Enterprise Software Sales and Procurement Need a Makeover

Time to Tie Payment to the True Measure of ROI:  User Adoption

Today, I believe that the only way for IT organizations to truly measure their effectiveness is by analyzing the usage patterns, satisfaction and productivity of their customers: end-users.  Period.  Any IT organization that doesn’t use this kind of measurement won’t be successful over the next 10 years.  As David Sacks, the founder/CEO of Yammer, has said: “Voluntary adoption is the new ROI.”

One of the things that bugs me the most about the software industry is the sub-optimal behavior that exists between vendors and buyers.   Software buyers and vendors are engaged in a dysfunctional dance that wastes money and stifles innovation – on both sides. This dysfunction is driven by outdated software business models, and further complicated by non-technical sales and procurement people whose identity is tied to controlling the buying process instead of optimizing value created for end users.

Simply put, times have changed dramatically; enterprise software sales and procurement haven’t.  Here are the new realities, as I see them.  (Most of these realities also apply to how software is sold to and purchased by federal and state governments.)

12 Realities That Vendors and Buyers Can Ignore – But at Their Peril

1.       The pressure of the “consumerization of IT” is game-changing. This pressure is coming down on enterprise IT organizations, although most still have their heads in the sand.  This pressure is going to get acute over the next few years as the gap widens between what is available to the average consumer on the Internet and what an employee’s IT ecosystem provides at work. This gap will reveal just how wasteful and disconnected most IT organizations are from end-users’ real needs. 

2.      Buyers purchase a ton of software that they don’t ever use, much less realize value from.  The enterprise software emperor has no clothes. 

Buyers need to step away from the standard perpetual license agreement.  Just put it down... and pick up a subscription/term agreement: it will be okay, really. Businesses haven’t imploded because they don’t use perpetual agreements.  Short-term, subscription-based agreements are working great for all those Google Enterprise and Salesforce.com customers who have month-to-month agreements.  Subscription/term agreements help ensure that buyers don’t waste bazillions of dollars buying software they don’t use. 

Now, the finance dudes will come in with their spreadsheets and models that show how you can finance perpetual agreements at a lower cost of capital.  Don’t believe them.  What these models don’t take into account is one important fact: that if you pay a vendor a bunch of money for a product that is supposed to do something and the vendor isn’t on the hook financially for this, then the vendor probably won’t do it.  There is little incentive for the vendor to ensure that the software is deployed, adopted and improved over time. The vendor (particularly if it’s one that’s oriented toward short-term goals) will likely take the money and run. Not necessarily because they are “bad people” but because the business (like everyone else) is under pressure to deliver more, faster, better. 

3.      Vendors sell a ton of software that is never deployed (see#2). And many of them don’t care.  As their businesses have matured, many of these vendors have sacrificed their souls to short-term thinking and financials. They are no longer driven by missions to deliver value or great experiences for end-users.  By comparison, the consumer Internet companies that have moved into the enterprise software market have used alternative models and behaviors and begun to disrupt the ecosystem.  Those customers that have embraced new usage-oriented models have benefited significantly. Those customers that haven’t are just wasting money and causing their end-users to continue to suffer with outdated and expensive technology that preserves the short term job security of narrow minded IT staff members.  

4.      Software vendor sales people and customers’ procurement staffs are disconnected from how software is used and developed in the enterprise.  Generally, neither procurement folks nor salespeople understand the technology or how it’s used. They are managed to objectives that have nothing to do with successful deployment, much less adoption of the software or technology.  Procurement people generally care about discounts and sales people care about commissions.  It’s time to get these folks out of the way or give them incentives that align with effective adoption and value created for end-users.  One of the powerful benefits of SaaS is that end users can buy their own capabilities and just expense the cost.  This is how many customers start with Salesforce.com, and I’ve seen this same adoption pattern occuring in infrastructure at companies such as Cloudant. 

5.      Software that sucks.  There’s a disconnect between the amount of money that big companies spend on software and the value they get from it. Many big companies only resolve this disconnect over long intervals, after tons of money has been wasted on useless technology projects that aren’t aligned with users’ requirements.  Moving toward shorter-term subscription models helps reinforce the need for software companies to create value within reasonable periods of time.  In other works, deliver software that doesn’t suck.

Part of the reason corporate IT projects take so long is that businesses don’t push their vendors to deploy quickly or drive adoption. Here’s an example, from the Front Office/Customer Relationship Management sector of the software industry.  Siebel Systems launched its system in the early to mid-1990s using the traditional third-party installed and heavily configured model. (I suspect that the rationale was: “It worked for ERP, so let’s do the front office the same way.”)  Unfortunately for Siebel, things didn’t play out this way. As Salesforce.com launched, customers realized that they could get immediate adoption, usage and value by just signing up for the Salesforce.com service. These customers perhaps didn’t get all the customization that usually came with traditional enterprise software, but most of that customization was being sold to big companies by consultants who wanted to make money as part of the enterprise IT ecosystem.  A lot of smaller customers didn’t need the customization, and ending up paying for overhead that they didn’t need.

A general rule of thumb for IT organizations was that you had to spend an additional 2X-5X in services to get a third-party enterprise software application deployed and working.  This never made sense to me, but I participated in the dysfunction along with everyone else for many years, on both the buyer side and the sales side.  As this thinking became more broadly accepted, it became a self-fulfilling prophecy: vendors could make money customizing the solutions for customers (regardless of their actual need for the customization), so it was in their best interests to create software that required a bunch of consulting to get it working for customers. (Software that sucks, in the classic sense of “suck”: time, money, corporate IT resources.) 

With the evolution of SaaS, all vendors now face more accountability, like it or not. Salesforce.com knocked it out of the park as an independent business while Siebel sold out to Oracle and has bounced along the proverbial third-party software bottom, collecting maintenance on software that they sold 10 years ago to big companies who are not capable of switching to Salesforce.com.

6.      Traditional business models encourage vendors to extract as much money from their customers as quickly as possible – regardless of whether the software works or the customer actually needs the software. During the 1980’s and 1990’s, this “sell first, ask questions later” model became standard practice for technology companies, based on the success of proponents like Oracle.  But now, we’ve evolved.  Customers shouldn’t stand for it. There are better alternatives.  And vendors in just about every enterprise-software category should realize that it’s only a matter of time before someone comes along and provides better solutions that work for users quickly.  Let the hangover of enterprise software purchases begin. 

7.      The perpetual-license model creates perverse incentives for both buyers and sellers.  The subscription/term license model creates a much more rational incentive for the seller of technology to deliver both short-term value (through adoption) and long-term value (through improvement to the software) for customers’ end-users.  With a perpetual license model, the seller gets too much value up front, misaligning his interests with those of the buyer.

8.      Traditional “maintenance” is just as dysfunctional as the perpetual license that it stems from.  Fifteen percent (15%) maintenance is not enough money to innovate and improve a new system. Therefore, vendors’ business models put them in a position where they have to “upsell” their customers’ perpetual licenses for some additional usage or a new product. 

9.      Many customers should be happy to pay larger subscription fees over time in exchange for significant probability of greater success, user satisfaction and innovation.  They just don’t realize this, because business owners, end-users and engineers aren’t involved in procurement processes.  This perpetuates a lack of accountability for vendors and feelings of helplessness among users and consumers of these software systems. 

10.   Multi-tenant Web services present a compelling alternative. The broad availability of commercial multi-tenant hosted web services (epitomized by Amazon Web Services and GoogleApps) is creating a widening gap.  On one side of the gap, there are buyers and sellers of software who are merely perpetuating outmoded models for consuming and selling software.  On the other side of the gap, are software buyers that demand that their vendors deliver value through reliability and innovation every single day – and have the means to measure this. 

11.    FUD continues to rule – for now.  Many of the procurement and sales establishment are using the FUD (Fear Uncertainty and Doubt) arguments to slow the adoption of new software-as-a-service models.  I can understand why: the new business models including SaaS challenge their very existence.  However, as a result,  their customers are saddled with a  sub-optimal state of productivity for their IT systems and infrastructure.  This is not sustainable as IT organizations are under dramatic pressure to reduce costs significantly.

12.   IT organizations that embrace new software models are more productive and efficient.  They can focus more on high-leverage skills like networking and integration – and worry less about lower-value activities such as racking and stacking servers or building and releasing software. These benefits have been documented among the likes of Google Apps enterprise customers (Genentech for example) as well as large companies that have embraced Amazon Web Services (Netflix for example).  

I believe that all software contracts should tie payments to end-user adoption.  Monthly software subscription deals can be used to accomplish this relatively quickly: if users adopt. you pay; if they don’t, you don’t pay.  

For software industry old-timers this is heresy.  But it’s time to leave this one in the rear-view mirror – or eventually suffer the consequences.  The packaged third-party software industry is due for a reckoning - it's time for vendors to modernize their business models which depend on bilking customers for perpetual licenses and maintenance streams on software that is never used.  And customers should start buying software as a service and not overpaying for big perpetual licenses that they may or may not ever use.  

Spend More Time on Your Mission - The Money Will Follow

Time – and how you use it – is the most important consideration for a Founder.  This is one of the most important lessons I’ve learned in my 20 years as an early employee, founder, and CEO of start-ups.

When you’re starting a new company from scratch, time is your most precious resource because it’s so scarce.  Initially all you have is yourself and one or two partners who are preferably (at least in my case) a lot smarter than you.

If you believe, as I do, that your success is determined by how you spend your time, then start by spending it on your mission and the experience of your customers – not on money.  Randy Komisar at Kleiner Perkins likes to talk about “mission-driven” founders and start-ups. I like that phrase a lot.  And I believe that you need to embrace the concept from Day One – by being mission-driven in how you allocate your time.

Spend your time talking to customers, recruits, and partners; not with consultants or financiers – it’s almost a complete waste of your time. 

As money for early-stage companies increasingly becomes a commodity, entrepreneurs’ success will be determined more by their ability to create a great business – and less by their networks and credibility with a small number of professional early-stage investors (who control the purse strings granted to them by a small number of relatively disconnected Limited Partners). 

I’m not saying that early-stage/venture investors don’t add value. Specific people absolutely do add value and are important to the success of many companies. However, early-stage/venture investors shouldn’t be the primary focus of your time – and the good ones don’t want you to focus on them anyway. They want to help you build a great business – to put the priority of your time ahead of their own.  The ability of a venture investor to prioritize the time of the entrepreneur ahead of their own time is a primary test of a great investor.

The best venture investor partners are those who embrace modesty as a primary quality: in other words, they exist to help make the company (and by definition the founders) successful.  In interviews, Peter Barris of New Enterprise Associates has specifically and frequently cited modesty as a primary cultural dynamic at NEA. I've experienced this first hand working with many partners at NEA – especially Harry Weller and Tom Grossi –and I believe it is a key component of NEA's ability to scale successfully. John Lilly at Greylock is another great example of someone who demonstrates this type of modesty – putting the entrepreneur first.

Often, the problem for Founders and venture partners is conflicting objectives relative to their time.  

As a company Founder, your goal is to get the best possible return on the time you spend achieving the mission of your company. For many venture investors, the goal is to meet with as many prospects as possible because their limited partners are essentially paying them to talk to people and gather information that the partners can use to make optimal investment decisions. This behavior is particularly true of younger, less-experienced early-stage investors, who have lots of time to spend.  Some young venture investors may meet with you even when they have no money to invest. Talk about a waste of time – it happens more than anyone would ever admit.  

You may ask:  “But don’t I get value from every meeting with investors?  Even if the meeting doesn’t result in an investment, won’t I get useful free advice?”  

This is a serious dysfunction, especially for first-time Founders. Sure, some of these folks can provide valuable advice, but to be mission-driven, it's much more important to focus on your customers, the people working for you and your business.   

The nature of the venture capital business is that it’s populated by a lot of people with relatively large egos. In my experience, such people are prone to radically over-estimate the value of the time they “invest” in your business. They do get a lot of data from a broad variety of sources – they get paid to meet with lots of companies ;) So if you're looking for a lot of data – great, go out and ask them a ton of questions. But be specific about what you are trying to get out of the interaction instead of just “catching up.” 

The best investors will want to get to decisions quickly and not waste time – yours or theirs.  They recognize that their success as investors will depend on how wisely you spend your time to build a great business in a short period of time.  In my experience, the best investors almost always start their side of the meeting with "How can I help?" not "You should think about...." They arrive prepared, they listen, they help and they give you decisions very quickly.

So, given all the "red flags" I talked about above, how do you find the best prospective investors and avoid wasting your time?

Time-Saving Tips for Dealing with Investors

Before you meet with any investor, try to qualify the person and the firm.   Sometimes this is difficult because of lack of transparency in the venture business.

Fortunately, transparency is steadily improving. Be sure to read the Kauffman Report, which does a great job moving us toward transparency for early-stage investing.  Kudos to the Kauffman team. 

It's somewhat ironic that so many venture investors  (who profess so much faith in capitalism and free markets) have worked so incredibly hard to limit transparency, both at the micro and macro level.   

• Who are the actual top venture firms by return?  
• Who are the partners who have created value for common shareholders vs. those that jump at the chance to dilute common shareholders at every opportunity?

This kind of information has traditionally been hard to find, even by doing primary research within entrepreneurship inner circles.

Here are some other to-do's:

Look up the investors on The Funded.  Get every source of information you possibly can about not only the firm – and the culture of the firm – but also the PERSON who you are taking money from. Relentlessly pursue personal and professional references. 

Before you agree to meet, ask them the following questions:

• How much of your existing fund(s) is still available to invest?
• When are you planning to raise another fund and what is the target size?
• How many investments have you (firm and partner) made in the past month, quarter, year?

Also, ask yourself:  “Who do I trust that has had experiences with the firm/partner?” Try to have candid conversations with those people.  True character in early-stage companies is measured by what people do during the worst of times and the best of times. This is where you see their true values reflected in their actions – you want to know that they will do when it looks most grim or when there is a ton of money on the table. Those who will support the mission of the company in either of those cases are the people you want to work with.  Empirical evidence is always telling.  

If you do meet with investors and they say anything other than “absolutely yes – we want to do this deal ASAP – here is a term sheet or I will have a term sheet to you within X days,” you should interpret their response as essentially a “NO.” 

Great companies are built by people (including investors) who are fiercely mission-driven.  If external financing is required (which is far less often than most entrepreneurs realize) – make sure that your investors believe that great companies are defined by their ability to create value for ALL shareholders through the achievement of the companies' missions – not a quick flip to pump up the value of a particular venture fund.  This is a long-term view that is all too rare among venture capitalists, but a key attribute of the most consistently successful early-stage investors. 

Transparency: It’s About Time

Fortunately, there is a massive culture change brewing in early-stage investing (thanks again to the Kauffman team and many others). The potential of democratized early-stage investing is becoming obvious: combine AngelList with the potential impact of the Jobs Act.  Entrepreneurs are realizing that it’s their time that’s precious (to themselves and their future investors), NOT the time of the investors.  This has always been true among the best companies and the best people at the high end of the start-up market, but it’s now coming downstream.  Hallelujah.

So, spend your time pursuing your mission, developing your idea and creating your technology.  Spend it with potential customers, turning them into real paying satisfied customers.  If you do this well enough, and are smart, disciplined and mission-driven, there will always be capital available for your company.

Finally, if you’re wasting time thinking “But I have a pit in my stomach because I can’t pay my mortgage,” stop. This is how it feels to take risks. It’s painful but it WILL make you stronger as a person (insert Nietzsche cliche). It will make you stronger as a role model for potential employees and customers, who will respect your commitment and sacrifice in the interest of achieving your mission.   And it will make you more attractive to the right kinds of investors, if and when you need them.