I’ve been meaning to write this post for a while, but I’ve been a tad busy. Then today, I saw a post over at the Real Story Group by the ever-so-wise Alan Pelz-Sharpe. In that post, he talks about the High Cost of Support, and how it seems to be rising. It is a great post that cuts a little into the financial actions of some of the vendors.
This is important to understand because financial incentives is what drives behavior at product companies, and all companies for that matter. Even startups that do anything and everything to please customers, but aside from a few founders with visions of a new world order, they are driving towards the payoff of the IPO.
With that in mind, let’s look at how some of the financial systems at Enterprise Software Vendors, not just Content Management, impact behavior of their employees and thereby impact the customers. Keep in mind that they’re are exceptions to the rule.
The Dangers of Commission
This is the biggest grief that befalls customers. Here comes the sales person. They sell you all this great software. If you are lucky, or have someone keeping on top of things, you buy all the software you need, but no more. The sales person then loses your phone number and appears to send your email to the junk folder.
The problem? The sales person is only paid to care until you buy the licenses. They don’t get paid if you stay a customer, only when you become one. All that valuable support money that is paid every year goes to corporate with nothing for the sales person. Until you decide you need to buy more software, you may as well not exist.
Don’t get me wrong, really large customers with a lot of weight may get some attention. May.
The strangest part is that if a customer leaves a vendor for a competitor, and thus stops paying maintenance, they might get attention again because they have reverted to the role of a prospective customer.
Uh, Now What?
To fix this, maybe have sales staff earn commission on support. Dock them if more than a certain percentage of their customers do not renew (A fair percentage may be tough). Think of the changed behavior. They would still sell, but sales people would care about existing customers because they lose money if a client gives up on the product. Every happy customer is more than a reference, they are income.
Another bonus, sales people wouldn’t move around so much. I have seen sales people sell to everyone in their territory and then move on to another company because the license revenue was tapped out. Now, they would stick around to enjoy the fruits of their efforts. This would lead to less turnover of effective sales people. They might actually become real Account Managers.
It sounds good, so it’ll never work.
Oh wait, some of the open source companies follow this route. You don’t buy license, you buy support. This is also the was SaaS vendors operate.
I wonder how their client retention is?
Word of Pie 
This isn’t a sales problem so much as it’s an organizational issue from sales and marketing, to professional services, administration, engineering, manufacturing and IT.
Incentives are screwed up at just about every organization I’ve encountered, in practically every department, on both the buy and the sell-side of the house.
For example, IT incentives encourage short-term thinking (often at the expense of long-term impact on business). Not unlike sales incentives that emphasize the next sale (at the expense of the long-term outcome of the last sale).
Let’s not scapegoat the salespeople. In the same way that it “takes a village to raise a child”, it “takes a company to support a customer”. Incentives across the board should encourage superior internal and external customer support over the life of the relationship, and beyond.
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I’m on board with you. This post just covered the first layer of the impact. I was going to go deeper, but I decided to break it out into multiple posts. I also don’t blame the sales people. I’m friends with a lot of them. It is the organization that sets it up. They are responding to it, and the clients suffer.
I’ll be talking about more later.
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Ahhh, well I apologize for pulling the trigger too quickly. This is an important topic.
Just a suggestion for the future…if you plan to break a topic into multiple discussions would you please mention that in the first post of the series. That way folks like me know there’s more to come and don’t jump the gun with comments.
Looking forward to the rest of your points.
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Joseph, you did great! There is no promise that any next post would hit what you brought up, or that anyone reading this post would read the next. No apologies necessary.
Thanks for the comments.
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Nice post Laurence! I think you hit the nail on the head with regards to there being a challenge to enterprise software vendors and their traditional model (full disclosure, I work for one). However, I don’t think the problem is necessarily isolated to the sales organization of a vendor….it’s something the organization as a whole needs to change. In my company, for the business I am responsible for, we have attacked this on two fronts. First, in a similar fashion to what you describe I do compensate our AE’s for helping ensure their customers stay customers. Don’t get me wrong, as a sales person their job first and foremost is to prospect and bring in new license revenue, but the governing principle of our business is customer retention. I’m proud to say that top to bottom in my group, from a code slinging engineer to a customer support rep to a quota carrying rep, anyone you ask what is the top priority the resounding answer will be ‘the install base.’ But, as I said, this is more than just compensating sales reps in pursuit of keeping customer relationships healthy. In our case, we instituted a cross functional team that comprises our ‘Customer Care Program.’ Again, it’s something that gets everyone in every aspect of our business on the same page and focused on how important the existing customers are…not only for maintenance, but for the fact that it is your existing customers that often provide much of your new license revenue as well.
So, I think the other variable you need to include is the maturity of the enterprise vendor and more specifically if they are a public company or not. This second fact, from my experience, is what casts a shadow over the operating models of many enterprise vendors. Let’s face it, there’s a reason that most open source software vendors are not publically traded…because historically that business model doesn’t meet the demands and growth expectations of shareholders. As an enterprise vendor we are too often driven by the expectation of ‘organic growth’ or ‘new license growth.’ Listen to any earnings call and you’ll hear the analysts quizzing leadership teams on this subject. As a result, many leadership teams place increased focus on the sales teams to be creating greater license revenue. I don’t like it, but that’s the way it is.
I was recently speaking with some colleagues who work for other enterprise software vendors; 1 in ECM and 1 who is not. In both cases I learned that their organizations were also looking at ways to morph their operating model to take on this challenge…I just wonder how long it will take them to be able to change. In our case, it took about 3 years, but our leadership team finally bought in to the fact that we needed to change and have taken actions to do just that.
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Thanks Todd. I’ll be talking about the further depth in the organization next. I decided to be kind and write shorter posts this time, so I started with the visible front-line. It is good to hear that some are changing, but it is a process as you have observed, especially when you are a public company.
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Excellent post – the issue of incentiviation is foundational to knowledge management as well. How do you get people to share what they know – even if they are inclined to – but are just “too busy”. The example you gave here of the sales person reminded me of a KM/BPM consulting gig I had with a major SW/HW company (Yeah you have all heard of them and probably use at least one of their products.) After digging around a bit we found that marketing, support and sales were all on completely different comp plans – no logical or real connection between them. For example, marketing was rewarded for getting the campaign out on time. As a result they did not aggressively track effectiveness, and therefor worry about (i.e., support) the sales team. Neither sales nor marketing were linked to support – who unfortunately all too often, as a result found out about new products and services when a customer called to seek assistance. Our recommended plan, like what you are suggesting, linked the measure of each group’s success to the success as well. Its not rocket science, yet most companies, rooted in silo-based management – just do not think about it.
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Pie, great post. I used the same argument often as to why to buy from a large vendor is not a guarantee for anything except for being screwed by sales. A medium size software business like ours can’t afford to behave this way. The problem not only appears after the sales but at every organizational break point.
We even noticed the same problem going from product training, to product installation and from there to project execution and from there into production. The normal sales, consulting and service organizations fail to bridge those gaps. When I was with IBM over 20 years ago, the customer responsible systems engineer would dampen those transitions. But then the cheapo Unix and Windows vendors came in and the full support model had to be dropped as customers did not want to pay for it.
We had to find another to solve the problem and first we created a new department filling the space between the consulting group and the support center. We call it PQA or Project Quality Assurance. As this group is now often heavily involved in daily operational issues at the customer we recently raised our maintenance fee and we will rename this group to ‘Solution Center’. They are paid by through the normal maintenance fee (which is still a lot lower than IBM’s, Oracle’s or SAP’s) but they close the gaps that appear in whatever situation there is. They even provide free upgrade support for software and application verification.
The key is to make sure that the business gets value from its investment. And yes, it MUST be an investment, which is why we also allow our customers to migrate from one operating system to another without having to buy a new product licence. Our per user licences are the same and exchangeable whether they are standalone, thick or thin client!
On the subject of incentives or commissions: they are OVERRATED! There is a lot of research that people aren’t motivated by money for anything except to make money. People are solely motivated by positive relationsships and the feeling to be a valued person. People who are motivated by money don’t care about much else. We do have financial incentives but they are always team or company based and not individual.
We don’t sell software or service, we offer a long-term relationship!!!
Regards, Max J. Pucher, Chief Architect ISIS Papyrus Software
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I never understood Wall Street’s fixation on license revenue. That number seems to be the most “flexible” when vendors are negotiating terms with a prospect while the services and support costs are not. Further flexibility happens when accounting fixes the zero-cost licenses through carve out adjustments.
Discuss.
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While I’m no financial analyst, I believe the ‘fixation’ comes from the fact that license revenue shows growth. Growth is what an investor wants to see because if the company is growing then their value must be growing and subsequently the shares owned should be growing in value…or the investor should be getting a dividend. So, regardless of the flexibility of the actual license cost at the time of the sale, it’s still growth…whether they sell the license for $10 or $10,000 it’s top line growth that will eventually translate to long term support revenue. As an investor looking to get as rapid and as large a return on my investment I don’t want to hear that the company I’ve bought ownership in was able to retain a bunch of their existing customers. That only tells me that I’m probably not going to lose my investment. I want to hear that the company is gaining new customers and selling more new licenses. That tells me the company is growing and thus so should my return on investment.
If a publicaly traded SOFTWARE vendor only showed sustainable support revenue, instead of new license revenue, one could argue that they are not in the software development business…they would at that point be a services and support vendor.
It’s an interesting paradigm. Personally, I think the proper medium, in terms of an operating model, can best be met by private software companies who don’t answer to ‘The Street.’ Of course, that means having to come up with a lot of private financing if you hope to compete at the enterprise level.
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This digs into a topic that is related, but not sure I was going to tackle, not being a financial guy. License revenue doesn’t show “growth”. It shows sales. It doesn’t reveal the rate at which customers may be leaving the product. An increase in total support revenue shows that.
As for the cause of the “fixation”, because every software company over the past couple of decades has drilled into the analysts and investors that license revenue is the way to measure growth. After all, if I sell 10% more software this year than I did last year, but I lost 30% of my support revenue in the meantime, that means that the company is likely in trouble.
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Some greats, that echo a lot of what has been going on in other software markets like ERP since 2005-ish.
Max makes a great point that its not just incentives – though I would argue that sales reps are and should be coin-operated – and it takes a deeper cultural shift.
But … it’s hard to escape Adam Smith and the realities of a P&L, no matter what you’re culture is.
The basic problem is license/maintenance models are asymmetrical with when and how customer value is achieved. If you’re old or retro enough to get this allusion, its like the the old Wimpy line “I’d gladly take your license fees today for some business results tomorrow.”
The market is starting to understand this more, which is one of the drivers for subscription models that are more typical in cloud delivery models. Vendor revenue stream and customer value stream are more aligned, so Adam Smith, not Wimpy, can work his magic.
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Good post and even better to see some debate on this topic – there is much light to be shed on how ‘software’ companies make money.
So what IS the magic number that demonstrates future growth? Can an enterprise software company survive if less than 10% of its annual revenue comes from the sale of new products to new customers? What is the number needed to seed future maintenance stability? And if really can be in single digits, why not just dispense with the layers upon layers of sales, marketing and administrative overhead needed to acquire it and just give it away transparently (rather than the quarter end pants dropping sales cycle theatre that provides such endless entertainment for us all….)
See: http://blogs.nuxeo.com/cmckinnon/2010/04/sales-cycle-theatre-time-to-call-a-charade-a-charade.html
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