000,000.  22% maintenance for 10 years = 2,200,000.  Assume a free upgrade.  Total cost 3,200,000.  Vendor R makes less per 10 year period.
  • Vendor W’s upfront revenue maximization strategy. (i.e. modest license discount/ low rate of maintenance). 60% discount on license = 1600 per user.  Total license = 1,600,000.  17% maintenance for 10 years = 2,720,000.  Assume a free upgrade.  Total cost 4,320,000.  Vendor W makes more per 10 year period.

In the above example, it becomes apparent that going for the upfront license discount gives clients the better long term value.  Clients save about 1.1M just by getting a better license deal upfront.  From a vendor point of view, they lose 1.1M in a 10 year revenue stream.  Hence that’s why some vendors have had to jack up maintenance fees as they discount their licenses.   It’s too hard to make up incremental revenue.  Now let’s add SaaS to the equation.  For SaaS, assume 100/user/month or 1200/user/year with maintenance included:

SCENARIO 3: The SaaS factor highlights True Cost of Ownership point of view

  • Vendor S (i.e. typical SaaS subscription licensing approach). 20% discount on license = 960 per user per year or 9600 per user per 10 year period.  Total license and maintenance for 10 years = 9,600,000

Right off the back one could make a few erroneous conclusions.  SaaS appears to be 3 times more profitable for the vendor and or 3 times more expensive for the customer!  But, on premise doesn’t include the cost of implementation which could be up to 2 times the cost of the license fee and upgrades which often 1 to 2 times the original license to implement, test, and deploy.  That’s at least another 3 times the overall cost.  Adding up the final bill over 10 years at least for license, upgrade ,maintenance, and implementation:

SCENARIO 4: Comparing 2 common business models against the SaaS factor shows win-win with SaaS model

  • Vendor R’s make it up on maintenance strategy (i.e. big license discount/high rate of maintenance). Total license and maintenance cost 3,200,000.  Add 6,400,000 for implementation.  Add 3,200,000 for upgrade.  Estimated bill = 12,800,000
  • Vendor W’s upfront revenue maximization strategy. (i.e. modest license discount/ low rate of maintenance). Total license and maintenance cost 4,320,000.  Add 8,640,000 for implementation.  Add 4,320,000 for upgrade.  Estimated bill = 17,280,000

Once you take into account all costs to the customer, SaaS looks cheaper for clients and vendors make more.  This win-win is rare in the market but one reason why this model will continue to gain steam in the next 5 to 10 years. In fact this back of the envelope calculation shows a 3,200,000 to 7,680,000 savings.  Now, there are drawbacks such as the inability to customize, dependency on provider, and availability of end to end comparable suite solutions, so for a real ROI, check out the Forrester report on ROI of SaaS vs On Premise.

As these examples illustrate, customers should be comparing these final costs against all proposals.  Otherwise, customers can not compare among various offers and fully realize the true cost of ownership! True cost of ownership should be what’s compared and discussed.

The bottom line for end users – consider True Cost of Ownership when reexamining value in the vendor – customer relationship

Packaged apps (i.e. COTS for the public sector) promised overall cost savings and constant streams of innovation.  Clients went down this route to avoid the hassle of having to maintain and upgrade custom apps.  Yet, most clients don’t understand their cost basis. How can you calculate ROI? Calculating the true cost of ownership requires customers to account for all costs across the five phases of the software ownership life cycle (i.e. selection, implementation, utilization, maintenance, and retirement).  Users can then make apples to apples cost comparisons among custom development and other vendors products.

However, costs alone does not address the benefits different vendors provide.  Functionality still trumps costs in all surveys about buying decisions.  Some software vendors complete a bigger functional footprint, or provide better flexibility as some software is easier to use, or increase risk as some software is tougher to implement.  Hence the Forrester view on ROI makes sense and end users should evaluate these costs along with benefits, flexibility, and risk - Forrester’s Total Economic Impact model.  Customers should focus on value, which might mean a fair balance between cost and benefits and a bit more.  With that in mind, the key questions clients should keep asking are:

  • “Am I still saving money buying instead of building?”
  • “What value am I getting for my support and maintenance?”
  • “Have we achieved the cost savings and innovation that was promised?”
  • “Can we respond quickly enough to changing business conditions?”
  • “Is there enough of a competitive differentiator?”

Once that’s in place, vendor selection will be harmonized.  And, contract negotiations strategy can align with product adoption strategy.

The bottom line for vendors – communicate how your business model drives value to clients

Fairness aside,  maintenance and license fees will be the first two casualties of a downturn as companies look to strike down costs.  Most vendors face growing pressure from users who face tremendous pressures to remain solvent.  However, vendors who communicate the role of total account value (TAV) at the beginning of each sale will gain a new advantage in an educated customer.  As customers understand true cost of ownership, (i.e. the customer view of TAV), they can compare among comparable solutions and understand the value of their investment over a longer period of time.  This level of transparency provides assurance to the customer they received a fair deal.  That eliminates the hassle of trying to manage the perception of being cheated on over the course of the relationship.  It also makes it harder to complain about maintenance and seek third party maintenance options!

Walking through the scenarios, vendors can also alleviate client confusion and gain credibility by demonstrating:

  • Value – demonstrating comparable ROI among competitive products over 10 years.  Showing what percentage of the maintenance dollar goes back to product innovation.
  • Choice – providing options for clients to pay more upfront, less later; less upfront, more later; or a constant stream over a fixed period of time.  Helping show transparency in the product road map and development process.  Provide tiered maintenance options or embrace third party maintenance like options.
  • Predictability – keeping cost structures predictable over an average life cycle of the product (i.e. about 7 to 10 years).  Communicating and delivering on product roadmap promises.

Your POV

Ready to have a frank conversation with your vendor or client?  Have you figured out what the right ratio of reinvestment to profit should be?  Are you a vendor which has been showing how your solution demonstrates value? Posts are preferred or send me a private email to rwang0 at gmail dot com. Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Monday’s Musings: It’s The Relationship, Stupid! (Part 2) – Stop Slashing The Quality Of Support And Maintenance

Economic Downturn Challenges Enterprise Software Executives To Uphold The Sanctity Of The Vendor – Customer Relationships

Conventional wisdom would assume that in a challenging economy, strong relationships would be a key success factor to retaining business and mitigating loss of revenue.  Unfortunately, this does not appear to be the case for many companies, including vendors in enterprise software.  Blame it on the economy, fear of depending on their people, or plain greed, but a good number of executives have taken an approach that attempts to preserve shareholder value at the expense of their vendor – stakeholder relationships (i.e.employee, customer, and partner).  Now in their defense, these muckety mucks face dire times and hard decisions need to be made.  However, they are not in a unique situation and risk jeopardizing brand value, trust, and market credibility for short term gain. Let’s look at five common value destruction strategies:

Part 2: Slashing the quality of support and maintenance while failing to deliver value.

Declining prospects in growing new license revenue in 2009 leave many vendors with few levers to grow margins. As vendors focus on mining the install base, support and maintenance remains the most lucrative driver for growing software revenue.  Though not all vendors have done this, one approach is to raise maintenance fees.  Another approach that some vendors have put forth is to reduce the cost of delivery of the support.  Some strategies such as web based and self service resources help mitigate the costs.  Other strategies such as community support groups provide improved value.  However, as clients become cognizant of the 70 to 85% margins in maintenance, software vendors can expect a backlash from customers seeking choice, value, and predictablity from support and maintenance contracts. Here are a few examples of what end users are experiencing from the “bad” vendors:

  • Moving to the lowest cost support model without regard for quality. “Recently, they replaced our client support team with more junior hires and college grads and we noticed a significant change in quality.  The reps no longer understood our business and we spent more time educating them then got value from them.  While they met their service level agreements for response, they failed at resolving issues.  We had better luck with the free online support forums.  In the end, this was a major factor in switching to a third party maintenance provider who gave us just what we needed – regulatory, tax updates, and bug fixes. “  Global 2000 discrete manufacturing company, Director of ERP
  • Reduction in the overall stream of innovation despite soft commits to product direction. “When we met 4 years ago to discuss our product direction, the vendor invited us to join an advisory group of fellow industry experts.  We found this helpful and thought we would have a role in influencing product direction.  However, their shift in focus to different industries and market segments left us with great plans that never were delivered.  Instead, we ended up with the same list of enhancement requests as our competitors  and we are all waiting for our maintenance dollars to go towards more innovation.  We thought we had a great relationship.  Well, at least we got the regulatory requirements!” Global Pharma, CIO
  • Increasing the cost to remain on stable products despite a customers desire not to upgrade.  “We’ve been using the product for 7 years and don’t plan to upgrade.  Our margins are too low to justify this.  We want to still receive tax and regulatory updates but we now must pay double the maintenance fee we started to pay even though we don’t intend to do any more for this stable release.  The vendor won’t budge and threatens to withhold the software license keys if we don’t pay up even though this is a perpetual license!  What kind of long term relationship is this?” NA based CPG firm, Director of IT

The bottom line for end users – keep seeking value for support and maintenance

Keep in mind that not all vendors are out to squeeze the customer. In fact, we see a resurgence in hiring of senior support executives to run “world class” support teams.  Just recently, the number of openings in the market place reflect this renewed emphasis in hiring by vendors.  At one vendor, they’ve added 90 support personnel in the past 3 months.  But as a precautionary measure, clients can take the following actions to improve value for maintenance:

  • Track interaction history.  Keep a log of support calls, requests, and correspondence with the vendor.  This will help in undestanding who uses support resources and for what purpose and provide proof points with the vendor and to the internal team.  Identify how often patches and updates are applied.  Many clients who pay over $1M in maintenance a year often just call the vendor no more than 10 times a year.  That’s the equivalent of $100k a call.  Someone better show up with white gloves on the next plane and handle the support request in person!
  • Stay on the current release when possible. Despite the high levels of ERP “upgrade fatigue”, being on the latest version or at least the latest technology foundation allows users to keep all options open without going through the whole process of a full upgrade cycle.  When ready, clients can then deploy and access new features or enhancements that have already been paid for in the maintenance fees.
  • Separate support and maintenance contracts. About a decade back it was common to have 2 line items.  Support covered help desk requests, bug fixes, and troubleshooting.  Meanwhile, maintenance provided access to regulatory updates, tax changes, enhancements and sometimes point releases.  Today the bundling of both support and maintenance prevents customers from choosing to keep maintenance without support or vice versa.  In new contracts, clients should push for separate line items so they can eventually engage the vendor in deciding what they would like to pay for going forward.
  • Reduce overall maintenance costs where possible. With an understanding of the value currently provided by the vendor, now’s the time to engage the vendor in conversations on what value can be extracted from existing agreements.  Determine a win-win go forward strategy.

Click here for more contract negotiation strategy tips.

The bottom line for vendors – create market differentiation with good service

Most vendors I’ve spoken with recognize that now’s not the time to raise maintenance fees.  Instead, the top vendors proactively provide programs for clients facing this economic downturn.  A combination of leading techniques focus on a few key areas:

  • Securing proper funding. Though it goes without saying, proper funding does correlate to higher satisfaction scores which result in higher retention and loyalty.  Often, only a small portion (i.e. 2.5 to 7%) of the support and maintenance fees paid by clients actually reach the support organizations.  Now’s the time to step up funding to prevent a customer backlash for the biggest revenue stream.
  • Investing in the support staff. Beef up your support staff with skilled resources who actually understand the product.  Improve training on relationship management, problem solving and resolution, and expectations management.
  • Aligning client facing teams. Sales, consulting, and service teams need to collaborate to solve the clients needs.  While natural conflicts will arise between sales and support, determine the rules of engagement that will preserve a client first philosophy without breaking the bank!
  • Delivering proactive and periodic outreach. Craft an outreach plan to help customers understand their existing investments, where they can gain value, and how they can optimize usage.  New customers should have an on boarding plan.  Balance the frequency of touch points with a prescribed plan that shows how the vendor can earn a more trusted adviser status.  Push out more frequent updates and patches.  Reduce time between major releases.
  • Embracing client feedback.  Its one thing to solicit input but another to actually implement suggestions.  Whether it be feedback on product direction or suggestions to improve support and maintenance policies, leading vendors provide multiple mechanisms to put feedback into action.  Some vendors leave open lists that are ranked order by clients.  These vendors openly and frequently communicate the progress on issues and concerns.
  • Providing choices. Customers need to have different options.  Tiered maintenance programs allow customers to adapt the right level of support and maintenance to their circumstance.  Vendors who have only one support option should create new tiers that reflect customer requirements.  Those with multiple tiers should help customers understand the trade offs.  If possible, separate support from maintenance.  Include version upgrades with maintenance.

Your POV

Got a success story where your vendor has put a value creation strategy based on improving the quality of their support and maintenance?  Has your firm changed their policies to improve the relationship?  Or got a great story on the bone-headed thing your vendor or your employer has done to destroy value in the relationship!  Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Monday’s Musings: It’s The Relationship, Stupid! (Part1) – Stop Commoditizing The Client Facing Workforce

Economic Downturn Challenges Enterprise Software Executives To Uphold The Sanctity Of The Vendor – Stakeholder Relationship

Conventional wisdom would assume that in a challenging economy, strong relationships would be a key success factor to retaining business and mitigating loss of revenue.  Unfortunately, this does not appear to be the case for many companies, including vendors in enterprise software.  Blame it on the economy, fear of depending on their people, or plain greed, but a good number of executives have taken an approach that attempts to enrich their fortunes at the expense of their vendor – stakeholder relationships (i.e. employee, customer, and partner).  Now in their defense, these muckety mucks face dire times and hard decisions need to be made.  However, they are not in a unique situation.  All stakeholders face the same pressures and require a win-win approach.  Yet, this arrogance places their companies at risk by jeopardizing brand value, trust, and market credibility for short term gain with investors.  Five common conventional wisdom strategies that destroy relationship value often include:

Part 1: Commoditizing the client facing workforce at the expense of the client.  With labor a major cost component for software vendors, it makes economic sense to layoff more expensive, experienced labor in favor of  lower cost workers.  Theoretically, the development and standardization of business processes can both improve quality and support an interchangeable workforce.  This level of “industrialization” can bring benefits, especially in many back office functions where processes are well defined.  Commoditized processes can be placed in shared services and even outsourced.  But in practice, when enterprises apply this theory to highly variable processes in client facing areas, they often fail to account for the value a more gifted or experienced employee may have in leveraging their relationships to deliver lifetime value, retention, and loyalty.  In fact, few managers even understand, let alone appreciate the “art” that’s required to create this level of success.  The result- client perception of lost value and a negative impact to the bottom line, especially when there is choice in the marketplace.  Let’s look at 3 real examples:

  • Changing to a more cost effective indirect sales strategy. “Our sales contact for the past 5 years left the company a year ago.  His replacement is now based at headquarters which is 2 time zones away.  We spend $300,000 a year with vendor X and the new girl has not come by once to introduce herself.  In fact, we used to grab lunch once a month to chat about our issues and we’d craft a solution in a matter of hours.  Now we spend less because we see her less.  Even worse, we’re told that we now have to do everything by phone.  This is unacceptable for such a large account.  An inside source tells us the sales rep spends all her time with telephone based campaigns and is measured on the number of interactions but not the quality of interactions.  We deserve a local resource. This is why we are weeks away from considering a new vendor” – Global insurance provider,  VP of Application Development
  • Replacing sales reps after a merger. “We gave our business to the other vendor because we felt our sales rep could not be counted on.  Since the merger, we’ve had 7 reps in 2 years.  For awhile, we had 3 reps call us a the same time. This current guy barely knows our business and only calls when he smells money. In fact, he has not even visited us once.  He lacks the experience to understand our issues and craft appropriate solutions.  He does not advocate for our success with the product.  We have to do all the heavy lifting including reaching out to the development teams.  We still don’t understand why he has to check in with his manager for everything.  This is truly not the partnership we once had with our more senior account execs who were laid off a year after the merger.” – Public sector agency,  Director of ICT
  • Terminating an “expensive” business development manager. “Six months ago, we were notified by our partner manager that he was being let go and a new one would be assigned.  We had worked with XXXXX for the past 3 years from the inception of the partnership.  The partnership provided $XX M’s in revenue and we believed the vendor would value the relationship we had built.  The initial transition was smooth but as we started to get into the technical details, the new guy lacked the educational and experiential background.  In fact, the guy was at least 3 levels junior and he evolved into just an order taker.  We finally confronted the vendor and confirmed our suspicion that cost had something to do with XXXXX being let go.  Last week, we told our partner that we would end the relationship unless they found a suitable replacement.” – Top 30 ISV – VP of Product Development

The bottom line for end users – clients have leverage in crafting beneficial relationships.

Current market conditions provide clients with the power to determine who they do business with.  Clients who have established strong repoire with a vendor’s client facing staff should make clear to that vendor their expectations in the relationship.  Criteria often include experience level, resolution process, executive sponsorship, and influence in product strategy.  In some cases, clients have written their customer service rep, sales account manager, and partner manager into contracts as both an incentive and reward to the individuals who have lived up to their end of the bargain.  Here’s two examples that illustrate the power of relationships in action:

  • Sales rep’s relationship tips deal. “We could have given the deal to either software vendor.  However, the relationship we had with their senior sales director made the difference.  She knew all our players and had followed our issues over the past 4 years.  She had proven to be good to her word and had our trust.  She came in proactively to always hear what we needed and never waited until the last month of the quarter or contract renewal.  When she walked in to the meeting with our new CIO, he knew it was the real thing.  Despite the recession, we understood their challenges and agreed to meet half way for the next year and they agreed to longer term discount commitments” -  Global 2000 process manufacturer,  Senior Director, Business Apps
  • Client dictates solutions delivery team. “The announced departure of a key player in the vendors’ professional services team midway in the project led us to consider postponing implementation for the year.  Once the VP was informed that the project would be jeopardized by his departure, changes were made to retain the individual.  The vendor agreed to have the individual and 3 other key technical resources written into the contract.  We ended up signing a 2 year deal with the vendor.” -  Consumer product goods division, Office of the CTO

The bottom line for vendors – place value on your staff who manage client facing relationships

Consequently, vendors must look at other metrics other than overall labor costs.  One approach – start by conducting a relationship audit.  Identify high revenue customers and partners and the client facing employees that serve these stakeholders.  Determine revenue per employee and profit per employee.  Quantify their relationship value with clients.  Focus on retention strategies, not replacement strategies.  Then work with these clients to identify win-win strategies to solidify long term value.

Your POV

Got a success story where your vendor has put a value creation strategy based on keeping good relationships? Or got a great story on the bone-headed thing your vendor or your employer has done to destroy value in the relationship!  Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.