deal architect

Software 2005 Conference - view from a buyer's lens

As usual, MR’s Software 2005 conference was star studded and a great place to network with a number of software executives. I presented with Brian Sommer on a topic called “Vendors are from Mars, Buyers are from Venus”. After listening to many of the sessions during the conference I am convinced I had decided on the correct theme. The disconnect between corporate buyers and software vendors may be even wider than I thought when I built my presentation slides. Here are 4 themes from the conference which when looked at from a buyer’s lens, shows the software industry may be listening to a different tune:

a) During the CIO panel at the conference, Dave Watson of Kaiser Permanante and Ed Meehan of Lockheed Martin both talked of the high-quality software (and other areas) their healthcare and aerospace industries demanded. John Leggate talked about BP’s Six Sigma quality initiatives. Other than in the interview with TCS, the Indian offshore firm and in the exhibition hall where offshore vendors like Aztec and Symphony had brochures and talked about their CMM initiatives, there was hardly any discussions about software quality. It is boring, but the industry has a bad ("abysmal" according to Dave) track record and needs to take quality a lot more seriously.
b) Charles Phillips, President of Oracle, in his keynote described a publishing customer as a result of Oracle’s acquisitions had in the last six months gone from just being an Oracle database customer to also a PeopleSoft HR, JD Edwards Financials and a Retek Retail customer. This customer told him Oracle was now a “strategic” vendor. What Charles did not discuss is that along with that moniker comes expectations of volume discounts, single account interfaces and more. Most of the CIOs bemoaned on their panel that so much of their budgets were already spoken for in existing maintenance and support commitments, and each is looking for ideas to cut that back to free up dollars for newer software. But in various sessions at the conference I saw more discussion on how to market better or how to preserve maintenance revenue margins. No real discussion around how to adjust to pricing pressure which exists and will likely accelerate in the market. Or those around how use of offshoring and open source components allows for lowered software development costs and therefore allows for lower pricing.
c) There were several sessions around Open Source, including an excellent panel hosted by my attorney friend, Hank (“Memphis”) Jones. However, during the CIO panel only John Leggate of BP talked positively about his Linux experiences, and he acknowledged they had not done much in the rest of the “stack”. Neil Cameron, CIO of Unilever talked about his small deployment of Open Source at his Iran operations (largely because US export laws would not allow proprietary US software to be deployed there). The other 2 CIOs acknowledged they had not done much around open source products (they did not touch on open source components in licensed software). Representing over $ 5 b in IT spend, this panel’s data point is not encouraging about corporate adoption of open source products. A lot more education/missionary selling is needed. And the industry needs some robust open source enterprise applications, not just tools and web browsers,
d) Scott Cook, in his fascinating presentation, talked about how Intuit listens to its customers and has introduced a string of very successful products. John Leggate of BP while acknowledging that much of his software budget was eaten up by maintenance costs, said he had $ 20 to $ 30 m a year for new software investments. His coaching to the audience “Come talk to me before you build it. Please don’t just build something, then try to sell me on it”. Neil Cameron of Unilever said “Our (CPG) industry has been dis-intermediated for so long…come help me get closer to customers” In different ways the other two CIOs articulated their own needs. Sounds like buyers with needs. But as Ed Meehan of Lockheed Martin said “ show me projects lasting less than 4 months, and costing less than a million dollars, and I am happy to fund them”. In spite all the talk of market consolidation at the conference, it is clear high payback, low risk, relevant enterprise software will always be in demand.

"Stupid Salespeople Tricks" (with apologies to Letterman)

In response to my blog on Making salespeople sweat at quarter end, I received kudos from a number of software executives. And a brickbat from a buyer. Here is his comment:

"I felt the software negotiating strategies were a bit Utopian only because the software vendors are still playing by the old rules. I just completed a software negotiation with Oracle and we insisted that we were not to be driven by end of qtr tactics. That said, Oracle sweetened the pot 5 days before the end of the quarter to accelerate the deal. Same old Oracle."

Good job, Oracle - keep doing that and even more buyers will make fun of my attempt to get them away from that tired practice.

Well in that blog I did promise to list some sales "stupid tricks"...here are a few more

a) "Revenue recognition"

a common excuse during negotiations is "our accountants will not allow a certain concession because it will cause us to defer revenue". A client CFO challenged a software salesman and asked to speak to his Controller about a so-called recognition issue. The issue magically disappeared soon after. We agreed it probably was a "commission recognition" issue rather than a revenue recognition issue.

b) "Discount shock"

"I cannot believe you can even talk about such a steep discount - never happens in our industry" - said a salesperson during a negotiation last year. I emailed him a link to the Department of Justice website which made public several of Oracle's pricing and discount sheets. Sheepishly, he agreed to a higher discount a few days later. Realize there are many buyers who bluff, but a few of us have benchmarks to back us up.

c) "But we do not make margin on travel expenses"

This is a consultant favorite to justify their 15 to 20% travel expenses in addition to fees. During one negotiation given the "no margin" explanation a few times, I told the consultant "But it is real money to my client. He would rather only pay 5%. Propose more local staff, and only fly in critical resources" See more why on long-term projects those additional expenses are budget and productivity killers in my blog on consultant travel.

More to come....

Enough frequent flyer miles!

A few years ago US systems integration/outsourcing/software vendors could not have done it any other way. We flew consultants week after week to client projects. Most of my 2.5 million lifetime miles on Delta (and a few million on other assorted airlines) were earned while was at PwC. But in today's world of robust telecommunications and global delivery models offshore vendors have shown they can staff 60 to 80% of their projects at remote sites thousands of miles away. Yet even today many US vendors insist on staffing long term projects with many fly-in consultants. In fact fly on any given Thursday evening and you are likely to be seated next to an Deloitte or SAP consultant.

It is unhealthy -and not just the re-circulated air on flights.

a) We see consulting proposals where travel expenses are being budgeted at 15 to 20 percent of (already expensive) fees - just the travel expenses are in some cases many times the cost of the software being implemented. For short term projects this can be justified, but on long term projects vendors should be able to lease apartments and cars and buy Saturday night stay tickets. For clients in major metro cities, there really is little justification to fly in each week a bunch of mid level or junior consultants. There should be enough talent which is local or can drive in. Many clients are capping expenses at 5% or restricting flying to key project team members.

b) Many vendors, sensitive to staff "burnout" from travel allow staff to work from "home" offices on Fridays. While it helps staff morale, think of the effect on client projects. To be able to bill at least 40 hours per week, consultants will frequently work 11 to 12 hours on Tuesday and Wednesdays. But are they really productive for such long hours? Also, what happens during project "crunch" periods where weekend support may be required? Few consultants work on the client project on Fridays - they do their chores, work on sales proposals, undergo training. This often causes morale problems with client employees - they expect slacker Fridays too. I have advised some clients to negotiate based on daily rather than hourly rates, and only pay for four days a week. Also to stagger - some consultants off Mondays, others Friday so there is coverage throughout the week.

c) While at Gartner, a client told me about her experience. She noticed a high incidence of back problems and other ailments in her consultants - attributable, she thought, to the stress of weekly travel. Her vendor had a "Friday at home" policy and younger consultants were constantly planning weekend trips - not home, but to various other holiday destinations. With Fridays off, and consultants often not arriving till Monday afternoon, she only had three and a half days of consultant support a week. The silver lining from this was that her project team learned to become "self-sufficient" much quicker than expected. The vendor's work scope ended up being cut 25 percent below the original budgeted effort; instead, a number of local contractors were hired to fill the void.

d) Most vendors have "solution centers" spread across N. America. But they are mostly used as "demo centers". Especially those in lower cost cities and in Canada can be used as remote delivery sites. Some clients insist on "seeing" the consultants they are paying for, but many would be eager to consider "nearshore" remote delivery options as alternatives to those in India and other "farshore" ones.

The only real bad news from reduced consultant travel on long term projects - airlines like United and American will have even worse financials than they do today.

The good news - my chances of getting upgraded on flights will likely go up! Nah, I am happy flying Southwest .

Making salesperson "sweat at quarter end"

You know the thinking. Desperate to close the deal, he/she will cough up a little more discount. It is time to retire this negotiation “best practice”. I happen to think it is overused – by both sides – buyers and vendors. I know IT and procurement execs who put in their Outlook calendars reminders of quarter and year end dates of their major software and other IT vendors. I started recommending the practice when I was at Gartner 10 years ago. If you accept that vendors have smart pricing and licensing executives, you hopefully agree they know that by now it is a common technique – and that they factor that in to their pricing. Worse, I have seen that if a deal slips in to the next quarter, vendors withdraw their “last minute” discounts and the customer spends weeks negotiating it back. I have seen projects delayed by weeks – the cost of the delay, the underutilized implementation team etc far exceeds the additional software or services discount.

The joke in the software industry is sales people only work 12 days a year – because most of the deals are closed in the last 3 days of a quarter. We have learned from industrial supply chains that helping vendors smooth out their sales and production cycles allows them to become more efficient and pass along better pricing. I happen to believe we can do something similar with technology procurement and selling. When I work with clients, I tell them that technique is nice to have in the back pocket, but I try to get far better pricing based on an analytical negotiation. And I try to get it closed by the 2nd month of any quarter.

Am I naïve? I did a webinar last year for several procurement executives, and when this topic came up one of the attendees sent this comment back: “If you were an experienced negotiator you would know that this tactic is very much used and a viable leverage”. I know it is very much used - I also know what discounts I have delivered to my clients especially when I tell the vendor sales teams I will deliver the contract way before quarter end. In return I expect them to not play their usual pricing/contracting games. If buyers can retire their tired practices, vendor sales people/managers need to give up a few "stupid tricks" of their own.

PeopleSoft and JD Edwards Customers - In the Driver's seat

A number of PeopleSoft and JDE customers were stunned, upset and worse with the Oracle takeover. Many even called their friendly SAP rep to discuss migration and SAP's offering called "Safe Passage" aimed at them.

Time to get over the negative emotions – and actually enjoy the growing vigorous competition between Oracle and SAP, and longer term the likely expansion of other choices.

While each PeopleSoft/JDE configuration is unique, and I am happy to review each on an individual basis (please send me an email) in general, here are some broad observations:

1. Short term

a. Sit tight. Consider re-negotiating maintenance rates with Oracle

b. Inspite of SAP's aggressive discounting, not sure you want to migrate to SAP in an over-heated ecosystem. If you do, focus on managing the significant implementation cost not just on SAP’s likely discounted licenses.

2. Medium term

a. See how Fusion evolves

b. Evaluate how both SAP and Oracle and others are extending their footprint in your vertical

c. If you are ready to move on, have each competing vendor provide realistic migration estimates not just showcase their migration tools

3. Longer Term

As the famous economist Keynes said – in the long run, we are all dead. Who knows what the market will be like, but more likely than not, you could have more viable choices.

a) Evaluate BPO options as they become more viable

b) Evaluate Open source enterprise application options

c) Evaluate how well Fusion modules are doing in field implementation (Oracle Apps release 11i looked good when it came out but went through a series of well documented quality issues)

d) Dave Duffield, the founder of PeopleSoft, may have some other solutions for you to consider by then.

As the old cliché goes – make lemonade out of lemons. You are actually in a much better position than you may have thought when the acquisition was announced last December.

"Vendors are from Mars, Buyers are from Venus"

Brian Sommer and I will be presenting at MR's Software 2005 conference in Santa Clara on April 27. Brian will talk about common vendor mistakes, and I will cover “Stupid Buyer Tricks”. For those who think I only critique vendors, this should show I am unbiased! The Buying AND Selling of technology is broken. See you there! Session details below…

http://www.sandhill.com/conferences/sw2005_breakouts.php#mars_venus

After 4 decades of software commerce, the buying and selling of software is still chaotic, inefficient and unpredictable. Pricing is out of line with buyer value and vendor cost: 80% discounts on licenses; 90% margins on maintenance. The numbers just do not add up. Buyers continue to use tired practices like making the software salesperson sweat at quarter- end. With ten years of sourcing experience with Gartner and his own sourcing firms, Mr. Mirchandani will draw on a number of buyer experiences and emotions, and vendor mistakes and myths. In this session you can expect humor, political commentary and some good practical advice on how buyers and sellers can get along better with each other.

The dying art of structured software procurement

There is a wide body of knowledge on how to conduct a rigorous, objective software procurement process. While at Gartner I wrote extensively about techniques like scripted scenarios, analytical hierarchy process, TCO analysis, payback/justification analysis vendor software quality analysis, upgrade path track record analysis and review of vendor services partner ecosystems. Other techniques available to buyers use include RFPs, site visits, financial viability analysis, participation in user conferences, conference room pilots and many others.

Yet with all these tools available, I find that structured software procurements have actually declined over the last decade. It was common for companies to hire a Big 5 consulting firm to help in a software evaluation project. Then clients came to realize these firms were not really that "independent" with their big SAP, Oracle and Siebel implementation practices. Post-Enron, these firms themselves have spun off consulting businesses or have tightened up internal guidelines on independence in consulting projects – and generally seem to stay away from software evaluations. Mid-tier firms like AnswerThink still continue to help clients with such procurements. But the need for rigorous procurements has not declined as the software industry has evolved in to more verticals/geographies/business processes and architectures and partner ecosystems have become more complex.

Well structured evaluations pay back in several ways. There is usually consensus in the buyer team at the end of the process – not just a politically expedient decision. Specialist vendors get a fair shot to showcase their capabilities – and in the process keep bigger vendors honest. The competitive juices that get going in a well run evaluation usually make for much better licensing negotiations.

I suspect software sales executives will groan when they read this. You believe your product is the best and does not need all this scrutiny. Unfortunately, your peers at your competitors feel the same way about their products and there is only on way to decide which is the best – in a structured, non-political kind of way.

Oracle: Fusion from Profusion

It was good to see Charles Phillips, co-President and John Wookey, SVP Application Development comfortably and passionately (at least on video) kick off the Oracle Applications Strategy Tour in New York this week. I have known Charles from his days as a financial analyst. He knows the enterprise application market cold and has a huge rolodex in the CIO, vendor executive and media/analyst community. John is a dyed-in-the-wool applications executive (yes, you can argue chart of accounts issues with him) with years of industry experience within Oracle and before that at Ross Software. It is good to see Oracle – finally - with solid applications leadership. They are going to need lots of it over the next few years.

Oracle will be trying to release a new set of “Fusion” products by 2008 – blending the best of Oracle, PeopleSoft and J.D. Edwards functionality. It will presumably also provide a variety of migration tools. It has said it will also support PeopleSoft and JDE functionality through 2013. The combinations of application modules being supported, migrated, developed will be in the thousands. Each module like a General Ledger has millions of lines of code, and of course each of the code bases is supported on a variety of databases and operating systems platforms. All this, while Oracle continues to acquire and integrate companies like Retek and SAP targets every PeopleSoft and J.D. Edwards customer with programs like "Safe Passage"

The last company to try and rationalize 2 different major application code bases and migrate them to a new one was Dun & Bradstreet Software (which tried to move MSA and McCormack and Dodge customers to a new client/server Smartstream platform in the early 90s), It failed and many of its customers are now on Oracle and SAP. CA also had a pot-pourri of acquired applications but it mostly kept them separate and gradually watched the customer bases shrink.

So the risks are high. But Charles is a man I know who does not need much sleep. And he has Oracle’s engineering army - much bigger than anything D&B Software ever had. He will need lots of disciplined program managers to keep all the development/migrations sane. And lots of defensive measures to keep SAP at safe distance from his customer base.

IBM execution issues

IBM reported a bad quarter. These things happen - though when IBM sneezes, the whole tech sector often catches a cold.

More concerning are some systemic issues  in its services arm - its biggest single business unit. For a while now I have noticed IBM proposals have moved to roughly a third US badged employees, a third contractors and the rest offshore (either employee or outsourced contract) model. While this is in line with what a Bechtel does in construction or a Boeing does in aerospace, I am not convinced IBM, big as it is, has the deep program management capabilities or methods needed to manage such staffing diversity or team complexity. Worse, from a buyers perspective and IBM's overall competitiveness, the savings from lower cost contractors or offshore staff are often not being passed along.

Time for buyers  to seek more pricing transparency (and appropriate pricing for contractors and offshore components) and to hold IBM's feet to the fire for better team staffing and management.  Vendors like Infosys have shown they can make gross margins of 40%+ plus on offshore models - so IBM can be similarly healthy and delight its buyers' budgets at the same time with better delivery execution.

GE and Software Industry

Every software executive should read GE's 2004 annual report titled "Our Time". It is CEO Jeff Immelt's poetry on business optimism. He talks about new frontiers – in biosciences, renewable energy, "verticals" financing, Hispanic television, global mortgages, and countless other areas. 90% of GE's earnings in 2005 will come from its "growth engines" rather than its "cash generators". In 2000, 33% came from the latter.

The software industry is moping about lack of opportunities, "market consolidation" and addicted to its maintenance revenue and other "cash generators". Time for it to refocus on growth engines.  Just by following GE around the world there are probably a hundred process improvement, vertical and geographic niches for software vendors to develop...