Posted by andy Fri, 23 Sep 2005 13:50:00 GMT

I have recently spoken with a number of enterprise software companies about a raft of strategies for growing their businesses. The market for enterprise software (including hosted apps) is improving after a tough half-decade, but it still isn’t comfortable for vendors. Buyers still don’t like buying big systems because adoption …

I have recently spoken with a number of enterprise software companies about a raft of strategies for growing their businesses.

The market for enterprise software (including hosted apps) is improving after a tough half-decade, but it still isn’t comfortable for vendors. Buyers still don’t like buying big systems because adoption is difficult and expensive. Budgets for new licensing continue to shrink. Sales cycles are long and expensive for vendors. Innovation by competitors continues, often involving powerful disruptors like open source.

Now let’s look at some good news and growth strategies

On-demand (hosted subscription) apps
Customers are finally moving to on-demand (that is, hosted subscription) applications in droves. They like the lower adoption costs and hassles, the starter packages, and they can pay for these deals out of operating budgets, which are much healthier than capital budgets. On-demand is also great news for a company that can afford to give up the initial license check. It’s good news for the CFO because the revenue stream and revenue realization is smoother and more predictable. It’s good news for the sales guys because customers can get started quickly. It’s great news for the product team too. They can move to agile development, because they control the release cycle and don’t need to fit closely to the long upgrade cycles required by installed corporate clients. And, on-demand products are strongly associated with open source infrastructure. Most of the leading on-demand vendors use open source components because they save money and increase flexibility in both development and datacenter operations. One big win (cost saving and development acceleration) comes from not having to test and support the various types of proprietary software that clients insist on (eg Oracle versus DB2). An emerging innovation is the custom ASP.

User innovation
Most vendors of any kind of product fall into a (profitable) rut. When they go to make a new version of their product, they survey existing customers to figure out what to do. That leads them to build a better version of their existing product. However, it doesn’t lead to market growth through products for people who aren’t already customers. Users, however, are a diverse group, and some of them will do amazing, market-expanding things with the product if they are given the opportunity. The key is to pay attention to the right customers (the ones that are “leading” as opposed to just eccentric) and give them the opportunity to innovate. You can read my blog entry on this effect here.

Platform strategy (with VARs or customers)
The platform strategy is a way to work with customers, consulting firms, and VAR’s that know more than you do about a particular market. You give them the tools to modify your product, and they make more specialized products. Salesforce.com has been pushing this strategy hard, and winning with it. The key challenge is making it work in the new environment where more apps are centrally hosted. Customization, sharing, and open code are relevant in the hosted case as well as the installed case.

Customer Collaboratives
The customer collaborative is a way of supporting the customers that work with your platform. Vendors have traditionally avoided supporting custom or integrated versions of their products, because upgrading those versions is a really hard task. Better to stick with the one line of official releases. Unfortunately, the customer reality is that they DO have customized and integrated software. The vendor can get extra revenue (literally, an add-on maintenance sale), raise customer satisfaction, and gain new innovations, by providing extra support for those customized and integrated versions. The customer collaborative provides shared code, build environments for customized versions, and tools for collaborating within and between customers and integrators. If this allows customers to get enhancements they want faster, they may even buy faster.

From Outsourcing to the Agile Global Team
Over the past ten years, a large amount of software development has been moved to low-cost countries through outsourcing. In the process, we gave up the agility of having teams work together on the entire process of defining and building software. Outsourcing required a considerable amount of extra work to specify software, hand it off, and accept it. Now, with “inspired by open source” techniques, we can get back the agility. We can create a single global team that is even more distributed. Any of those team members can be responsible for any part of the process. This saves money because the distributed team can handle a larger chunk of the process. And, it saves time because we can run agile processes.

Open Source licensing
Open source and shared source licenses are an essential ingredient of platform strategies (even Microsoft’s), and customer collaboratives. They are easy to adopt if the vendor is selling some core, closed-source platform code (for instance, a search engine, workflow engine, or OS) and they want to encourage people to wrap applications around it by releasing a bunch of application level code.

Selling software licenses to enterprises is a long, expensive, and often fruitless process. Only big software companies can do it comfortably. If you are a smaller company facing this sales cycle and losing money, you have options. You can try to sell yourself to a bigger company with a better channel. Another now-standard option is to release your software as open source. This creates an entirely different sales cycle, where users adopt your software first, and then call you later for service and support. It’s not a cure-all, but it’s often better than the alternative. I think it will be a financial win in cases where the first-mover can take a big chunk of an existing application market.

Buying, Selling, and Global Scans
If you aren’t big enough to survive the sales cycle, selling to a bigger company with a better channel is probably a good idea. The flip side of this is that a lot of software assets (with limited customer bases, but good embedded industry knowledge) are available to be purchased at very reasonable rates. It’s a big world. If you post a message to contract development boards, industry boards, venture capitalists, and IT users who build their own software, you will often find software that roughly meets your needs for satisfying a new market.