ISVs


I was talking to one of the SaaS vendors and he was mentioning that their Sales & Marketing expenses were 75% to 125% of their new sales bookings. He was also mentioning that anything below 75% and anything above 125% is considered to be danger zones. I was relating this to one of my earlier posts on this “To SaaS or not to SaaS – An ISV’s perspective”.  In that post I had dealt in detail as to why ISVs may not be going for SaaS discounting the benefits of moving to SaaS.

This high percentage of Sales & Marketing expense adds another dimension to ISVs possibly not wanting to move the SaaS way. For them to be successful, it becomes extremely important for ISVs to ensure that their sales and marketing is cost-effective, for which they need to have extremely good visibility on their sales funnel and ability to predict and forecast accurately. Additionally, they need to identify metrics that would be able to measure the returns on every program that they do in the mix. Keep what brings revenue and throw what doesn’t in your marketing mix.

This also makes it necessary for the ISVs to have access to quality funding that will allow them to do increased sales and marketing spending towards achieving breakeven and eventually profitability. As more and more customers seek SaaS, this may not result in a level playing field as big platform players would be better positioned to offer them as opposed to non-funded setups. Else, you need to have substantial legacy revenue for you to easily move the SaaS way.

Most enterprises consider business applications to be their priority. Enterprises haven’t given importance to becoming information-centric all these years but it is visibly changing. Priority business applications are ERP, business intelligence and accounting apps.

Primarily, these business applications have helped organizations convert ‘unstructured information’ into a ‘structured format’ that allows for easier management of business critical information. But, organizations have realized that this alone is not enough and there is a lot of knowledge that is available in different forms and buried in different processes across the organization. It becomes imperative for them to manage such content and capture knowledge to be efficient in their business.

This has prompted many enterprises to look at text mining tools that would allow them to do in-depth mining of ‘unstructured text’, both online and offline information, and convert them into actionable inputs for enterprises. This will include customer complaints, call center transactions, email communication etc. Though, this certainly is a few years away for this to become an enterprise priority.

Enterprises definitely have a taken a step in that direction where information-centricity will be sought, with other business applications and data mining application.

ISVs that engineer enterprise software face a number of challenges with respect to flexibility, scalability, extensibility, availability, performance etc. In my mind, the top three challenges that enterprise software face today are:

  • Integration with third party software and IT systems
  • Transaction types from different data sources and support for disparate client types
  • High-volume transaction capability

If a software is architected keeping in mind these three challenges, most issues related to the enterprise software will cease to exist.

I’ve been following this company dimdim for sometime now and it is getting better and better. I wrote a post earlier where I was suggesting that they should position themselves as a Live eLearning Platform with the features that they have. They have gone a step further by providing integration with Moodle, an Open Source Learning Management System. Moodle and dimdim dancing together will be irresistable. The reviews that I read about dimdim’s integration with moodle are also excellent.

I also see a number of projects displayed in sites like rent-a-coder, getafreelancer etc. where the requirements are integration of Moodle and Dimdim, Moodle+Dimdim+Joomla etc. There definitely seems to be a active community that has been positioning Dimdim pretty well. I would love to hear and write about the initiatives that dimdim has been taking with respect to their positioning.

Essentially, at this rate dimdim would become a necessary backbone of any unified communication strategy of enterprises.

There have been various industry reports that keeps suggesting that most companies will move towards SaaS as the customers want them more than the willingness of ISVs to offer their product as SaaS. But then, not many are offering SaaS and the possible reasons why they aren’t offering is what is covered in this post.

  • Most enterprise software vendors don’t want to move their offering to SaaS as the sales cycle is too long and the buyers aren’t going to get convinced easily on the service levels
  • Entry barriers for the software vendor is quite high, and some statistics that I pulled from the web suggest the same. They are as follows: It takes 1.6x longer to get liquid; it needs 3.65 x more capital, it takes 1.75x more revenue to hit profitability
  • Every time a vendor adds a customer, it costs them more cash that quarter that is a result of the customer acquisition, because of huge infrastructure investments. When you are looking at huge number of customers and the cash requirement multiplies accordingly
  • Sales and marketing expenses are too high for them to acquire customers and service levels also need to be on the dot to retain them. Only then, they would ever achieve profitability
  • SaaS business is an investor’s nightmare for liquidity takes much longer than expected and the risks are multi-fold in comparison to license revenue business models. Additionally, even if you grow at xx% tending towards hundred quarter-on-quarter, it still doesn’t give you the profitability as your infrastructure expenses also grow along with it
  • It is less likely to prove to your investors that your customers will achieve profitability; you will be able to retain close to 100% of the customers that you acquire; and your market isn’t saturated
  • Movement from on-premise model to on-demand model is all the more complicated, for most companies that contemplate that are already profitable and they wouldn’t want to risk the high-cost entry into SaaS
  • If you are looking at going the IPO route, then the revenues that you need to garner will be far higher to support that move and the best possible route that SaaS companies will look at will be the acquisition route. This effectively means that the buyers are going to be even more wary in them opting for a SaaS solution

Considering all of this and the fact that they have to look at the feasibility of offering SaaS, it is going to be really hard for an ISV to move the SaaS way.

It has been sometime since I have posted anything in my blog and it has been slightly over 5 months. I am back to active blogging on this space and there have been some changes in what I am personally doing as well. I will have them updated in the next few days. Coming to the main portion of this post….

There is a lot of consolidation happening across the ISV space; quite a few big names are getting absorbed into other companies. Peoplesoft, Siebel, JDEdwards, Hyperion, Business Objects, Cognos, Opsware, Webmethods and JBoss have got acquired. Add to this, we have Pilot Software, Inxight, Outlooksoft, Applix, Telelogic, Xensource, Agile Software, Altiris and  WebEx. Some of the reasons for this trend are:

  • Commoditization of software sector
  • Need for big platform vendors to take over new markets as growth in their own businesses
  • Weak IPO market or weak stock markets
  • Competition from Open Source alternatives and investor pressures

With this trend, only the big platform players will survive and the ones that come to my mind are IBM, Microsoft, Oracle and to an extent SAP (maybe this could well get acquired in due course of time). Is the situation as bleak as it appears to be, and for all my money, it may well not be the case as there is far too much innovation that is happening on the ground:

  • Big names that have survived this are primarily vendors who are privately owned and are less commoditized.
  • New wave of startups – in virtualization, SaaS, enterprise web 2.0 have emerged and will grow to large ISVs and the cycle will continue
  • Pure plays will always be there as long as innovation takes place

Software new product development has become an obsession of late. We have been talking about it, doing a lot of papers and culling out best practices that we have employed, figuring out the success and failure of our association with multiple new products and assigning reasons for their success and failure of the products/business. One thing that is clearly coming out from this exercise is that new products can be created successfully and engineering it is completely predictable.

Then, we decided as to why don’t we do a webinar and share our learnings based on this analysis and discussions and we also requested one of our customers for whom we did the product development to be a part of this session. They have also agreed to be a part of this session.

We (Aspire Systems and MangoDVM) are doing a webinar on this topic of “Successful New Product Development – What does it take?” on the 25th of September, 2008 at 11 am PT/2 pm PT.  You can register for the webinar here.

In this Webinar, you will learn:

  • How to validate your product idea
  • Usage of web 2.0 concepts in the enterprise ecosystem
  • How can you enhance the quality of your product?
  • How to leverage the latest development tools, technologies and platforms available

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