Another random rambling – this time caused in part by a twitter conversation today morning, and a few analyst reports I got around to reading at lunch break. And finally I saw this past homework sheet that my daughter filled last year , where she says she wants a job like the one her daddy has.
I work in this great industry, and yet I continue to be amazed (and amused) by the logic of big and small companies that make our industry. An entire set of companies operate as if the forces of market just don’t EVER apply to them.
For software, supply is a non-issue in most cases. You build it once, and you sell it many times. And one way or another, you get customers to pay for maintenance and enhancements – either explicitly in case of on-premises companies, or built into subscription costs for the cloud companies. This model worked great for many years because only a few companies were competing in each segment – be it ERP, Databases, CRM or whatever. The threshold of entry was always high enough so that supply side remained a vendor advantage – Supply won over demand , believe it or not.
Software was not the only industry where this happened – even in the world of tangible goods, we have examples to learn from. Look at semiconductor companies. Till very recently – they defined demand of their customers based on their available capacity. Customers were told how much they will be allocated – and customers could not do much about it given the capital needed to stand up a new fab was beyond the financial strength of most companies. Well, these companies eventually had to turn (painfully) to pure demand driven companies – and the same is bound to happen to software companies too at some point. In a few cases, it is already happening.
Along came cloud, and it made it easy for anyone to be a SW player. When I passed out of college – it was hard to start a SW company given there was no cheap way to access internet or buy hardware. Many good ideas never saw the light of day and many bright students shelved their ideas and took employment at big companies to execute on someone else’s vision. That is so not the case now – it costs very little to start a new software company today in comparison – at least from a “production” point of view.
Challenge today is that of demand (as in top line revenue) – not supply. Since threshold of entry is low, everyone and his brother is now in the SW game. And not surprisingly, the quality of ideas is poor in many cases, and there are no “easy” customers to find . So what is one to do – you hire the best sales person(s) you can afford and ignore the cost of selling to “buy” market share.
Profits be damned – it is all about growth. The trouble with this model is that you probably can never take your foot off the high sales/marketing expense pedal since competitors are also trying the very same strategy as you are.It is a mega race downhill.
Its not just high sales and marketing expenses that come with accelerated growth. To “buy” market share – acquisitions cannot be avoided either. The problem is that the owners hate to dilute their stock – so in most cases, debt is the only viable option. So between debt and the high expenses – the question is how long can such a company do its business . Debt is cheap for now – so probably they can all keep afloat for a while, but sooner or later, they will have to pay up. And it remains to be seen how many will be still viable and solvent at that time.
Then there are the companies who care only about profit ( EPS for the public companies ). They have the same challenges to generate demand – but instead of taking the harder route of increasing topline to create more profit, they play with other levers. They squeeze costs out of their system ( move to cloud, use labor arbitrage etc), they buy back shares aggressively and so on. Again, at some point – you run the risk of cutting into the bone.
Then there are the companies who try to take a more balanced view on top line and bottom line together. But they are in a fight of their life too – since companies who are aggressive on top line and companies who are aggressive on bottom line both have “trained” their customers on what to expect. So these “middle of the road” companies usually will have to resort to tactics unnatural to their DNA to fight it out with the others.
Customers “might” win in the short term when there is intense competition on vendor side, and that is a good thing. But in the long term, the very existence of some of the vendors might be questionable. So over the long term, do even customers win? or do customers also join this downhill race , maybe without even knowing it?
In short it is a mess – or I guess the more PC way of saying it is “It is an interesting scenario”. The extent of this mess is clear in the communication style of the leaders who run some of these companies. Every one touts they have the right strategy – yet very few seem to execute to it over time. How fast can they drive forward while constantly watching the rear view mirror?
When I worked in the UK more than a decade ago, my friends got me hooked to watching horse races. Did you know that a horse never loses a race because it is slow ? That is how I understood it reading the coverage of races in newspapers and magazines. A horse might lose because of bad training, bad surface, unfair handicap and a hundred other reasons. But NEVER will a horse lose because it was slow. If you watch our beloved industry from outside, I think you will feel kind of the same way about the companies that make this industry.
I do believe that the forces of market will eventually trump everything else – and I wonder how many vendors will stand when that happens and how many will bite the dust. Maybe it is time for this industry to get off the high horse called “strategy” and focus a little more on good execution.
And I hope this happens before my kiddo starts looking for a job – and yes it would be quite an honor if IBM (or SAP) employs her.
And Vijay Says... 