IT services companies agents do miserably in pricing, selling and delivering their home-grown IT products and associated services. Why does this happen?
1. The sales and marketing team often sell IT software product like services instead of selling the products and then add-on services
2. The solution architects simply dont get how to solution and postion the services and IT Software product separately
3. The marketing folks are confused on how to price the licenses and support for the IT software products effectively and competetively in the market.
4. The delivery team often dont get the fact that you need to run the IT software products business like a product company and not like services. For example they need a Engineering team, development team, dedicated resources who can work on products, processes and methodologies for product development in line with what is used in the industry, professional services arm which focuses on services, which is seperate from the core products team, incentives and motivation for the team in line with industry standards, nurturing and influencing the ecosystem of the IT products through investments and participation, having a support team which focusses on providing ongoing support, a release and program management and product management team that works with cross-functional team and vendors out there to drive features,/functionalities/releasesetc.
The above are only a few, but the biggest challenge often is how do IT services companies solution and price these products?
So what is the right model to sell Home grown IT software products and associated service. To answer this lets look at what SAP and Oracles of the world do and learn from them:
SAP and Oracle charge a Software update and Product support yearly fee of ~25% of their license fee. Ofcourse, this can be negotiated. The software Update and Product support comes with free maintenance packs/patches, ongoing vendor support for product issues. If you keep applying the regular patches and maintenance packs and have done no bespoke RICEF customizations it is as good as upgrades. But this is seldom the case as any enterprise application will require you to build RICEF to work with other IT systems in organization that’s where IT service providers like us fit in.
Given the above background, if you are selling home-grown Software product, client is expecting you to provide this software update and product support. But this doesn’t come free; you have to charge client with a yearly fee a.k.a. 25% of software license fees. I don’t know what is the standard that is charged for the home-grown software product update and software support . You should provide ongoing Software updates/fixes to the product as this is home-grown software and you would have roadmap of future releases that enhances the product based on some charge. Over and above this you need to also clearly separate AM work for client like the way IT services firms do for SAP/Oracle and estimate this work and provide this as a separate service.
So your overall pricing = Home-grown software product license fees + Implementation Fees + Ongoing product and Software support fees + Application maintenance fees.
The first 2 components will be SI and does not concern your ongoing IT services. The last 2 is where you need to separate this our clearly and charge client as you are both the software vendor and application maintenance/management vendor. IT services companies often muddle up the last two components as they don’t have an existing shared services based support team which people like Oracle and SAP does so they often get confused and muddle up the scope of ongoing product and software support with application maintenance. My submission would be to scope and separate this out clearly and position this to client team so they can pitch it to client.
Saturday, June 18, 2011
Friday, June 17, 2011
Why IT service providers are not successfull in selling home-grown software products?
Have you ever wondered why pure play IT services companies are a utter failure in selling a home-grown software product to clients? They are good at providing services and sometimes service large product vendors like Oracle and SAPs of the world to create world-class products, but they fail miserably in either creating industry leading IT software products. Even if they have one they are unsuccessful or rather pathetic in making their products successful in the market. Some of the reasons I believe are:
1. They often dont have the R&D budgets to create and sustain the products in the market over long term.
2. They lack the pricing and delivery acumen to run the Product Update and Software support leaving the clients high and dry with poor future release road maps and upgrades
3. They fail to understand that product support is critical as no IT software product can work independently without configuration, but rather a part of the larger ecosystem requiring ongoing support and maintenance.
4. Since Software product licensing and selling is not their core competence it often takes lesser priority both in budgeting and resource allocations in the firm.
5. They look at every new client opportunistically and when they sell their products they also end up selling part of their critical resources (manpower) into services work leading to lack of competent people to providing ongoing support to product development.
6. The incentives and motivations for for sales and delivery of software products are not commensurate with the risks and efforts of the team. Often they see their services counterparts have better incentives and well motivated.
7. It requires commitment, patience and diligence on part of management to make the software product successful, which they often lack. They take the easier and quicker route of generating the same by selling services.
What can a IT services player do to make their software product successful:
1. Hive-off a separate software product Legal entity rather than subordinating it to the larger services organization. With this you also end up having dedicated management that reports independently to board, separate books of finance, separate HR policies, separate budgets and commitments to make it a successful business.
2. Operate the IT software product business as per the norms of the industry rather than that of a services firm. Eg: Professional services arm instead of full fledged services focus, engineering team for product, R&D budgets for future product releases, participation in Software standard bodies to influence the standards, etc.
3. Have the software licensing and support model in line with the IT products industry norms.
4. Have an arms length transaction in sales, delivery and services around the Software product.
1. They often dont have the R&D budgets to create and sustain the products in the market over long term.
2. They lack the pricing and delivery acumen to run the Product Update and Software support leaving the clients high and dry with poor future release road maps and upgrades
3. They fail to understand that product support is critical as no IT software product can work independently without configuration, but rather a part of the larger ecosystem requiring ongoing support and maintenance.
4. Since Software product licensing and selling is not their core competence it often takes lesser priority both in budgeting and resource allocations in the firm.
5. They look at every new client opportunistically and when they sell their products they also end up selling part of their critical resources (manpower) into services work leading to lack of competent people to providing ongoing support to product development.
6. The incentives and motivations for for sales and delivery of software products are not commensurate with the risks and efforts of the team. Often they see their services counterparts have better incentives and well motivated.
7. It requires commitment, patience and diligence on part of management to make the software product successful, which they often lack. They take the easier and quicker route of generating the same by selling services.
What can a IT services player do to make their software product successful:
1. Hive-off a separate software product Legal entity rather than subordinating it to the larger services organization. With this you also end up having dedicated management that reports independently to board, separate books of finance, separate HR policies, separate budgets and commitments to make it a successful business.
2. Operate the IT software product business as per the norms of the industry rather than that of a services firm. Eg: Professional services arm instead of full fledged services focus, engineering team for product, R&D budgets for future product releases, participation in Software standard bodies to influence the standards, etc.
3. Have the software licensing and support model in line with the IT products industry norms.
4. Have an arms length transaction in sales, delivery and services around the Software product.
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