Enterprise Software Needs a New Business Model

Long sales cycles, even longer implementation cycles and questionable solution value define the enterprise software business. Having worked in this space for almost a decade, I saw it up, close and personal. It was not easy for an engineer to transition to sales – presentations, demos and sales anxiety were big challenges.  However, a non-commercial, yet analytical and curious engineering mind questioned the ways of business. An enterprise software company spends hundreds of thousands dollars on a sales cycle with no guarantee of winning the business. Software vendors fly around teams frequently, build expensive proof of concepts and entertain clients, all on their dime. However, the moment a client signs on the dotted line and writes a fat check, the tables turn. Now the client is spending millions of dollars in the hope of realizing value presented in jazzy slides and achieving the streamlined workflow shown in the Proof of Concept.  More than half of these implementations either completely fail or run many years and multi-million dollars late achieving a fraction of the value promised.  Can such a business survive?

When I bought my Audi, I did my research, paid my tributes to the dealer by spending eight hours haggling, and finally wrote a big check. However, I received the product as specified, albeit four weeks late [the dealer provided a rental car for that duration], and now I am enjoying the great driving pleasure [read value] as promised. A simple transaction where both parties are happy. Yes, car buying can be further simplified by reducing negotiation time and optimizing the delivery process but it still is an efficient process with minimum surprises on both sides. Why doesn’t enterprise software work the same way?

Today, when mankind is obsessed about productivity, innovation and simplification of all things possible, why enterprise software–a $220B a year industry–is not on the list? Software companies should investing more in R&D than lost sales. Clients shouldn’t struggle to find the right solution and labor to get the promised results. It should be a simple and efficient transaction like buying office supplies or utilities. There is some hope in software as a service [SaaS] business model, where clients pay as they use the software and can theoretically turn it off if missing value or a drop in utilization. It is a great step toward simplification but still far from perfect. Any decent size organization ends up customizing hosted software and finds itself in the same rut of enterprise software.

Salesforce.com started only a decade ago. It now has a market cap of $18B and sells at 260 times earnings because it successfully commercialized the SaaS model in an otherwise mature enterprise software space already taken by biggies like Oracle and SAP. However, Salesforce.com can soon become the “Google” of this space if an innovator simplifies the business model to become the “Facebook” of enterprise software.

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2 responses to this post.

  1. Posted by wussel on February 28, 2011 at 9:01 am

    The Facebook of enterprise software? I am sorry but this gets more ridiculous every day. Not only that this stock is overvalued by a factor of 2, no people seems to tink that this company is anything more than it reall is: it sells CRM software and nothing more.

    Its main customers are small and medium sized businesses and Mircosoft is currently luring these business away with their new Dynamics CRM Online version which is cheaper and offers a switiching premium. So there is margin and sales pressure on the horizon for this software vendor and people still are talking like this something like Apple.

    Apple and Netflix are two companies with a unique selling position and therefore higher multiples are justified. But this is just a software vendor with high profile competitors at the gates.

    Regarding R&D: guess which company does invest more in R&D: MSFT or CRM? CRM likes more to invest hundreds of millions for empty land instead.

    This stock will crash down below 100 $ very soon. And even then it is more than fairly valued.

    Ask yourself the following question: if this company is really that innovative why has it not be bought by one of the big boys already? Answer: after paying that price that would have to book an immediate impairment charge of 15 billion $. They know better than any analyst that this company is way overpriced.

    Reply

  2. Wussel,
    Thanks for posting your thoughts. I agree that Salesforce is an overvalued stock at this time. But valuation and fundamentals are two different things. I think Salesforce became so successful in CRM market while 800 pound gorrilla of CRM – Seibel – failed, because of innovation in Salesforce’s business model. Today all major enterprise software companies – SAP, Oracle and Microsoft have their own SaaS based CRM solutions, which proves robustness of SFDC’s business model. SFDC not only has many small companies as clients but they are also getting into Cisco, GE and Honeywells of the world. In addition, they are accelerating the pace of innovation through their App Exchange and Force.com platform. My point is that SFDC has done many things right on innovation and business model front in otherwise dead space as Enterprise Software. Their valuation is a different story. Thats why I don’t own their stock.

    Reply

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