The Changing Software Business Model

A Software Marketing Advisor white paper http://www.software-marketing-advisor.
com
The Changing Software Business Model
By Joanna Lees Castro
Copyright 2008. Software Marketing Advisor.
Contents
Introduction ............................................... 2 Software Trends ........................................ 3 Impact on the Business of Software ....... 3 Planning Your Software Business Strategy ............................................... 4 What are Your Software Services Options? .............................................. 5 Your Action Plan ....................................... 5 References................................................. 6
Introduction
The business software marketplace is changing, as vendors and customers move toward a service-oriented model. These changes are impacting many of the fundamentals of doing business as a software vendor: strategy, marketing, sales and distribution. The goal of Software Marketing Advisor is to provide timely information and advice to software and software services vendors about doing business in a servicesoriented world. This whitepaper outlines the changes that are occurring, and the types of actions that software vendors must take to stay relevant in the business marketplace.
Copyright 2008. Software Marketing Advisor. http://www.software-marketing-advisor.com
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Intel Corp., for example, has realized ROIs in excess of tens of millions of dollars. This is according to Steve Birkel, chief technology architect for Intel IT, in his recent interview with SOA Magazine. The primary reason behind Intels move to SOA three years ago was the amount of resources they were putting into point-to-point integration of vendor software products. We were really spending an inordinate amount of our development capacity in both developing and then sustaining those integrations as vendors would change their products, said Steve. The benefit has been the ability to reuse services, he explained, you save every time you re-utilize the service in the process of developing a solution. However, he also pointed out that to be ultimately successful with SOA, [one] has to make substantial changes to the lifecycle because the [traditional] lifecycle is designed for that vertical integrated solution delivery mechanism and all of the planning [that] surrounds [it]. And thats just for SOA. If one looks at the related trend of SaaS, that can have a profound impact on a software vendors business, impacting everything from software deployment, pricing, marketing, and sales in a significant way. Vendors that have been used to the level of direct customer interaction and relationship building that is required of a high-end software sale, find themselves faced with figuring out a move to a channels-based service sales model through partners. This can raise significant challenges for software vendors and consultancies, particularly for those that provide a verticallyoriented customized solution requiring onsite setup and integration, and for those that are small and dont have the resources or infrastructure to invest in re-architecting their entire product suite or defining an entirely new sales and channel strategy. Many of these vendors are finding themselves squeezed from both sides: from the bottom by the rise in web services-based or hosted one-size-fits-all solutions, and from the top by the major enterprise software vendors who are broadening their reach in this space, such as Microsoft, Oracle, SAP, and others.
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Software Trends
Information Technology is moving toward a service-oriented model. This change is evident in a number of current trends in the IT marketplace: for example, Service-Oriented Architecture (SOA), Software as a Service (SaaS), and the move toward IT as a service business. Enterprises and software vendors alike are adopting SOA. SOA allows business needs to drive IT architecture through the integration of repeatable services to support business processes rapidly and flexibly, with the potential for substantial ROI for small and large companies alike. Software vendors are moving toward Software as a Service (SaaS), with software applications offered as web services over the Internet, hosted by a 3rd party SaaS supplier. This gives business customers the benefit of low initial investment in the software, and minimizes their growing IT complexity. Finally, IT departments are finding themselves expected to be run like a business, providing service offerings to their business unit customers complete with Service Level Agreements (SLAs) and service-level management and metering.
Impact on the Business of Software

This ongoing move to services has critical implications on the architecture of software products, and even on the business models that vendors need to consider, as their customersfrom small to Fortune100 companies continue to move toward a servicesoriented model.

planning and product lifecycles, as evidenced by the Intel quote above. They expect agility from their IT solutions, and that same expectation extends to the software products or services they purchase: o vendors that can integrate, customize and deploy their solutions quickly, meeting the customers desire for fast time-to-money, o applications that are component-based, making them easier and faster to update and integrate with other applications, and o solutions that provide standards-based integration with existing systems, making it easier for the customer to integrate with their legacy systems or other vendor solutions. As reported in Software Business Executive Report in January, IDCs recent report Predictions 2008: The Post-Disruption Marketplace Takes Shape, predicts that 2008 will be the year in which software vendors must fully engage with adopting their new business models. Those firms that continue to sit back and watch are going to be increasingly left behind by these changes in the marketplace. Software developers must consider that their applications may end up running inside the end customers business (on an in-house server or client), may need to run outside their business (at a hosting provider site, for example, or even at the ISV location), or may run at the site of a customers supplier, client, or partner (in the case of a B2B application). Ideally, solutions should be developed to support all these deployment models to capture the maximum market. Likewise, vendors must take into account the different pricing, sales and marketing strategies appropriate for each model, as a one-size-fits-all approach is unlikely to succeed. Recurring revenue is always attractive, and vendors need to consider situations where subscription or service-based pricing can be leveraged, rather than one-time license fees. Of course, the vendor needs to be able to justify ongoing fees by some recurring support or value-add provided to the customer. These decisions must be driven by the vendors
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The move to services is inevitable, as the global market place drives businesses to be more flexible and agile in order to stay competitive. Customer Relationship Management (CRM) software, for example, is one area with rapid adoption of a SaaS model, with 62% of companies believing that ondemand solutions will replace licensed software solutions as the premiere platform for CRM, according to a recent report by the Aberdeen Group. Budget pressures are forcing businesses to consider whether to outsource or keep in-house their various IT functions, where in many cases outsourcing is most cost-effective.
Planning Your Software Business Strategy

Given this inexorable move to a services model, should your strategy be to stay laser-focused on a competitive niche where you have customers willing to pay for a full-service vertical software solution? Should you join the trend toward a Software-as-a-Service (SaaS) business model? Is the right answer a software consultancy model or addition? Or would it be something in between, with a low-end hosted service option and a high-end customizable software solution? But this requires additional resources and know-how to invest in and market two very different product streams. The answer will depend on many factors: your customer base, their expectations and needs, your solutions usage models, your applications technical characteristics, your in-house skill sets to support a new services approach, your existing vendor partnerships, and your businesss end goals. What does this mean for software suppliers? Customers no longer have patience for monolithic software

business model. We suggest a usagemodel-driven analysis to develop the business model and find the optimal market fit for your software solution, as shown in the figure below. Componentize your product, not only in the software development lifecycle, but also in the way the product is priced and licensed. Allow customers to select from a menu of options that change or update frequently to keep them coming back. o Go SaaS: this could be either through moving your solution entirely to a hosted service, or by providing two different options to your customers: one being the traditional license model, and the other a (perhaps lighter) hosted service model. This will require that you identify the right partnerships and marketing strategy to take full advantage of that new model, and to ensure your solution brand remains front-ofmind to your customer base. o Consulting: Supplement your product strategy with additional consulting services to provide the customization and implementation support that traditionally might be bundled with a vertical high-pricetag software solution. If youre going the SaaS route, this could include helping your customers align their infrastructure and business processes to take the best advantage of the service that they are adopting.
What are Your Software Services Options?

The opportunity to move to a recurring revenue model can be attractive, so long as the right short- and long-term planning has gone into the selection. Vendors have a number of options within the services model, such as o Subscription: Continue with a vertical or horizontal license-based software product, but add a subscription component with a unique ongoing value-add to your customer. That could be through additional continued support, ongoing consulting or customization, ability to get frequent component updates or additions, or some other type of value-add. o Menu of Component Licenses:
Your Action Plan

Which of these routes you choose will depend on the factors outlined above plus, more than likely, a number of others that depend on your specific situation. Talk to your customers, and identify other potential customers that you could gain from a change in business model. Most businesses will be following Intels adoption of an SOA and continuing on to a full services
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model. The question is when, how, and whether your software solution will be a part of their plans. Now is the time to take action and refine your business strategy, including both short and long-term plans, in order to take advantage of these trends to grow your business. Software Marketing Advisor can assist with helpful tips and information via our website, articles and whitepapers, templates, as well as our fixed-price and customized consulting services. Joanna Lees Castro runs Software-MarketingAdvisor.com, a website dedicated to helping software vendors with business planning and marketing strategy in a services-oriented world.
References
o Software Business Executive Report, Jan 28 2008, Many Software Companies to Engage in New Business Models in 2008 http://www.softwarebusinessonline.co m/eNewsletters/2008/newsletter_01_ 28_08.htm#fe o Aberdeen Group Research Preview, Dec 2007, CRM Software as a Service Update 2008 http://www.aberdeen.com/c/report/res earch_previews/4672-RP-crm-as-aservice.pdf
o Intel Chief Architect Steve Birkel on

SOA Practices and Intels SOA Adoption, SOA Pioneers Interview Series, The SOA Magazine, November 6 2007 http://www.soamag.com/I12/11071.asp
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A Software Marketing Advisor white paper http://www.software-marketing-advisor.