Supply-chain software developers, the companies that power today's successful enterprises, are little different from the customers who have come to rely so heavily on their products and services. While companies of any stripe may differ in their market focus, and the challenges they face vary in their particulars, certain things remain constant: Everybody, including software companies, has cost-containment issues, pricing pressure and the need for new business.
But balance is required when dealing with these challenges. Companies can't be too stingy while trying to keep a lid on expenses; in software, for instance, investment in research and development is crucial. If that is curtailed too severely, software developers may not be able to compete. As for pricing, supply easily outstripped demand in the difficult economy of recent years. Sophisticated customers knew how to squeeze vendors on price, including software developers. The appropriate response is not to undervalue the software, but to ensure rapid ROI on enabling technology. And what is new business worth? Any company that neglects its existing customer base while pursuing new deals is flirting with disaster.
Many software companies over the past decade seem never to have acquired that balance, according to Oracle, Logility and G-Log executives, who shared their thoughts on how to achieve or sustain consistent profitability in this industry sector.
Many failing companies "flamed out" because their fundamental business priorities were out of order, says Mike Edenfield, president and CEO of Atlanta-based Logility. That's not to say that software companies that failed necessarily had poor ideas or products. But their business models or processes were faulty. As Mark S. Johnson, vice president of marketing at Shelton, Conn.-based G-Log, says, "It's not good enough just being better."
Clearly, there has to be something more to be consistently profitable in software development and sales.
Oracle Corp., based in Redwood City, Calif., is a giant by just about any measure, but it must contend with Business 101 issues or suffer the consequences. "We're not unlike any other company," says Jonathan Colehower, vice president of supply-chain management. "We've got headcount costs and expenses and investment costs." He says he stays on top of things with a personalized desktop portal that gives him a look at expenses in the cost center that he controls. "With my dashboard, I can pull things at a moment's notice and get an accurate view - as accurate as today - at how things look in my organization: how many people I have, what the payroll is, what the expenses are, who's taking vacation, who hasn't - you name it, I can tell you that."
And every department at Oracle is similarly equipped. "We're held accountable to make sure that we manage appropriately to a budget."
Accountability is required at every step if a supply-chain software company is to reach profitability and sustain that for any period of time. In his position as head of supply-chain management at Oracle, Colehower helps generate sales by articulating the company position to customers, and prepping the sales message for the marketing force. But his company-facing role is quite different. There, he faces the development organization and is required to give input as to what products should be developed and what kind of return can be expected on that investment.
"If I say that we need to build out an entire procurement and sourcing consulting practice to be able to compete with someone in their professional services, I better have a pretty good understanding of what the investment is going to be and what the payback is going to be."
Investment and payback aren't the concerns solely of the customer, who needs to see a return on the money expended on, say, IT systems. To be successful, the software developer must continually invest back into the product. The return is in the form of continued viability and competitiveness, not to mention an increase in sales. Profits, reinvestment, payback. It's a continuing cycle, says Logility's Edenfield. "It's mandatory that we be profitable because that helps us provide infrastructure to service our customers appropriately and achieve their objectives," he says. "To stay current in any technology business, you have to invest back into the product. And if you are not generating profits, you cannot invest as aggressively as you should into product to keep it current as things change in the marketplace both from the business process and base technology perspective."
He is confident that Logility invests at a higher rate than the industry average. "This year, fiscal year 2004, we're going to invest approximately in the 23-24 percent range in research and development. The industry average is probably 14 or 15 percent."
It's a given that you have to have a good product to sell, according to these executives, but it is crucial to provide value, and that isn't the same thing as great systems at all. Edenfield defines it as the benefit that a customer gains from interaction with not only his product but also his company and its services. "I'm talking about, what can they accomplish by using us? So, for example, can they reduce their inventory investment, reduce the amount of inventory obsolescence they have, reduce their transportation expense, and then, can we help them improve their ability to serve their customers? If you look at software companies that are successful for a period of time and then flame out, it's because they do not provide that sort of value on a consistent basis."
G-Log's Johnson defines value as remaining "relevant" to your installed base while searching for new business. He says smart executives should have learned something from the "feed the machine" mentality of the late 1990s and the early part of this decade. G-Log has instituted what it calls its Customer First program, which guarantees that C-level managers make quarterly visits with every customer. "We go through a scorecarding and action plan process with them to see that we are maintaining relevance with them in terms of service and value," he says. "It's hard, it's very, very hard."
In these executives' minds, overselling capabilities is what has proved fatal for many software developers. When the market sagged in the last few years, they say, new customers were hard to come by, and old customers had abandoned them because their after-sales service was lackluster or missing altogether.
|"If you are not generating profits, you cannot invest as aggressively as you should into product to keep it current."|
- Mike Edenfield of Logility
Timely, incisive articles delivered directly to your inbox.