Erik Keller over at Sandhill must have had a bit of an off day when he penned an analysis of business models for software companies. This is important for all practitioners because our lives are shaped by available technology so trends others are studying take on importance.
Erik conducted research among a diverse group of technology players and came to the conclusion that SAP and Oracle are more efficient than smaller players like QAD, Hyperion and SSA. In arriving at this conclusion, Erik says:
Most overhead expenses are more associated with the selling of a software license then the deployment of services to install software as well as continuing maintenance payments. Thus when you look at the income statement of software vendors from this perspective, a key measure of corporate efficiency and productivity is the ratio of overhead (S&M plus G&A) to software license sales.
That is an oversimplification. Software vendors who also engage in providing professional services are forever juggling the numbers to demonstrate the most favourable picture possible. Numbers become jumbled and from the outside, it is almost impossible to conduct a rational analysis of overhead allocation.
There has for example been a change among some vendors where they are actively seeking to enter the consulting game as a way of shoring up total revenue – that’s an expensive exercise in marketing with no guarantee of a favourable long term outcome. Crucially, Erik concentrates on the top line license figure and ignores the revenue/cost profiles of maintenance/support and implementation services. In addition, Erik does not make any case for the impact of R&D spending. And yet that is precisely where the challenges of today are emanating.
Erik conducts a comparative analysis of overhead to license revenue, drawing a direct comparison between SAP/Oracle and other vendors, concluding that the big boys are much more overhead efficient than their smaller competitors. Again, I’m not convinced it is quite that simple.
There is nothing intrinsically new in the argument that inefficiency leads to favourable consolidation conditions and opens the door to new business models. We have seen this type of thing during the last dot com boom and there has been a steady consolidation throughout the last 15 years. Remember when D&B was top of the accounting software vendor pile and SAP was a midget in comparison?
Recent fundamental shifts – such as the rise in global outsourcing, the current fashion for shared services in public sector and the emergence of ‘good enough’ commercial grade software are far more likely to hurt the larger incumbents first. Erik sees that and deduces that while the idea of ‘free’ is top line anathema to the vendor community, in most cases, they might as well give it away. That’s an interesting perspective but I’m sure the underlying economics are not quite that simple. Nevertheless, he does a good job of pointing up examples where alternative, low cost business models are proving successful.
SAP/Oracle could get caught in a squeeze at the top coupled with an inability to penetrate markets one or two levels down from their traditional hunting grounds. It is to the mid-market they need to look for volume growth as they sort out their offerings and fulfil their R&D promises to customers. Paradoxically, it is the mid-market where I expect to see the greatest short to medium term impact of workgroup style internet only applications.
Many of these applications hold the potential to disrupt the market, especially in the areas of knowledge management and human capital management. I can see how smaller, nimbler vendors might create a groundswell of innovation among mid-range companies such that their larger competitors and customers could be overtaken in the business effectiveness stakes. If that happens then those mid-range SaaS vendors who deliver enterprise class resilience as part of their service offering will command a premium while the big boys are scratching their heads over cranking out yet another licensing price book – this time for utility computing where the discounts start at 80%.
What does this say for the future of our profession? Is it not true that the technology trends of today have a direct impact on our ability to serve clients? If you agree, then it is but a short step to realising that the technology choices you may not have thought were necessary a year or so ago cannot be deferred. The upside is that the most costly component of yesterday – knowledge management – will almost certainly turn out to be relatively low cost but of exceedingly high value, For which you’ll gladly pay a premium – and still be better off.
Technorati Tags: new business models, SaaS
