Friday, April 13, 2007

Software 2.0: How the use of internet is transforming the software industry

In the past seven years, Internet has changed the business landscape and software has not been an exception to the rule. The web has brought simplicity and transparency in a world of complexity and opacity, empowering a new generation of public software companies like, NetSuite, Webex and WebSideStory who learned how to take advantage of it.
So what changed so dramatically? Several things - and I like the way Tin Tzuo, the Chief Strategy Officer of illustrated them during his speech at the Stanford Technology Venture Program. These changes fall into 6 main buckets:

1) Product Awareness: From Gartner to the blogosphere
In 1994-95 - the great age of traditional Enterprise software, the only way to learn about a software application was to read the ad-hoc Gartner report or various esoteric software reviews. Today, all the information is free and available on the internet. Through sites like Gizmodo, the NY Times Online or thousands of technology and software blogs, IT managers can gather all the technical information they need, as well as in-depth customer and user feedback. To win in this new space, software companies need new marketing skills. On top - or sometime instead of developing relationships with Gartner, IDC and other market research firms, Software 2.0 companies need to be extremely good at online marketing. Both on the spend side (keywords, banners...) and on the organic side (SEO optimization, buzz among influential bloggers and journalists...). Companies need to be prominent on the web (see my previous post on online marketing for more details)

2) Product evaluation and testing: From seminar and demo to free online trial
The second element that radically changed in Enterprise software is how people evaluate and test products. In the 1990's, the only way to get an overview of a product was to attend a seminar or call a sales rep. for a demo. Today, people find software applications on the internet and they can test the product with a free trial. This radically change the purchasing process. Before, a product demo was a great opportunity for a sales team to start partnering with a potential client - they would spend several days to customize the product and populate it with real customer information and it was a great opportunity to spend time and develop a relationship with the key decision makers. With a free trial - populated with dummy data - potential customers can see and test the product very easily and it makes them comfortable - or not. To "get the foot in the door", Software 2.0 companies need to do their best to easily show the value they are providing and let user "touch and feel" the product easily by leveraging the web.

3) Product design: From complexity to usability
In the old days - may be not that old - enterprise software products were designed to be complex. Complexity was a necessity, as it allowed vendors to control their customers. SAP understood that very quickly. Now, the new generation of applications is going against this principle, designing their product with several layers of functionality. The first layer is easy to use and provides basic functionality. The second layer is more complex and the deeper the user goes, the more complex it becomes, but the key here is to have this hierarchical filtering that enables basic users to go around the product and understand its value.

4) Sales model: From seasoned sales people to a tiered sales engine
To buy, people needs to be comfortable with the product. To be comfortable with the product, people need to talk to someone. Basic sales principle. But this can be done in different ways. In the pre-internet era, software sales meant highly seasoned sales executives with a big Rolodex. The post-internet sales force evolved into a more agile tiered engine, starting with leads generated on the website, followed by a telesales team that would further qualify the lead and assigned it to the proper sales team (telesales for SMB or direct sales for Enterprise). And this human touch is necessary even if you have a free demo on available on the web. People want this human interaction before buying to get answers to the final questions they have and feel good about it. Having widgets on the website that enables customers to call directly a sales person proved to work very well.

5) Segmentation: From solutions to packaged services
Before, enterprise software companies developed very segmented offerings articulated around the magic word "solution": you had the Enterprise solution, the Corporate solution, the SMB solution... These solutions were a mix of hardware, software and services and required usually the involvement of several companies (or divisions). ISVs, SIs and Hardware vendors were combining their strengths to offer a complete package that would solve a business issue. Today, SaaS companies have changed the model: they owned all the hardware and infrastructure, run a single instance of the application for all their users and provide the limited integration services required to make the whole thing work. And to maximize economies of scale, they need to run a single instance of the application to cover all the customer segments. To differentiate their service offering and maximize the value captured, Saas vendors package their services by segment with different price point. Each package will have specific features of the application enabled and with a maximum load (# of seats). The key benefit of this approach, is that instead of being "stuck" with a specific application, vendors can easily change their packaging and adapt it to the customer demand to maximize their profits and the customer satisfaction

6) Usage: From services to monitoring
In the 1990's, once the deal was closed, the sales team would drop a CD on the customer desk and it was up to the customer to figure out how to implement it. Alternatively, they would sell services to drive the implementation "now that you are stuck with the product, you'd better find a way to use it!". Today's world is different. With a service model, customer can stop their subscription any time. So, to limit the churn, Software 2.0 companies need to monitor and ensure that their application is widely used in the customer organization. Successful companies have developed specific teams focused on developing and monitoring key usage metrics. And the good news, is that is it easy to implement, as the application is hosted by the vendor, not the customer.

This post covered the new ways "software 2.0" companies design their products and interact with their customers. The next question is "what do these companies need to change in their internal management processes to be successful"? In a subscription model, are the "bookings" number still relevant? How should the sales force be incentivized? What metrics drive the value of this new generation of software service providers? The answer will come in a follow-up post...