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The Reinvention of Software Vendors and End-User Value

Written By: Olin Thompson
Published On: May 9 2003

Situation

For public application software companies, the phrase, "not meeting expectations" is the most frequent comment heard by the investment community. In the last quarter, 14 publicly traded software companies have used this phrase in their reports to the market. In most cases, we hear them talking about reinventing themselves into a customer focused business model, a "Love The Customer" model.

The stock market of the 90's saw new accounts as a key metric when valuing application software companies. This drove application software companies to a business model designed to win new accounts. New accounts were seen as the primary source of revenue by many of these companies. For both the investor and vendor, this "New Accounts at All Cost" was the right business model. But times have changed. Market penetration is high so few new account opportunities exist. Economic uncertainly has pulled the purse strings of most companies so selling is more difficult. Therefore, application vendors are focusing on their install base as their primary source of revenue while cutting costs to provide profitability. The result is a drastic change in their business model. The old business model of "New Accounts At All Cost" must morph in to a "Love the Customer" model.

Most vendors will tell you that they are both new account and customer oriented, and some have struck this balance. But the vast majority have been worshipping at the Wall Street idol of new accounts for so long that the reality is, they have a new account business model.

Changing A Business Model Not Easy

Changing a business model is a fundamental change; it is not changing the web site or printing new brochures. In this case, it is a flip in strategy from a new account culture to a customer culture, and culture is always very hard to change.

The most important asset of any application software company is people. In a new account culture, sales, marketing, support and implementation teams are oriented towards selling and installing new accounts. In a customer culture, the same departments are required but the skill sets and attitudes can be very different. Can the vendor change the skill sets and attitudes? If not, the customer must suffer the consequences of less experienced, less knowledgeable people.

To illustrate the problem, application software sales management often classifies the sales teams in two groups, hunters and farmers. The hunters search out new accounts, the farmers grow the customer. The skills and the attitude of these two types of sales people are very different. Can a hunter be converted into a farmer? Most sales managers will tell you "not usually." The new account culture needs mostly hunters; the existing account culture needs farmers. What happens is turnover (voluntary or otherwise) with hunters being replaced by farmers. But when a farmer walks out the door, they take their experience, product knowledge, and market knowledge with them. Most new farmers cannot make up for that knowledge and experience and the customer suffers.

In a new account culture, the majority of service personnel are trained and equipped to install new accounts. They are very good at taking a customer from nothing to being implemented. In the customer culture, the service personnel work to enhance the value of the software already installed. While some of the skills and knowledge are the same, the enhancing objective requires greater experience, knowledge and people skills. The identical people issue exists in our sales team example above.

The Software Support model has challenges similar to the services team. When an account initially implements, it get lots of relatively easy calls for help. Once, installed, the quantity of calls drops but the difficulty of the questions increase. Of all departments, software support may be the one that needs in-depth product knowledge more than any.

In this down economy, we must also realize that in the application software business, people = cost. If the company wants to reduce expenses, they really have only one way, cut headcount. Today, most vendors have two objectives, they want the change the mix of skills and they need to reduce headcount.

Business Practices Must Change

Business practices must change. Installed customers are more interested in services than products. Installed customers have excellent knowledge of the pluses and minuses of being a customer and expect to interact with the vendor in a way that enhances the pluses and fixes the minuses. Therefore, they often want more flexibility. For example, they want support of older releases. They want options or "ala cart" support services.

Perhaps the hardest change is management. If the business requires a "love the customers" approach, business decisions are made differently. Metrics on business or team performance must be different. All companies need to make money; the customer-focused companies are focused on a long-term relationship with the customers as their profit strategy. They see the long-term value creation or at least value protection as key to their customers well being.

One warning, beware of vendors who interpret "Love the Customer" as "Milk the Customer". This business model focuses on short-term profits, not long-term relationships. Typically, these companies increase support fees and set service level based upon income and profit considerations. As one executive in a "milk the customer" vendor put it, "It's an easy business to run, you see what your support revenues are going to be for the year in January, you subtract the profit you want and fire people down to the level that you can afford."

"Love the Customer" vendors look for additional ways to add value to the customer in an effort to maintain the long-term relationship. The "love the customer" vendors often offer:

Enhancements Added functionality inside the product
Extensions More software modules, integrated with the existing product
Hot Line Phone support for both technical and user questions
Knowledge base Self service FAQ's available over the web
Consulting Services Business and technical consulting centered on the product and tuned to the needs of existing customers
Education On-going education on both new subjects and "remedial" topics
User Groups Period meetings for customers to meet with the company and other customers to exchange ideas
Partnership programs Relationships with other vendors and services organizations which can benefit the user community
Refresh services Reinstall the software using the most current release
Upgrade services Upgrade the software from one release to the next
Support for prior releases For a fee, they will support "back releases"
Flexible packaging Alternative ways to configure services and cost to best meet your needs

One Vendor Who Has Made the Transition WorkWise, Inc.

Both end-users and vendors can learn from a vendor who appears to have made the transition. WorkWise (www.workwiseinc.com) is a manufacturing systems supplier that provides the Time Critical Manufacturing (TCM), enterprise applications. TCM provides systems in six core areas: product data management, planning, supply chain management, manufacturing execution systems, finance, accounting & administration and decision-support and enterprise tools. WorkWise also provides consulting and support services to 500+ manufacturing companies that use TCM. .

TCM has an interesting history. TCM was originally developed by Effective Management Systems (EMS). In 1999 Sweden-based enterprise system vendor IFS purchased EMS, hoping to convert the TCM customer base from TCM to its own enterprise applications. But customer satisfaction with TCM was very high and therefore customer loyalty made it difficult to move customers off TCM. With the majority of the TCM customers reluctant to transition, IFS agreed to sell the TCM product line in November 2001. Thus, the WorkWise organization was formed comprised of former EMS staff and focused solely on the TCM product line and its customer base.

"WorkWise was formed with our business model focused on being customer centric. We built a team on that model, attracting the best people with in-depth experience in TCM. We focused on providing quality and incorporating new technologies throughout the organization. Our focus on the customer base allowed us to provide high value to our customers through rapidly advancing our products and service offering while engineering high productivity and efficiency throughout the organization", states Wayne Wedell, President of WorkWise. "Our customers have embraced our business model, we are coming off a very successful year in 2002 and our future outlook is brighter than ever". WorkWise had the opportunity to build an organization with the objective of "love the customer" without having to transform itself from a "new account" culture.

Using the information offered on the WorkWise web site, we see that they satisfy the list given above in many ways. WorkWise features their commitment to long-term relationships with the TCM customers. The center piece is product support which consists of a knowledgeable support staff and an extensive knowledge database (5000 entries) available 24 hours a day, 7 days a week. WorkWise claims a customer centric support process engineered to eliminate non-value adds time. They use Call Center support tools and they respond to customer request submitted via the web, phone, email, or fax. Education, business and technical consulting and the WorkWise partner organization are all featured on the web site. WorkWise packages their support and maintenance offerings with flexibility, up to a full maintenance plan which includes benefits of upgrades to new releases, access to their Call Center Web Site and Knowledgebase, discounts on services, and 24 hour disaster recovery assistance. WorkWise is continually advancing the TCM product line and has recently starting shipping their new TCM Version 7 and announced their new application suite "TCM eSolutions".

The WorkWise User Group meeting, set for May 2003, combines the TCM community with attendees including customers, WorkWise, Partners and consultants.

Recommendations

End-users - With your existing software you need to understand your vendor's strategy toward you. Yes, talk to sales people and vendor executives, but look for more than words. Compare the offering to our list above. Ask about why certain items you think you need are not available. Ask about headcount changes, release schedules, release contents, partnership programs, etc.

Vendors - We feel that Workwise has done an excellent job of creating a "love the customer" business model and other vendors should examine WorkWise to more fully understand how it can be done.

About the Author

Olin Thompson is a principal of Process ERP Partners. He has over 25 years experience as an executive in the software industry. Olin has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce and the impact of technology on industry. He can be reached at Olin@ProcessERP.com.

 
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