If your enterprise software brings revenue it is worth a lot more than if it just cuts costs – the revenue model shift from Subscriptions to Transactions June 4, 2014Posted by Bernard Lunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups, Strategy Workshop.
Tags: b2b2c, crossing the chasm, revenue sharing partnerships
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Historically, the objective of enterprise software was to make employees more efficient by automating tasks. The software industry moved from cutting G&A costs to making people at the front line more efficient through software such as CRM, Marketing Automation, Business Process Management and Collaboration.
In all cases, the business model was licensing. The licensing model moved from perpetual to periodic (monthly or annual). Seen in this context, SAAS is just an evolution of the old licensing model (plus bundling the hardware into the price). Consumerization of software is a natural response to the risk/reward shift of periodic pricing in SAAS. When vendors got all the money upfront, they could afford an expensive sales process. SAAS shifted the risk to the vendor who got investors to fund the cash flow gap. Investors were happy funding that cash flow gap because periodic SAAS revenue is more predictable and therefore more valuable. To reduce the cost of sale and therefore minimize dilution, entrepreneurs created consumerized services and Freemium.
That about brings us up to date.
So, what’s next?
What’s next is usually an evolution when it comes to enterprise. There may be a disruptive 10x technology shift driving the change, but big companies tend not to make big disruptive shifts. There are exceptions of course, the most famous being Intel’s shift into semiconductors under Andy Grove. That is such a compelling story (told in Only The Paranoid Survive) and so many enterprise executives reference it in glowing terms that we can easily believe that it is the norm. It is not the norm; it is “more honored in the breach then the observance”. Enterprises have built-in inertia, because senior managers are incentivized to optimize short-term profits.
The next iteration will continue the risk/reward shift that was started by SAAS. This will change the revenue model from licensing to % of transaction/revenue (in any shift we see hybrids of old and new so many ventures will mix subscriptions with transaction revenue). I am observing a few innovators who are combining digital consumer marketing techniques with selling a partnership model to enterprise. This is where the puck is going. These ventures get their revenue from a % of the transaction/revenue. This is obviously highly scalable. These ventures take on more risk and have to generate more value before they get paid, but if they can get there they have great scalability and moat.
The idea is simple. You create a consumer service and get enough users that you prove the proposition. Then you scale by partnering with enterprises. One way to look at this is as a technique for crossing the chasm. You can easily find early adopters online. (I say easily, it is of course not easy, but the techniques for doing so are well understood and documented). However, scaling beyond that is hard. Only a tiny % of ventures, blessed with great virality and addictiveness, cross the consumer chasm. As always exceptions (such as Facebook) prove the rule while blinding us to the rule with their brilliance. Many other ventures will cross the chasm by partnering with enterprises. One reason that enterprises are so big is that mainstream consumers trust these large enterprises.
If you prove the proposition directly with consumers you have created a lot of value. You can exit at that point. You can sell to a company that can cross the chasm to the mainstream consumer. Or you can partner with the enterprises that have access to those mainstream consumers in a shared revenue model and scale to become a large enterprise. You will typically be making one or more of these propositions:
- Get more revenue from their existing customers. You are accessing their customer base and they are using your service to get extra revenue from those customers.
- Bring them new customers. This is where the big $$$ prize lies. If these new customers represent the early adopters, the enterprise will be worried that eventually their mainstream customers will “see the light” and want to switch to your model. If they see that they will buy you for a big premium or partner on terms that are more advantageous to you; in this situation you have real clout.
You can create these partnerships on a white label or co-branding basis. Obviously you get higher margins if you get co-branding. There is a spectrum of co-branding. The more traction you have with consumers, the more clout you will have in those co-branding negotiations. Once again, Intel was the thought-leader, with their Intel inside campaign. These negotiations are fundamentally about “how big is my logo vs your logo?” Screen real estate is precious, so this matters. If you have 1 million consumers and the enterprise has 1 billion consumers you have reasonable clout if your 1 million represent early adopters and they can see their 1 billion moving to your model at some point. If you have only 1 thousand consumers, you will be limited to offering a white label service.
Back in the days of the Dot Com Boom/Bust era we saw the concept of B2B2C. Like many concepts from that era, it is easy to ridicule this one, because it did not happen then. That may simply be related to the % of people online. Now that more than 50% of the global population have mobile phones, the concept of tiny ventures getting millions of consumers directly is no longer a pipedream. However it is not wise to ignore the power of the incumbent enterprises. Rather one should get enough traction with consumers to have some clout when negotiating revenue sharing partnerships with those enterprises.
Emergent Business Networks May 27, 2014Posted by Bernard Lunn in Corporate Strategy.
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As my blog title is Emergent Business Networks, I need to explain what I mean by that. I have been groping around this story, like a blind man around an elephant. Prodding, pushing and pulling on the beast, it has seemed very different depending on the point of view:
- New networks for buying and selling. What used to be done within a company needs to done across companies. We will see more platforms and networks that create trust, aggregate demand and enable transaction efficiency.
- Leveling of the playing field between big and small companies. This is a golden age of start-ups. 50 years ago, small businesses accounted for 2/3 of economic activity. Today it is 1/3. That trend maybe reversing (I hope so).
- The end of information arbitrage. This makes the end consumer more savvy and hard to sell to. The buyer is king. This forces innovation by suppliers who collaborate faster and more efficiently to deliver what is needed.
- Reduction in transaction cost. Vertically integrated firms arose because it was usually more efficient to transact internally than externally. The Internet changes that calculation.
- New markets for investing/raising capital. As more start-ups get created in more places, the capital markets need to adapt with new ways to raise and to get liquidity.
- Globalization. This opens up new opportunities to source and sell but also reduces barriers to entry and ratchets up competitive intensity.
I first tried to define this in a post on Read Write Web in September 2007. A year later when the financial markets went into meltdown, it became apparent that the pace of change was accelerating. The meltdown looked like a symptom of a deeper wave of change.
This is what I am trying to chronicle.
Here are some other posts around this theme:
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Think of these Four Gates like a funnel, with lots at the top and very few at the bottom (just like a sale funnel):
Gate #1: Conceptual Clarity.
Gate #2: Prove the Concept.
Gate #3: Scale within Niche.
Gate #4: Expand and Dominate.
It takes totally different skills to go through each of these four gates. Few founders have all the four different skills needed, which is why so many ventures fail as they attempt to pass through these gates. Even harder is the fact that the skills, techniques and attitudes that make you successful going through one gate are exactly the opposite of the skills, techniques and attitudes that make you successful going through the next gate. Each gate requires a wrenching pivot.
Gate #1: Conceptual Clarity.
This is the “fit to the future” phase. This is where you have a vision of “a world where….”. From this you have a mission for the venture along the lines of “in this future world, we will…”. Finally, you have a strategy, as in “we will do this by….”
There has been a lot of fruitless debate about whether concept or execution is more important. This debate is silly, because you must have both. A bad concept that is brilliantly executed will be nothing more than a tough uphill slog with relatively little reward at the top if you get there. On the other hand, a brilliant concept with weak execution is nothing more than “woulda, coulda, shoulda”.
In consumer web ventures, the investment in this phase is coding an early version of the service; these ventures are usually founded by developers who can invest their moonlit coding time, knowing that the best way to articulate the concept is to show something. In enterprise software, the investment in this phase is talking to lots and lots of potential customers to really understand their pain points both now and the likely pain points in the future world that you envisage. The founder is often a sales executive in an established company who keeps hearing the same request from customers that his/her current employer has no interest in fulfilling. They start with a crystal clear understanding of the pain, but only when they team up with a great developer do they create a solution to that pain. The established vendors are nor being totally blind, nor are they only inhibited by the innovator’s dilemma from cannibalising their core business. Usually a technological breakthrough is needed as well. Thanks to Moore’s Law the world is awash in technological breakthroughs but most of them are solutions looking for a problem. What differentiates the great enterprise software ventures is a crystal clear understanding of the problem, because they have heard the pain described by so many customers and prospects.
Conceptual clarity must address these 3 dimensions:
Huge market. A niche might make for a great venture that can be bootstrapped or flipped, but these are criteria for ventures that can “go the distance” through the four gates into multi-$ billion in value.
Massive disruption hitting that market. This is the kind of disruption that creates an existential threat to the major players in the market – think of Skype vs telephone companies or Google vs traditional advertising. If it is not disruption of that scale, the existing vendors will add the features they need to stay competitive (“adding that feature” may mean acquiring your venture, so this is fine for ventures that will be acquired before they go through all these gates).
You have a 10x proposition. You have to be 10x better or faster or cheaper than the incumbents. That seems like a high bar, but it needs to be this big to overcome the start-up risk that you are asking customers to take. Tactically you may start by offering say 3X knowing that as the technology rolls onwards you have much more in reserve, but you must see where that 10x is coming from.
Here are the two things you do NOT need to have at this stage:
- A strategy that seems viable to most people. Most great ventures look totally ridiculous to most sensible people in their founding days. You do need a couple of smart people to believe in the strategy, whether they be co-founders or investors. But get comfortable with the fact that most people think you are crazy (unless you actually are crazy, there will be times when you doubt yourself and when you think most people are right).
- Any proof that any of the three things on that checklist are true. Anybody who asks for proof at this stage does not know how this works and does not deserve to be your partner.
Many great entrepreneurs have conceptual clarity but are weak at articulating it, or too busy executing on the next phase. At this stage nobody cares about your concept. Only after you have passed the next gate does anybody care.
Gate #2: Prove the Concept.
This is the “fit to today’s market” phase. This is also what VC call “traction”.
Enterprise software ventures focus their pitch on the immediate needs of customers who are ready to make a commitment now, leaving out all the futuristic, big picture stuff which would only scare potential customers. Consumer ventures seed the market and prove the value proposition in a tiny little niche; at launch all the market will see and all the entrepreneur is thinking about is that tiny niche.
However, somewhere in the back of their mind, the great entrepreneurs carry a conceptual vision that is a lot bigger than the immediate solution that they offer to get through Gate # 2.
That almost certainly means you get traction in a niche that is tiny compared to the big vision in your concept. This process of digging deep into a niche and focussing 100% on the present day needs is a vital step in turning dreams into reality. It is also 100% opposite to what you do to get through Gate #1.
In enterprise software, getting through Gate #2 means getting the first three paying reference customers. This is a tough job because most customers prefer to wait until you have these three references before committing; one way to drive enterprise software founders crazy is to ask them about this chicken and egg problem. These need to be real enterprise-wide deployments with customers paying 6 figures. A few logos of customers deploying the software in one small area and paying a few thousand dollars won’t make the grade. Lots of enterprise software ventures reach this stage and become cash flow positive without raising any VC, but then stumble at the next Gate.
In consumer ventures, getting through Gate #2 means month to month growth rates in attention. I am using the word attention because the specific metrics such as page views, uniques, downloads, active users tend to change a lot as people “game” the old metrics.
Gate #3: Scale within niche.
This is the “make it work as a business” phase.
For consumer web ventures, the big obstacle at this Gate is proving a scalable and profitable revenue model. There are now trade offs and conflicts to be managed between the needs of free users and the different needs of paying customers (i.e advertisers) and that is often hard for the entrepreneur who won in the last Gate through their self-proclaimed single focus on user experience.
Some enterprise software vendors that made it past Gate # 2 get acquired for their R&D value with a bit of credit for the quality of your customer relationships. If you raised VC, the acquisition value will be a disappointment to investors. As VCs usually get liquidation preference, this will be an even bigger disappointment to founders and management. If you bootstrapped past Gate # 2, the value you will get from the trade sale will still be life-changing as you don’t have to share the spoils with VC. However the big money, the fame and fortune, is reserved for those who make it to Gate # 3. One way to look at this is, don’t raise VC unless you are determined to make it past Gate # 3.
Consumer ventures can exit for great multiples at Gate # 2 as deals like Instagram and WhatsApp show. However these deals are few and far between, it only ends that way if you get massive growth in attention at a time when a big acquirer is facing disruption (think Facebook facing disruption from mobile and thus paying a big premium for both Instagram and WhatsApp).
Enterprise software ventures that make it through this gate need to make the tough transition from founder-led sales to a scalable, professional sales team. This is harder than it sounds for reasons that I describe in this post.
Businesses that make it through this phase are “in the catbird seat”. You have a profitable, scalable model that you can grow with internal resources as long as you like. You will be fending off acquisition offers all the time, both from financial buyers (private equity funds) as well as strategic buyers (the enterprise software Bigcos). You get to choose when and who you sell to. Or you may choose to go all the way to Gate # 4.
Gate #4: Expand and Dominate.
This is the post IPO sustainable public company phase. This is where ventures grow into their original conceptual potential, moving beyond the niche orientation that you need in order to get through Gates 2 and 3.
For consumer technology ventures, consider the difference between Apple and Google and many of the batch of 2011 IPOs. Apple and Google look good on all financial metrics, they built a superb monetization engine, not just superb products.
In the enterprise software space, only one company has broken through into the big league during the last decade and that is SalesForce.com. There have been plenty of SaaS IPOs, but only a few of them have escaped the “small cap hell” by getting a valuation over $2 billion. It is possible that Splunk and Workday will grow into their premium valuations and join the big league.
The “expand and dominate” Gate #4 is about getting back to that original founding conceptual clarity, of realising the big picture potential. All the long years of the earlier Gates are simply laying the groundwork to make this possible. This is another wrenching pivot. The skills, techniques and attitudes that got you through Gate # 4 are all about focussing on a niche, constraining ambitions for the future while concentrating on the immediate opportunities. If you have done a good job in the transition through Gate # 3, you will be able to leave the quarter by quarter growth to a highly competent team. That frees the founder CEO to focus on expanding into adjacent markets and dominating their market. Dominate may sound harsh to some ears but it is what public market investors expect, that is what the high valuations given to fast growth tech companies are based on.
Entrepreneurs that make it through Gate # 2 get the opportunity to exit and that can be a good result if they have bootstrapped to that point. Entrepreneurs that make it through Gate # 3 get the opportunity to exit and that is a good result for founders, management (this is when those stock options become life-changing) as well as any investors who are fortunate enough to be along for the ride.
The Silicon Valley VC orthodoxy for a long time was that no founder has the right profile to make it through all the 4 Gates. Therefore VCs have usually tried to either sell the business at each of these Gates or find professional management to replace the founder CEO. (I refer to the Founder CEO as the key, even though there are often co-founders it is one of them who emerges as the leader). That conventional wisdom is being seriously questioned today as we witness the failure of “professional managers” from big companies to drive the growth of start-ups. When you look at the really great success stories, you tend to see one highly charged entrepreneur who takes it all the way through these 4 Gates – think of Gates, Ellison, Page, Zuckerberg, Bezos, Jobs, Benioff. Their ability to pivot and personally change at each of these Gates is the story of their success. It would be crazy to see these entrepreneurs in their founding days and envisage them as the CEO of a multi-billion $ publicly traded company, yet some of them actually do that. The current VC fund structure, with its need for exits to return money to the Limited Partners, is not conducive to backing entrepreneurs all the way through these four Gates. So we are likely to see some innovation in this area as the rewards for backing entrepreneurs through all four gates is very big.
Enterprise start-ups need thought-leadership selling, a mix of sales, marketing, technology and strategy May 4, 2014Posted by Bernard Lunn in Corporate Strategy, Enterprise Sales.
Tags: enterprise sales, messaging clarity, software business, thought leadership selling
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This is post # 11 in a serialized book called Enterprise Sales for the Digital Age. You can get value from each post in isolation, but if you really need to understand enterprise sales, it is worth reading the whole series. You can buy an improved version, neatly printed and bound, for $6 from Amazon.
There are two core jobs in enterprise software; you either code it or you sell it. All the other jobs, vital as they are, facilitate those two core tasks. In the great companies there is a culture that synthesizes the best of the coding world and the best of the sales world. In those great companies, both techies and hustlers respect each other and know that they depend on each other like mountain climbers roped together.
Sadly that kind of mutual respect culture is all too rare. For the first generation of enterprise software, the sales guys ruled and they often abused that privilege. It is therefore no surprise that in the next generation, characterized by SaaS and consumerization, many technical founders sought to write the sales guys out of the script. This is the world of Dropbox, Evernote and Yammer, using one click at a time to break into red ocean markets.
Marketing has become a science that is tightly integrated with the product (e.g lots of AB testing to find out what gets consumers to hit the buy button). Consumer marketing techniques have been translated to B2B. We now have a perfect quantitative feedback loop of Analytics feeding into Marketing Automation feeding back into product feeding back into Analytics….
This consumerized approach to the enterprise works well in red ocean markets, but even in those it is a venture life-stage issue. You get early traction, the foot in the door, one user at a time using Freemium. To grow your share of budget you need at some stage to engage with the people who manage these enterprises (or sell to an acquirer who can do this, but that is a very limited pool of acquirers). When you reach this stage, you can take an arrogant approach as in “your users already want this, your job is just to enable more of them to get it” or a more solution oriented approach as in “what big problems could we solve for you if we made this an enterprise-wide solution?”. The latter is more likely to work and it requires some real solution selling.
Even before you reach the stage of CIO conversations, the bots alone are not enough. Humans are needed to create a qualitative feedback loop integrated with this quantitative feedback loop. You need to hear what people are thinking and feeling about your product, to understand what would entice them to buy more. When you find this out, you need to quickly integrate this into your product and into your marketing; this has to be an agile feedback loop. For this you need humans who can understand the nuances of the enterprise you are selling to, the geography and the trend line dynamics in the market that you are focused on. They also need to be credible inside your company so that the voice of the customer is heard. In other words you need thought-leadership selling. Or you could have a marketing person do this, or product management person or a developer or the CEO or whoever can do this job well. This is a task that crosses what are today’s job description boundaries; to do this well, you need a mix of sales, marketing, technical knowledge and a head for strategy. The end game is to close a deal, deliver great software, get a happy reference customer, get cash; that is a classic sales job description. If your Product Manager can do this, great. It does not matter what the job description is, the reality is that it will involve both selling and thought-leadership.
So, what is the difference between thought-leadership selling and solution selling? One answer is “none”. The aim of thought-leadership selling is to solve a big problem for a big client and get paid big bucks, which is a definition of solution selling. The other answer is “everything” because “the Internet changes everything”. The twin tsunamis of change – digitization and globalization – create radical, disruptive threats and opportunities for enterprises. Solutions require radical, strategic thinking. It is no longer enough to shave a small % off G&A costs, you have to show how you can enter new markets, fix existential threats and transform the business. One way to look at the difference is simply that “thought-leadership selling is solution selling on steroids”.
Thought leadership selling is also key to creating a market-dominating company by helping to create a message that really resonates. This Forbes article describes how Salesforce.com did it:
“Take Salesforce.com as an example. This was an organization that took cloud-based software-as-a-service for customer relationships into the mainstream marketplace. There are several elements to its success, namely a strong product, but it also has an army of thought leaders who specialize in app development, sales lead development, sales management, etc. that helps customers do their jobs better. Salesforce’s model, driven by product success and thought leaders, has led to a familiarity with “the cloud” and a willingness to accept it in a corporate environment. These achievements not only helped the cloud computing industry with adoption rates, but helped make Salesforce a leader in the cloud-based CRM space.”
Marc Benioff is a salesman. He is also a technologist, thinker, marketer and strategist, but at heart he is a thought-leadership salesman. You can think of thought-leadership selling simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. It is no longer OK for customers to read interesting blogs on your site and then meet sales people who cannot continue the conversation because they follow the old fashioned scripted model of selling. This is particularly true when crossing the chasm through the bowling alley of niche markets. Of course in the early days, the founders do this and in very late days you can hire teams of sales people who follow a more scripted approach, but you need thought leadership selling to make the tough transition from the early days of founder led selling to mature enterprise sales processes.
Enterprise software market leadership starts with mindshare. Winning the mindshare battle requires intense clarity about your message. If you can distill your message into a single word or phrase that defines your market, you have a big competitive advantage. That is what Marc Benioff did with Salesforce.com.
Of course it is not easy to do that. Thousands of marketing professionals get paid millions of dollars to come up with cringe-inducing phrases and tag lines that last as long as snowballs in hell. What makes it so hard is that messaging clarity has to be based on a very deep understanding of the dynamics of your industry and the position of your company within that industry and the customer’s pain point and your technology secret sauce. If your message does not seem real, it does not stand a chance. In fact it has to seem so real and obvious that when people hear it they assume they have heard it before.
History Lesson – Information Bus
That final touch of clarity that is enshrined in a single phrase or word, can make all the difference. I learnt this the hard way in the early days of the market for real-time application integration middleware, when technology such as Publish & Subscribe, real time messaging bus and Enterprise Application Integration was being adopted on a large scale in the first vertical niche market – financial trading rooms on Wall Street.
My company, Aregon, was an early innovator with solutions dating back to 1984 that were the first implementations in the industry. We were the technical pioneers. However when customers started to ask us whether we had an “Information Bus”, a term invented by a rival company, things started to go wrong.
How To Respond When A Rival Has Mindshare?
None of our responses was very effective.
For example, “no, that is not what we call our technology, let me explain” left people cold. Customers saw the Information Bus concept and automatically “got it”. They did not want to waste time understanding some new concept. Coming up with an alternative message is doomed unless you catch things very early and you are very, very good at coming up with an alternative that will crush the concept invented by your competitor. I mean crush, mindshare is not a game of percentages.
Replying that “yes, we have an Information Bus and ours is better for the following reasons” will get you sales, but will automatically relegate you to the position of follower. You can build a good business as the number two or three vendor in the market and, if you time it right, you can sell out at the right time for a reasonable valuation. That is what happened to Aregon. However that is a far cry from being the market leader in a large market that you define, which was what happened to Teknekron, which was later renamed TIBCO (as in the The Information Bus Company). They invented the market-defining messaging concept andthen became the leader in the booming enterprise integration market.
Why Was Information Bus Messaging So Powerful?
The payoff from getting it right is huge. However there are very, very few examples of great successes. Why was Information Bus so powerful as a message?
It was simple and easy to understand for the target audience. This does not mean “dumbing down” for everybody. This was a technically sophisticated audience, so TIBCO could count on a base level of knowledge.
It was based on a genuine “aha moment”. As related by Vivek Ranadive, TIBCO’s founder, the moment came when he asked a software expert to describe why so many software projects failed. As a hardware engineer by training, Vivek, could not understand why well-tested components could not simply plug into the system Bus. Why not do the same with software?
TIBCO created a clear and simple visual diagram of the Information Bus that anybody could draw on a napkin and understand in a heartbeat.
The company executed by ensuring that everybody stayed on message. Execution consistency is critical to success. The phrase enabled a dialogue that went into increasing levels of details as the company engaged in customer dialogues. Yet at every level they could come back to the simple Information Bus concept and diagram.
Think SAVE – Simple, Aha, Visual, Execution.
Thought-leadership sales guys are critical to Messaging Execution at the early stage
The best messages come from a synthesis of what you are hearing from the customers and an understanding of your technology secret sauce. You cannot rush that process.
If you force it and hire a lot of standard sales guys to deliver the message, it is unlikely to resonate in the market, you will just blow a lot of capital on sales and marketing. Hiring external consultants to create your messaging is usually a mistake. At best external consultants can act as facilitators, drawing out what is already known but hidden. Great messages cannot be forced out; they have to emerge. You cannot set a firm deadline and it is better to have no message (just great technology and a solution-selling mindset) than a bad one.
This is why you need a breed of thought-leadership sales guys at the early stage who are totally different from the standard sales guys who help you to scale once you have got a message that resonates. Standard sales guys deliver a message, thought-leadership sales guys help to create the message.
Many entrepreneurs fail by not hiring sales people that fit the life-stage of the venture.
Don’t rush to replace the passion and creativity of the founders – the thought-leaders who got those critical and tough early deals – with too much process too soon. This is a chasm that many entrepreneurs fall into. You have to replace the passion and creativity of the founder-led sales in order to build a valuable business, but if you rush that transition you end up destroying what made your company viable .
Everybody wants process – for the other guy!
Developers want to see sales guys follow a process, so that they sell what can be delivered. Sales guys also want developers to follow a process so that the customers they sell to get quality deliveries on time. Both tend to underestimate the amount of art vs science in the other person’s job. That lack of respect can lead to toxic behavior that damages the business.
When you see how the really great developers are not just a bit more productive than the average, not just 2x more productive but 10x, you would be crazy to load process onto their creativity.
Working with armies of average developers requires boatloads of process, but that is typically the maintenance type of work that is sent offshore. It is all about where you are in the life-cycle. Early in the life-cycle, you want to give individual creativity full rein. A bit later you have some light processes for small teams – that is what Agile is all about. In the latter stages it is all about metrics and scalable, repeatable processes. You move from artisan to factory worker.
The same is true in sales. By the time the product is a market leader in a big mature market, the sales teams need lots of process. You can visit the sales teams of companies like Oracle and IBM to find out how to do this well. However, if you are bringing a new product to market, you need to unleash the creative drive of a few great thought-leadership sales people.
Enterprise software is complex. A simple concept/name/diagram like Information Bus is just the enabler for productive conversations that go into greater detail on the value proposition and technology. It takes years for a concept like Information Bus to become fully realized in the market and in those years you need thought-leadership sales guys who don’t expect all marketing material to be delivered in a neat package, they are comfortable with the uncertainty of refining materials on the fly (those final adjustments in the taxi on route to a meeting and the post meeting debrief where you change a message that clearly did not resonate).
Startups need thought-leadership selling because “you have to capture mindshare before you capture market share”. That may sound like marketing, but the thought-leader sales people are also marketers. They don’t expect brochures and canned messages to deliver. They create the messages based on a thoughtful synthesis of their company’s value proposition and the pain that they hear from the market. Startups need to see evidence of that kind of thought-leadership selling before hiring.
Tags: blue ocean, enterprise sales, red ocean, strategy
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This is # 2 in a serialized book called Enterprise Sales for the Digital Age. You can get value from each in isolation, but if you really need to understand enterprise sales it is worth readinging the whole series. You can buy an improved version, neatly printed and bound, for $6 from Amazon.
There are four market strategies:
1. Consumer. Any selling will be done by inside sales teams sitting in call centers. This series does NOT address consumer markets.
2. SMB (Small Medium Businesses). Very few companies get the SMB market right. It is hard. Each small business looks at the purchase as critical to their company. They want to take as much time as a large enterprise in making a decision, want the same amount of support and hand-holding; the problem is that the $$$ at the closing are a tiny fraction of that enterprise sale. There are only two ways to sell to SMB. You either a) scale back an enterprise solution or you b) scale up a consumer solution. The latter, scaling up a consumer solution, has usually worked best. This series does NOT address SMB markets, although some vendors selling to the top end of the SMB market can sell based on an enterprise approach and scale using channel partners.
3. Enterprise-first. This series addresses solutions that are sold to enterprises. The enterprise market is usually given a title such as Global 2000 or Global 5000 (as Fortune 500 is too small a market and is too US centric). The Global 2000/5000 moniker is loose, it just signifies big. Some people use Fortune 100 or Global 100 to signify really, really big. Enterprise-first vendors are usually agnostic on cloud vs behind the firewall, they will implement whatever the cutomer wants. Enterprise-first vendors are usually also flexible on licensing, using monthly per user (like SaaS), or annual or perpetual based on some other usage metric. More importantly, Enterprise-first vendors focus on solving enterprise-wide solutions; from day one they aim to get a significant sized order that solves a significant problem for the enterprise. The end goal is to be a globally approved vendor within large enterprises, but one does not get there in a single step. Most startups use a “land and expand” strategy; you sell to one department or business unit first and then use that as an internal reference to get the next department or business unit. Then you are in a position to become an approved vendor so that other departments or business units find it easy to order from you.
4. Agnostic. Many vendors have adopted an agnostic approach. Products such as Box and Evernote can be used by consumers, SMB and within an Enterprise. This strategy has clearly been working well. You get enough traction within Enterprise one user at a time that the IT folks want to talk to you. This is when you negotiate volume discounts and implement features that help Enterprise IT to integrate your product with all the other products that they have. This is when you need enterprise selling skills (or sell your venture to a big company that has an enterprise sales team). The agnostic strategy works best in red ocean markets, whereas an enterprise-first strategy works best in blue ocean markets. Get clarity on this score before creating any kind of execution strategy. A “red ocean” market is an existing market. It is red because there is a lot of blood in the water and the sharks are circling. Full frontal assaults on red ocean markets (eg trying to sell 100% functional match against incumbents at 20% lower price points) almost always fail. VCs used to “throw money” at the problem, but no longer, it was a very expensive mistake. Red ocean markets are where an 80/20 strategy works. You sell 80% of functionality of the incuments for 20% of their price (ie for 80% less than the incumbents). This is where single feature ventures such as Box, Evernote or Yammer score. You gain traction one user at a time just like you do in consumer markets, ignoring the jeers and put-downs of the incumbents saying “it’s not enterprise-worthy”. A “blue ocean” market is a market that does not exist yet. That sounds crazy, why would anybody go after a market that does not exist yet? What I mean is that the market has not yet been blessed with a name by the analyst firms. It is not yet a “space” in VC speak. What does exist is a) a serious pain point and b) a disruptive technology innovation that enables a solution for that pain point. The beauty of a blue ocean market for startups is that it allows you to get established before the big vendors notice that there is a market. The best strategy in red ocean markets is to use product-driven marketing, using a consumerized product that gets adopted one click at a time. This is where you use Freemium and, if it goes viral you are golden. If you want to avoid ever employing sales people, get enough traction using these techniques then exit to a big incumbent. Or get enough one user at a time traction that the CIOs want to talk to you, raise a big round, hire a sales team to sell to the CIO and become the new incumbent. In blue ocean markets, you can bootstrap using modern tools and frameworks and the “three projects to a product” methodology: Project # 1: Sell a purely custom solution, get paid and learn. “Once means nothing.” Project # 2: Productize a bit, turn specific features into configurable parameters. “Twice is coincidence.” Now you are ready to talk to everybody you can find who will tell you about their ideal future requirements. Project # 3: Build a product that fits those ideal future requirements. Sell it and license it like a product. “Three times is a trend.” Now you are ready to launch, tell the world about your product, hire sales people, scale. If you choose the red ocean consumerized strategy, serious sales skills can be postponed until later and you may be able to exit before you need them. If you choose the blue ocean three projects to a product strategy, you will need serious sales skills – real thought leadership selling – from day one. The founder has to either be equally comfortable in a tech and a sales role or more likely the venture needs two co-founders, one tech and one sales.
Getting “the vision thing” right in Enterprise Software December 12, 2013Posted by Bernard Lunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups.
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Lou Gerstner wrote one of the best business books of all time, an educational thriller about how he took an IBM that was on the ropes in 1992 (having failed to adapt to a PC centric world) and made it great again, which he called “Who says Elephants Can’t Dance?”
IBM was in total crisis in 1992. He was asked by a journalist what his vision was for IBM. His reply became famous and much misunderstood. He said something along the lines of “the last thing IBM needs right now is a vision”. A couple of years later he did unveil a classic bland corporate vision statement and then said what he really thought which was:
“So the most important strategic priority for IBM becomes, when you peel it to the core, to execute what it knows – and has known for years. Execution will lead IBM back to success.”
Gerstner did have a vision – to make IBM a customer-centric business – but he recognized that realizing this vision was all about execution. Later in the book he revealed his growing understanding that execution was all about changing the culture.
At IBM’s scale he was right. It was 99% execution and 1% vision. For tiny startups struggling to get noticed in a crowded market, that balance is different. Execution is critical – it always is – but startups need crystal clarity on vision, mission, positioning and so on. Mind-share precedes market-share.
In many enterprise software startups, this is harder than it should be, because executives are like blind folks around an elephant. Each one feels a different part, but only one part, such as the side or the tusk. They then compare notes and learn that they are in complete disagreement.
The different parts of the enterprise software elephant are:
A. Technological Advantage aka “secret sauce”. Externally this is irrelevant. Your customers only care what you can do for them, not how you do it. You actually want to hide this externally and protect it with patents. However, internally you must know where your source of competitive advantage comes from.
B. Customer pain. You must know “what keeps them awake at night” and how you can use your technical secret sauce to solve these problems. The difficulty that horizontal platforms have is that the language used to describe this pain varies dramatically by market. The way that a CXO level person talks about the pain is totally different in a Bank, in a Pharma company, in Government, in FMCG etc.
C. Market Space Labels. This happens when some bright analyst does some pattern matching across vertical markets. They spot that the customer pain being described in such different ways in a Bank, in a Pharma company, in Government, in FMCG etc all have a common theme. They give it a name, a label for the market “space”. All the participants in the market realign to position into this new space and to get into the magic quadrant or other short list paradigm.
The problem for startups is very simple:
By the time the customer pain across verticals has been aggregated into a “space”, it is too late for a startup to become the dominant player in that space. The incumbents can offer “just good enough” features to be signed off by buyers who have already put them on the approved vendor list.
Startups have two ways to meet this challenge:
1. Name the space while you are creating it. It’s incredibly hard to do. In this post I describe how Tibco did this.
2. Just deliver and don’t label yourself. That is what Splunk does. You deliver value and let the market figure out what label to put on you.
Tags: competitive advantage, enterprise software, moat, SaaS, subscriptions, transaction revenue
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Yes, “software is eating the world” as Marc Andreessen puts it. But the software game is changing at a fundamental level. The opportunities are massive, but it is harder than it used to be to create sustainable value.
The big change is the revenue model for software; that is as fundamental as you can get. The revenue model used to be perpetual licensing. Then it moved to subscriptions aka SaaS. The next iteration is to transactions. The software enables a transaction to happen and the software owner takes a cut of the transaction as revenue. This fully aligns the interest of the software owner and the software user (as opposed to the licensing model where all the risk/reward passes to the user/licensee). This transaction revenue is variable but predictable; the metrics are similar to consumer web ventures.
Software licensing was a wonderfully simple game. Once you had built the software and sold it, all you needed to do was send a disk to the customer. The first time I saw this for real – I had sold the deal, signed the contract and asked “what do we have to do now?” and was told “just send them the disk”. This was a contract worth high six figures and the cost of the disk was a couple of bucks. During contract negotiations my boss told me that “the only thing we can warrant is that the software will have bugs”. My eyes were opened to the wonders of 100% gross margins. Customers eventually woke up and revolted against having all the risk passed to them; into this gap charged the SaaS pioneers.
During the SaaS wave of innovation, which started with Salesforce.com over a decade ago, the game got a bit more complicated. But only a bit. You now had to manage a data center or an outsourced infrastructure provider. Lots of vendors rushed in to make that pretty simple. Gross Margins went from 100% to around 85% to pay for the hosting infrastructure – still incredibly high compared to most businesses.
But SaaS is still a licensing game and that still passes most of the risk and all the upside to the customer. The SaaS vendor takes away the hardware capex cost and the technical implementation risk. But these are not costs and risks that keep the CXO folks awake at night.
To really build value in the enterprise software you need to build a moat to keep out the “ankle biters”. Then you need to put alligators in the moat. That may sound a tad cryptic, so let me explain.
“Ankle biters” is a term coined by Fred Wilson in this engaging talk to describe the startups that will invade any good niche with dramatically lower prices. The upstarts use open source and cloud infrastructure to copy the functionality of market leaders for a fraction of the cost and then use that lower cost to offer an alternative to the market leader at a dramatically lower price. A classic upstart game is to offer free license and charge only for maintenance. Say the market leader is charging $500k for a Perpetual License with 20% Annual Maintenance (ie $100k per year). The upstart simply charges $100k per year; whether they call this an Annual Subscription or Maintenance with a Free License is mostly optics.
It is very hard for the market leader to defend against this. Their cost structure and sales team incentives make it impossible to compete on price. The usual response is to greet the upstart with FUD and scorn, pointing out the functional gaps. This does not stop the upstarts; their customers happily trade a 10% loss of functionality for a 90% drop in price.
The only sustainable defense is to build a moat. Historically this has been through Patents but this is increasingly a weak defense (the reasons are too complex to cover in this post). The best moat is network effects, where each new user brings in more users or brings in data (or both). For example, you can easily recreate the functionality of Facebook, Twitter or LinkedIn but that does not give you a shot at beating those network effects champions.
Network effects is the best moat. In Consumer markets that is all you need. There is now plenty of advice, most of it free in blogs, telling you how to generate network effects. Despite all that advice, this is a totally Darwinian game, thousands of ventures attempt this and only a handful succeed.
Nobody has yet mastered the game of network effects in B2B. This game is just starting. Fortunes await those who succeed, as B2B has a direct revenue model; combining that direct revenue model with network effects is the magic quadrant of ventures.
What about the “alligators in the moat”? This is using service as a game changer. This matters in B2B where there is lots of functional complexity. To get people to commit to transactions you need to offer really high quality 24/7/365 support. That is of course not easy or cheap but once you build it you have a real competitive barrier.
HP Autonomy. When You Need Forensic Accounting For Enterprise Software, Who Ya Gonna Call? November 22, 2012Posted by Bernard Lunn in capital markets, Corporate Strategy, Deal-making, Enterprise Sales.
Tags: autonomy, forensic accounting, HP, revenue recognition
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Wow, what a story! It makes me wish I was till writing the Enterprise Channel for Read Write Web. It is a fascinating story because how you see it depends on where you sit. This story sits at the intersection of accounting, software technology, enterprise sales and business strategy. I have sat at all those intersections.
The best Forensic Accountants usually make money from their skills by shorting stock. Folks like Jim Chanos who spotted problems at Autonomy don’t need to know a lot about running an enterprise software company to know that when cash flow is way less than profits, something good is not up. They look for simple signals such as high receivables and low deferred revenue. You don’t need years of running an enterprise software business to know that those signals are worrisome (or exciting if you make your money shorting). Of course if, like Larry Ellison, you have years of running an enterprise software business and had your own issues with revenue recognition, you will quickly come to a conclusion that the price being asked for Autonomy was too high.
Why did the massive number of highly paid accountants and lawyers from fancy firms not read those same signals? I am sure they asked a few questions around this but got snowed by the replies. That is when they should have got advice from a grizzled veteran of running an enterprise software sales team who has seen every technique for boosting revenue at the end of a quarter or year (channel stuffing deals, deals done on the 35th of the month, bundling deals with disguised discounts – the gaming ingenuity is endless). Then you need an accountant who has a passion for understanding the nuances of IFRS and GAAP accounting standards as they relate to revenue recognition (yes, they do exist, a quick bit of online searching will surface them and I am sure they can use a consulting gig).
Parsing through the “he said, she said” stories, my guess is there was something wrong in the accounts, something that was either aggressive accounting or fraud (I will let the lawyers parse that one as I am sure they are doing) but nothing even close to enough to justify the $5bn that HP is claiming. HP needs to decide whether they are a consumer company or an enterprise company. The Autonomy acquisition was part of a strategy to ditch the PC and the consumer business and emulate the IBM turnaround under Lou Gerstner. HP clearly wanted to do the deal, knew they were over-paying and were OK with that as part of a broader strategy. If HP had stuck with that strategy and executed well, the price paid for Autonomy would be a footnote in history.
It looks like Meg Whitman leans to the HP as a consumer tech company strategy. That fits her eBay past and the prevailing fashion in Silicon Valley. She may execute brilliantly on that. What clearly does not work is marching determinedly north (enterprise) and then a little later marching determinedly south (consumer). The HP Board is rightly getting a lot of flak for this kind of flip flopping that destroys value really fast. Nor will a fudged strategy work (“a little bit of his and a little bit of that with chocolate sprinkles on top”). Focus matters. Strategy means clarity. “Which direction do we go, Sir?”
Looking at this from a modern software perspective, this mess adds to the move from perpetual licensing to subscriptions and transactional revenue models. These new models simply don’t lead to the same frantic “must hit the numbers this quarter by bringing in that sale NOW and maximising every $ on that sale”. Subs and trans revenue is fairly stable and predictable. Nor do subs and trans models leave as much room for gaming. I suspect the Boards of enterprise software companies that still rely on perpetual licensing will be debating this subject more vigorously than before the HP Autonomy story broke.