Supply-chain Software Developers' Strategies For Consistent Profitability
Supply-chain software developers, the companies that power today's successful enterprises, are little different from the customers who have come to rely so heavily on their products and services. While companies of any stripe may differ in their market focus, and the challenges they face vary in their particulars, certain things remain constant: Everybody, including software companies, has cost-containment issues, pricing pressure and the need for new business.
But balance is required when dealing with these challenges. Companies can't be too stingy while trying to keep a lid on expenses; in software, for instance, investment in research and development is crucial. If that is curtailed too severely, software developers may not be able to compete. As for pricing, supply easily outstripped demand in the difficult economy of recent years. Sophisticated customers knew how to squeeze vendors on price, including software developers. The appropriate response is not to undervalue the software, but to ensure rapid ROI on enabling technology. And what is new business worth? Any company that neglects its existing customer base while pursuing new deals is flirting with disaster.
Many software companies over the past decade seem never to have acquired that balance, according to Oracle, Logility and G-Log executives, who shared their thoughts on how to achieve or sustain consistent profitability in this industry sector.
Many failing companies "flamed out" because their fundamental business priorities were out of order, says Mike Edenfield, president and CEO of Atlanta-based Logility. That's not to say that software companies that failed necessarily had poor ideas or products. But their business models or processes were faulty. As Mark S. Johnson, vice president of marketing at Shelton, Conn.-based G-Log, says, "It's not good enough just being better."
Clearly, there has to be something more to be consistently profitable in software development and sales.
Oracle Corp., based in Redwood City, Calif., is a giant by just about any measure, but it must contend with Business 101 issues or suffer the consequences. "We're not unlike any other company," says Jonathan Colehower, vice president of supply-chain management. "We've got headcount costs and expenses and investment costs." He says he stays on top of things with a personalized desktop portal that gives him a look at expenses in the cost center that he controls. "With my dashboard, I can pull things at a moment's notice and get an accurate view - as accurate as today - at how things look in my organization: how many people I have, what the payroll is, what the expenses are, who's taking vacation, who hasn't - you name it, I can tell you that."
And every department at Oracle is similarly equipped. "We're held accountable to make sure that we manage appropriately to a budget."
Accountability is required at every step if a supply-chain software company is to reach profitability and sustain that for any period of time. In his position as head of supply-chain management at Oracle, Colehower helps generate sales by articulating the company position to customers, and prepping the sales message for the marketing force. But his company-facing role is quite different. There, he faces the development organization and is required to give input as to what products should be developed and what kind of return can be expected on that investment.
"If I say that we need to build out an entire procurement and sourcing consulting practice to be able to compete with someone in their professional services, I better have a pretty good understanding of what the investment is going to be and what the payback is going to be."
Investment and payback aren't the concerns solely of the customer, who needs to see a return on the money expended on, say, IT systems. To be successful, the software developer must continually invest back into the product. The return is in the form of continued viability and competitiveness, not to mention an increase in sales. Profits, reinvestment, payback. It's a continuing cycle, says Logility's Edenfield. "It's mandatory that we be profitable because that helps us provide infrastructure to service our customers appropriately and achieve their objectives," he says. "To stay current in any technology business, you have to invest back into the product. And if you are not generating profits, you cannot invest as aggressively as you should into product to keep it current as things change in the marketplace both from the business process and base technology perspective."
He is confident that Logility invests at a higher rate than the industry average. "This year, fiscal year 2004, we're going to invest approximately in the 23-24 percent range in research and development. The industry average is probably 14 or 15 percent."
It's a given that you have to have a good product to sell, according to these executives, but it is crucial to provide value, and that isn't the same thing as great systems at all. Edenfield defines it as the benefit that a customer gains from interaction with not only his product but also his company and its services. "I'm talking about, what can they accomplish by using us? So, for example, can they reduce their inventory investment, reduce the amount of inventory obsolescence they have, reduce their transportation expense, and then, can we help them improve their ability to serve their customers? If you look at software companies that are successful for a period of time and then flame out, it's because they do not provide that sort of value on a consistent basis."
G-Log's Johnson defines value as remaining "relevant" to your installed base while searching for new business. He says smart executives should have learned something from the "feed the machine" mentality of the late 1990s and the early part of this decade. G-Log has instituted what it calls its Customer First program, which guarantees that C-level managers make quarterly visits with every customer. "We go through a scorecarding and action plan process with them to see that we are maintaining relevance with them in terms of service and value," he says. "It's hard, it's very, very hard."
In these executives' minds, overselling capabilities is what has proved fatal for many software developers. When the market sagged in the last few years, they say, new customers were hard to come by, and old customers had abandoned them because their after-sales service was lackluster or missing altogether.
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| "If you are not generating profits, you cannot invest as aggressively as you should into product to keep it current." - Mike Edenfield of Logility | |
"It's not so much what we do that sets us apart from the competition," he says, "it's how we do what we do. I can argue feature and function all day, and at the end of the day, someone may say to me, 'OK, your systems do some things that no one else's does, and theirs do some things that yours don't,' and that's true. But these things were built to work together. The benefit of that is that I can have a single view of the customer, a single view of my products.
"If I look into my system, I know that the inventory I'm looking at is consistent across the entire organization. Everybody is seeing the same numbers I'm seeing."
Colehower acknowledges that most customers aren't going to eat the entire elephant, as he puts it, and buy more than a couple of modules at a time. He can rattle off a laundry list of big names that have done just that: a steel company that implemented financials, manufacturing and HR, then added payroll and some online functions later, for example; or Sandia Labs, which implemented manufacturing and purchasing, added financials, then tacked on internet procurement. "Because the applications were built on one single data model, they all run off that single source of the truth. That's value."
Rapid implementation is an inherent value of the product at Logility, Edenfield says. He says a report from AMR Research supports his contention that customers, in most instances, can deploy Logility supply-chain systems more quickly than those of the competition.
Degrees of ROI
Logility's own metrics are designed to determine not just how long it took to implement the product but how long it took to get a return on the investment, and then, how good was the ROI, Edenfield says.
"When we developed the product, we decided up front we wanted it to be easy to implement, and we made it more of a package whereas some of the other products out there are more tool sets, which take a good deal of high-powered consulting from the supplier or some other third-party to implement. That's part of the value."
Logility, of course, is not Oracle. The former's net income last year on just under $25m in sales was $2.3m, according to published sources. Oracle's net was $2.3bn on $9.5bn in sales. Consequently, the focus is much narrower. Logility's management is very much aware of spreading the resources too thin by trying to enter into too many business sectors. What works quite well for a large company like Oracle can be fatal for smaller companies.
"It's not that our applications wouldn't work elsewhere," says Karin Bursa, Logility vice president of marketing, "but the focus has kept us meeting the needs of market segments where we've got a high opportunity of success: in distribution-intensive businesses." Among the market sectors Logility focuses on are chemicals, consumer goods, durable goods, food and beverage, furniture, pharmaceuticals, retail, service parts planning and soft goods. Its Voyager line of solutions, compatible with numerous ERP systems, enable online collaboration with suppliers and other partners, among other things.
Edenfield may sound a bit cautious when he speaks of sticking with one's core competency, but he says his views are based on seeing too many software companies "try to be all things to all people. Too many software companies - and we probably made this mistake a little a long time ago; maybe we had too many products - went after too many markets. You have to be careful when you expand that it's really the right thing for your company and your customer."
In 24-plus years in the business, he says he has witnessed major technology shifts every six or seven years. To remain competitive, a company has to invest in R&D, but it must be able to distinguish between fads and what is real.
That requires sound administration from management. Johnson, who joined G-Log last year after years with Viewlocity, Frito-Lay, Dell and Reliant corp., says sound administrative judgment and vision makes the difference between a successful software company and one that nosedives and disappears. He acknowledges that G-Log at one time ballooned up like many other companies, but management recognized what was happening to the market and pulled back before it burned through the funding.
The company has since installed controls and systems that can guarantee "SPQR" - CEO David Cairns's shorthand for sustained, profitable quarterly results. G-Log's record revenues for the fourth quarter of 2003 marked the company's 15th consecutive growth quarter. The company says it grew annual revenue by more than 50 percent compared with 2002.
That kind of discipline is absolutely necessary when a client list begins growing. Everyone in a software company can "mobilize" around a few customers, but G-Log is aiming to acquire four or five new customers each quarter. "You have to put systems in place, and controls and processes that make sure those original customers and the four and five you're adding are happy," Johnson says.
KPIs & Sales
G-Log's GC3 logistics and transportation solution is designed to provide a single, integrated technology platform for planning, executing, and managing the movement of goods across the supply chain, regardless of mode or geography.
Key performance indicators have been instituted to assess the efficacy of sales efforts, says Johnson, who uses baseball to illustrate. "What's our number of at-bats, what's our batting average and slugging percentage? How big are those deals, how many opportunities are you getting into, what's your percentage at getting a hit, and how big are those hits when you get them? Every single initiative we have, we measure in terms of leads and deal size.
"Every group within the company has begun implementing similar scoreboarding techniques. There are lots of KPIs that fall under that, but it's about leads and deals and deal size."
More recent developments include implementing a forecasting system, which Johnson says is still being shaken down. But with it, the company is forecasting five quarters out.
An accounting and reporting system is paying off as well, he says. He says the most recent business strategy took two and a half months to hammer out. Each company department then had to develop its own detailed operating plan in support of it. The A/R system measured against that. "We just did a strategy refresh, and we came in and said. 'These assumptions we made in building a strategy are slightly different to what's occurring in reality, what does that mean? Do we need to change our packaging a little differently to be able to sell to this particular group?'"
He says the new controls have given G-Log "consistency and flexibly without being schizophrenic."
Forecast accuracy is essential, he says, because selling software systems and licenses is a lot like running hurdles in track and field. Successfully crossing barriers in operations, for instance, isn't the end of the race; you may have to deal with purchasing or legal or any number of other departments, especially at large companies.
"They are big, long and intense sales cycles, and they are very complicated," he says. Curiously enough, that may have caused some competitors in part to start "dumping on the market - trying to come in at literally a fourth or a fifth of the price we're asking." That's especially so, he says, now that the market seems to be turning around and "growth" is something one hears for the first time in years.
How does a supply-chain software company looking to maintain consistent profitability compete with lowball pricing quotes? "You have to go out to those companies with a much higher value differentiation. It's not good enough to just be better. As they compete with us on price, we have to keep that differentiation strengthening."