- Business model differences
- Inflexible operations
- Non-compatible policies
- Internal system capabilities
- Organizational culture
3. Non-compatible policies. Policies are framed to support the needs of a business model. Hence many of the policies of hardware companies fail to satisfy or even are at conflict with the needs of the software business. For example, as marginal cost of software is nearly zero, compensation and bonus structure in software companies are skewed to disproportionately reward top sales performance. A common policy for sales compensation between hardware and software would risk losing the software sales people by paying lower salaries.
Besides managing existing policies, new policies that relate to software lifecycle events for e.g. software compliance enforcement policies (when would you deny software access, how would you respond to extra usage, do the policies vary across customer segments, geography etc.,) need to be developed.
The diverse nature of the two businesses needs policies that can support them. The organization should undertake a careful analysis of the combined businesses to identify the ones that can be standardized, those that need to be different and those that need be newly defined.
4. Internal system capabilities. The ERP and CRM systems of hardware companies are designed neither to track software licenses and versionsat customer sites nor to manage entitlements for different software lifecycle events. Besides, the foundational capabilities required for supporting new software business models like managing bundled offerings, enterprise contracts, billing based on usage, recurring invoicing and sophisticated revenue recognition and allocation mechanisms are not well supported by traditional ERP systems.
I find that these poor system capabilities affect IDMs' top line and bottom line by inhibiting their ability to launch new products and business models, increasing operational costs and impacting customer satisfaction. While this is an issue for many software companies as well, I find that IDMs try to bend their internal systems a lot more until they break.
5. Organizational culture. Software companies not only experience shorter product lifecycles but also experience rapid evolution of business models. Hence developing a viable software business is a continually moving target. To support this rapid change, the culture of software companies is more collaborative that enables them to co-exist in an ecosystem with other partners while at the same time they are also likely to have a more top down management approach to facilitate quick decisions.
The culture of many IDMs is at odds with that of software companies and poses significant challenges as they try to grow organically. This challenge is even more pronounced if they embark on an acquisition path. Even IDMs that have a successful track record of integrating acquisitions find these hurdles manifesting into longer lead times, significantly higher integration costs and less than expected benefits.
Companies embarking on a journey to become more solution-centric should be aware of these challenges. Although the path may be difficult and the waters rough, significant rewards exist for the one who traverse. A ship is safest at the harbor, but that is not where it is meant to be.
At Flexera Software, our products and services focus on helping IDMs from a strategic, operational and technological perspective as they navigate through the rough waters. For more information, read the related white papers: Ten steps to optimizing your software licensing revenue and How IDMs are using embedded software to grow revenue
Look forward to hearing your experiences and thoughts.