5 challenges for the ISV CEOs
Tags : ISV, CEO, Innovation, Software development, Revenue, maintenance, SOA, Software Product Outsourcing, Software Product Outsourcing, Development Cost
In this rapid and ever changing software industry, ISV CEOs are faced with some tough questions. Addressing these challenges and more importantly executing on them will help you protect and keep abreast of competition.
5. Are you spending on innovation?
Innovation can be of many kinds, depending on the stage and size of the company. Apart from disruptive innovation, ISVs strive for application innovation, product innovation, platform innovation, design innovation, marketing innovation, integration innovation, process innovation, value migration innovation, and acquisition innovation.
When it comes to innovation, the ISV typically looks at the R&D budget as a benchmark in measuring innovation. However R&D commitment is just the beginning and is not really an indication of innovation spend. Up to 95% of R&D budgets are being used by ISV’s to build new features in current products to keep current clients onboard. This leaves a very small amount for true innovation which does not significantly alter your competitive positioning in the market.
Hence the challenge for an ISV CEO is to re-look at the R&D budget and to challenge their CTO’s and Technical Managers to optimize R&D spend and set aside an appropriate chunk of the budget on actual innovation that is focused on delivering the next big thing: that new product that will create the much needed differentiation and not just the new features for existing products.
4. What part of your revenue is coming from maintenance?
In order to meet the needs of customers, ISVs tend to build in every little feature into the product. By doing so, your customer is happy and continues to pay your maintenance fees. Over a period of time, this approach to building software products results in bloated products that become very large and complex to upgrade and maintain.
70% of the code in software products is known to be rarely, if ever, used. The challenge then for ISVs is to productize for majority of the customers and provide custom implementations for the rest. Keep in mind that in order to execute such a strategy you need to firstly adopt an architecture that can support such a code base and implementation model and secondly, adopt a services business model to deliver to customers who need the customizations.
3. Are you focused only on selling licenses?
As an ISV, the typical mentality is to maximize your revenue from licenses – which are known to be the most profitable part of the business. Services revenue – which forms part of the System Integration that goes into delivering a complete solution to the customer, has been carved out as a separate ball game which is handled by the SIs. In recent times, SIs are known to be making up to 50% or even sometime 60% profit margins whereas the ISVs are left with 20% to 30% profit margins. This has led the ISVs to make an active move into the services business to take some part of the pie.
Hence the challenge for ISVs is to plan to not just focus on licensing revenue but to also be part of the services play which is proving to be more profitable. CEOs must plan to have the required implementation team and professional services arm in place, apart from the core product development team to provide the service required.
A word of caution: As you make your move to get a part of the services pie, especially when you also work with SIs and VARs(Value Added Resellers) who serve as your channels to market, make sure not to alienate the SIs as you can be perceived as encroaching upon their space – particularly if the SI model has always been your Go-To-Market strategy.
2. Are you leveraging vendor ecosystems?
SOA, Utility computing, SaaS, open source are not just buzz words anymore but disruptive technologies that are beginning to show customer value. Such concepts are evangelized very effectively by the large vendors as they quickly tie them into their sales and marketing strategies. Small and medium ISVs who have the technology know-how and delivery capability can sometimes get lost in the wave that follows such disruptive technologies.
The challenge for an ISV is to come up with an effective partnering model with the vendors. For example, by creating pluggable or extensible products on top of a vendors existing offering, customers can buy your best of breed functionality while enjoying the benefits of the big boys. This of course goes back to the challenge of innovating to come up with the right product that can be plugged into the vendor ecosystem and to keep abreast with a vendor’s offerings and integration options.
1. What is your product development outsourcing goal?
Many experts say that vendors should have 70% of their product development lifecycle off-shored or outsourced. A large portion of that work needs to be entrusted to a services vendor whose core expertise lies in that area.
Motivations for outsourcing is moving from pure cost arbitrage to value arbitrage – in which specialized companies can provide increased value in developing products with increased time to market and better quality.
Hence the challenge for ISV CEOs is to set up a seamless multi-shore development model which taps into the best talent wherever it exists in the world.
Finally, ISVs should be ready for the next wave of competition from product companies that will emerge from countries like India and China – who can offer your product at half the cost!
Appreciating these challenges, forming a strategy to address them and putting them to execution is of utmost importance in this fast paced industry.
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