Last week, Marc Andreessen published an essay in the Wall Street Journal entitled “Why Software is Eating the World”. A particular passage resonated with me:
‘Companies in every industry need to assume that a software revolution is coming. …new software ideas will result in the rise of new Silicon Valley-style start-ups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic.”
Since we are all going to be software companies (eat or be eaten), I think it is important to understand how/where value creation is shifting within the software industry itself. In short it is a tale of migration from features and functions to data – a trend which many of the enterprise software companies I work with see and understand, but are slow to adapt to- primarily because it is a trend highly disruptive to their existing business models.
To examine this shift, let’s look at how software has evolved over time.
Software as Tools
The first business applications were ones that helped individuals do tasks more effectively. Remember Lotus 1-2-3? Wordstar? In short, for roughly the first decade of the PC era, software was primarily a tool that you used to make some individual function/task more efficient to complete. Software was an interface that allowed us to leverage the rapid advancements in computing power and get the work all of us were doing anyway, get done faster.
Software as a Repository of Best Practice
From point solutions that streamlined highly generic tasks, vendors began to create value (and charge for this value via licensing and services) by embedding specific business process knowledge into applications. People could move down the learning curve more quickly and be managed more effectively by having them operate in a well defined and highly customized software environment. Software became a way of capturing and propagating best practice within an enterprise and something that became critical in very specific functional areas of enterprises. CRM was an early example of this, integrated ERP (HR, financial accounting processes, inventory management, payroll) systems followed quickly thereafter. The economics of SaaS/PaaS are generating a proliferation of these models across every industry vertical/ functional process imaginable. All of these applications create standard work process and control mechanisms that drive productivity and consistency.
Software as a Communication Medium
As the various parts of a business process started to be connected, and common standards for connectivity (e.g., XML) evolved, communication/collaboration has become a central function integrated into applications. Indeed, communication has given rise to a new value creation mechanism for software- transaction platforms. Ebay? Paypal? Skype? They didn’t make money by selling software licenses- rather they made platforms for communication, collaboration and validation that allowed them to make money on the transactions that they brokered.
Software as a Data Collection Mechanism
So now we arrive at data.
Is Zynga a game or a data collection mechanism? Google search engine or data-based advertising platform? Facebook communication tool or targeted marketing platform?
We now have access to literally millions of useful applications at little to no cost. To be sure it is cheaper to create them, but firms are finding new ways to offer subsidized or free software because of the data they hope to compile through widespread distribution of their products. Software has become a data collection mechanism and analytic competitors are hoarding data and learning how to make these data streams useful to refine their own businesses and create value for others.
One thing is clear. Across all of the disruptive models that have dominated “bubble 2.0”, none have involved licensing fees. Indeed, the primary source of value that Mr. “no bubble here” Andreessen is so confident in is data. The extent to which his investments will pan out will depend on whether they will be able to meaningfully realize value in the petabytes that his firms control.
What it all means?
If you are building a software product, you need to incorporate all of the means of generating value that I reference above. Doing so not only maximizes value for your users, but provides you with flexibility to morph your business model for the future.
As you build, expect that at some point soon you will face someone willing to be highly disruptive that will be seeking to generate profits through business models that are vastly different to your own.
Recognize that value is shifting towards data and that to win, you had better become great at collecting, managing, analyzing, and MONETIZING all of the data streams that you control.
So if you are in a business that charges fees for software licenses, or a platform that makes fees on transactions and have no vision or plan for how you will monetize the data you control, welcome to a decade of pain. The “Silicon Valley-style” startups that Mr. Andreessen is funding are coming to eat your world.
Stay tuned for more on data and analytics- if you are in/around San Diego, and interested in the topic, be sure to check out an event I am moderating on 9/13.
According to Compass Intelligence, market for mobile business apps to grow to $6.12B in 2014 from $3.21 last year. By far, greatest use of apps is for navigation/tracking (nearly half of businesses use apps for this purpose). Link to article here.
Long sales cycles. How many of those of us who have sold enterprise software before have had to deal with this problem? To be sure it’s a challenge that many IT companies face when peddling their wares to clients (and a big challenge for startups that want to sell to enterprise http://wp.me/p1hDJ1-1A). But is it something we as business development professionals just accept and live with? Should we all just crawl back into our respective caves and hibernate until our clients thaw out? After all, what influence could we possibly have on how fast an organization can move?
Over the years I have been developing some thoughts on this based on the experience of the companies that I have worked for and advised, and I believe that in fact there are ways for companies to influence faster decisions, open new market segments and raise awareness by thinking beyond their core customers and looking to the various constituents in their respective supply and distribution chains to provide value. It’s a concept that I am calling “network based selling” which I try and describe in more detail below.
I came across this concept while serving on the board of a company that sold compliance solutions for the insurance industry. Due to the regulatory morass that is the nightmare of the insurance industry, there was this massively complicated paper-based process that involved insurance companies, regulatory bodies and the independent and captive agents that sold insurance policies to end customers. The company I served was formed to take these processes to the digital age. It began by creating a platform for state governments then moved to manage licensing processes with agents, then moved to serve insurance companies.
What is interesting in this case was the momentum and selling inertia that this company was able to gain with the most intractable customers (can it get any slower in IT than government and insurance companies?) because of the fact that it had strong penetration within constituents in the insurance regulatory/distribution chain. Agents liked the company because it had a fairly seamless way to deal with regulators in each state. Insurance companies liked having access to multiple states and thousands of agents. As we bulked up the number of agents and insurance companies we served, we got more attention from state regulators.
The important point here is this. You can accelerate the speed and ease with which companies make decisions about your solutions if you engage other constituents in your client’s ecosystem. Think carefully about your prospective customers’ upstream and downstream constituents- their customers- their suppliers. Is there anything that your company or your solution can do to provide these entities with value? Do these constituents represent potentially new markets for growth? Because if you do build traction in these markets that comprise the “network” of your core clients constituents, you’ll be sure to garner more attention and likely deliver more value for the companies you seek to serve.
I’ll blog more about this concept of “network-based selling” and provide more examples of companies who do this effectively. I’ll also present some ideas on how/where I think this concept can be used more effectively ( e.g., Enterprise Purchase to Pay industry), but my point here is to introduce the topic to my blog and return to it with future posts, examples and content.
Happy selling (in shorter cycles).
Below is a link to a WSJ article which talks about how enterprise SW vendors and customers are increasingly using social applications to drive productivity in the enterprise:
Key takeaways include:
- Social application spend by enterprises estimated to reach$630M in 2011 (IDC)
- Many organizations would rather build functionality on platforms that they know (on sharepoint?) than use third party vendors (one company, Eaton claims ($900k investment and ~$200k maintenance)
- ROI measures still seem to be pretty foggy (wondering if they measure how much time employees are burning on this)
- Focus seems on a new form of internal communication rather than using it to build revenue (perhaps just the bias of the article)
Link to the article can be found here: