Accenture Electronic & High Tech Solutions Priorities for Software Companies to Manage Through Challenging Times Accenture’s research into the 1990 –1991 recession and the dot- com meltdown reveals a clear distinction between enterprises that followed a strategy of managing their cost structures and strengthening their strategic positions and those that did not.
2 Priorities for Software Companies to Manage Through Challenging Times
Around the globe, the economy continues to challenge all industry and are expected to top 21 million in 2009.1 This trend has major sectors, and software companies are no exception. While an overall implications for software companies whose business model is slackening of demand is impacting software sales, a larger and based on bundling copies of their new software packages into PCs potentially more pervasive trend has the potential to substantially designed for home use. alter the software industry landscape in the coming decade. This trend is the move to less-expensive ways of computing, a shift that Indeed, this combination of soft demand and threatening has only intensified during the economic downturn. technology shifts is a major test of most software companies’ strategies. Faced with this test, software companies should resist More specifically, to reduce their own technology costs, enterprise the temptation to hunker down and hope for better days. Instead, customers are increasingly specifying software-as-a-service (SaaS) they should consider investing strategically to strengthen their and cloud computing for their applications. These moves will have capabilities and market positions and, thus, position themselves a major impact on software companies that make their living to gain a competitive advantage both for now and for when selling multiuser licenses to enterprises for on-premise computing. conditions do ultimately improve. Indeed, being proactive in these Indeed, major enterprise software providers have reported slumping challenging times is a recipe—in fact an imperative—for managing revenues, while SaaS providers such as Salesforce.com are through this market cycle. experiencing growth. Supporting this notion, Accenture’s research into the 1990–1991 Furthermore, to meet consumer demand for less-expensive recession and the dot-com meltdown reveals a clear distinction computing options, hardware manufacturers are releasing a between enterprises that followed a strategy of managing their slew of new computers—netbooks—that enable consumers to cost structures and strengthening their strategic positions and inexpensively connect to the Internet without having to pay for those that did not. In fact, those that took the bolder path expensive software applications. Such products, which sell for as outperformed their industry peers for six years following the little as $250, generally come with free versions of open-source recession. software such as Linux or, in some cases, old versions of Windows 1 “Less Is Moore,” The Economist, January 15, 2009, http://www.economist. (such as XP). According to market-research firm IDC, sales of com/opinion/displaystory.cfm?story_id=12932356&CFID=40505160&CFTOKE netbooks increased from 182,000 in 2007 to 11 million in 2008 N=57350160
3 Figure 1 10 priorities for software companies in challenging times
Products Strengthen the product portfolio. Improve the economics of product development. Industrialize the product launch process to make it more repeatable and reusable.
Customers Tailor interactions according to specific customer needs. Improve license management capabilities to reduce revenue leakage and recover license fees due.
Value Chain Explore nontraditional partnerships and alliances. Team up with ecosystem partners to provide better and more effective technical support. Outsource noncore functions and activities. Assess the status of past acquisitions to determine if additional synergies can be generated by further integration. Capitalize on opportunities to acquire key assets at potentially bargain prices.
Today’s environment provides a similar product portfolios, weeding out low- doors to a new set of customers who opportunity for software companies. performing and unprofitable products were previously not inclined to purchase Through our research and work with and investing in those core products that the entire SAP suite.2 leading software companies, Accenture have the highest potential for growth and has identified 10 priorities (Figure 1) that margin within the next two years. And In addition to optimizing their portfolios, can help these organizations manage more when there is irresistible pressure to cut companies must improve the economics effectively through today’s challenging R&D, it must be channeled toward those of product development. Indeed, as times and position themselves for high multiyear product development projects research and development costs continue performance when the recovery comes. that may have low chances for eventual to rise, software companies should These actions are tightly focused on success. consider adopting several practices that developing products and bringing them to can help reduce product development market, forging stronger relationships with For instance, SAP found that its product costs while cutting product time to customers and ecosystem partners, and portfolio was increasingly at risk because market. Two such activities are boosting deriving value from external assets. Taken of the advances of SaaS providers. In the use of open-source software and together, they provide a road map through response, the company invested in a new capitalizing on online communities and adversity to market leadership. software product dubbed Business Suite. social networks as drivers of new product This new offer is more closely aligned ideas and feedback on existing products. The Products with the way enterprise customers want to purchase software today: buying only The road begins with a strengthening of the pieces of functionality they really the product portfolio. More specifically, need instead of regularly upgrading software companies must resist reacting an entire system. Business Suite is less to tighter revenue and profits by making expensive and easier to implement, and it 2 “SAP Takes a Page From Rivals for Software across-the-board cuts in R&D. Instead, reduces total cost of ownership for SAP Update,” Leila Abboud, Wall Street Journal, February 4, 2009, http://online.wsj.com/article/ they should carefully evaluate their products. Best of all, the product opens SB123369737470844941.html
4 Software companies must resist reacting to tighter revenue and profits by making across-the-board cuts in R&D. Instead, they should carefully evaluate their product portfolios, weeding out low-performing and unprofitable products and investing in those core products that have the highest potential for growth and margin within the next two years.
5 Many software companies “reinvent the wheel"—starting from scratch on training their channel partners on the new version, working with advertising agencies on the launch campaign, and equipping sales and service personnel with the information they need.
Beyond those actions, moving R&D activities time and money, and also can cause it to markets, where demand is more robust to India and China can generate better miss market opportunities due to delays than it is in developed economies, results for the same cost. Both India and in release. software companies find themselves facing China produce highly trained scientists and new customer demands, behaviors and computer engineers whom companies can A major reason this problem plagues preferences. The extent to which software employ at a fraction of the cost of their software companies is that they lack a companies are able to understand these counterparts in North America and Europe. repeatable, reusable launch process—one new requirements and tailor customer that has been “industrialized.” Such an interactions and offerings accordingly But product development is not the only industrialized product launch process is a major factor in companies’ ability potential locus for cost and efficiency leverages and builds on lessons learned to excel in these new markets. Such an improvements. For example, the launch of from previous launches, incorporates understanding also allows companies to a new version of a software product can best practices, and builds vital product gain an understanding of which processes be extremely costly and time-intensive. development institutional knowledge. they can standardize and scale globally Making matters worse, many software The key elements of an industrialized for efficiency and which they need to companies “reinvent the wheel”—starting approach are clear progress milestones, customize to reflect the unique behavioral from scratch on training their channel decision criteria and decision trees, all of differences in various markets—a concept partners on the new version, working which work in concert to accelerate the often referred to as being “super global, with advertising agencies on the launch launch and allow more time to be spent super local.” In other words, a company campaign, and equipping sales and on creative, value-added activities. adopting the “super global, super local” service personnel with the information approach is centrally managed for they need. And in too many cases, long The Customers efficiency while pushing key decision periods of time elapse between product making down to those in local markets. launches, allowing critical experience Another key aspect of building the and skills to disappear into other parts of right products is developing a better Improving customer relationships the organization as employees take on understanding of one’s customers, not only enables better offerings and other assignments. All of the preceding, regardless of where they are. As they interactions, but also can help mitigate of course, costs the company valuable pursue growth opportunities in emerging revenue leakage. Indeed, the software
6 industry has a worldwide problem but even more welcome during a with enterprise customers not fully downturn when revenue growth is The Value Chain complying—knowingly or unknowingly— slowing or declining. Thus far we have covered two major with their software providers’ license areas of action: products and customers. agreements. In fact, the Software While identifying revenue leakage is However, software companies Business Alliance’s 2007 Piracy Study important, preventing it in the first determined to make the most of these estimated that approximately $50 billion place is at least as critical. To do so, challenging times also must consider is lost annually to revenue leakage and software companies must address opportunities elsewhere in the value piracy. This, in effect, is “free” money— shortcomings in the contracting process, chain—in external sources of value such money that software providers have as well as strengthen monitoring and as distribution channels, outsourcing, earned and are not collecting. tracking capabilities so a vendor knows value chain partners and acquisitions. precisely what each customer should To recoup missing license fees—which be paying and whether those fees For example, there are numerous would amount to an immediate have been collected. Other licensing possibilities for software companies increase in revenue without having improvements include improved to team up with noncompetitive to gain a single new customer— entitlement reporting to customers but complementary enterprises to software companies should conduct and the ability to automate compliance reduce the cost of distribution or even a comprehensive analysis of all their management by linking software create new distribution channels for existing contracts to determine which usage to contractual terms. In essence, software products. In other words, by customers are in compliance and which software companies need to help “piggybacking” their products with are not. Such an assessment can result their customers in software asset other software or with hardware in a boon to the top line, as one major management to boost compliance. vendors, these companies expand their software vendor discovered: A study distribution opportunities and do so for the company conducted of its licenses far less cost than if they had to cultivate worldwide revealed that it was owed those channels on their own. For more than $1 billion in license fees. This instance, Google has bundled its Google figure is impressive in any environment,
7 The downturn also changes the rules for new acquisitions, providing opportunities to acquire key assets at potentially bargain prices.
8 Toolbar product with Adobe Reader so of operational costs and a 35 percent growth predictions were much rosier. Now, the Toolbar gets deployed to more PCs run-rate reduction. many of the entities acquired as revenue each time Adobe Reader users update boosters have become cost headaches, the Adobe software. Another example While cutting costs via outsourcing is a with upside potential diminished by the could be electronic software distribution familiar way to find value in challenging economic downturn. In other words, the that takes advantage of not only the times, collaborating with value chain business cases on which the deals were Internet but also television and cable partners on service delivery is a bit more based have fundamentally changed, for the networks combined with WiFi networks novel. More specifically, as electronics worse. Times like these—when consumer in the home. equipment of all kinds becomes more behavior, competitive strategies and the complex, there is a growing demand economy are all in flux—provide a golden External sources of talent and expertise among consumers for premium technical opportunity to assess past acquisitions also can be valuable allies in the pursuit support that can help them manage and to determine if value can be increased of high performance. More specifically, use their collection of high-tech products. by further integration, consolidation or software companies typically excel in For example, according to Accenture’s divestiture. product development and marketing Digital Home survey, 51 percent of but are less effective in operations. For consumers are interested in—and willing The downturn also changes the rules for instance, software companies, having to pay for—in-home installations of such new acquisitions, providing opportunities been relatively profitable businesses, are products as home theaters and wireless to acquire key assets at potentially behind in streamlining their operations via networks. Fifty-six percent said the same bargain prices. Just as not all software outsourcing because they have not been about backup services, 61 percent about companies are equally hard hit by the forced to deeply scrutinize their operations remote monitoring services, and 69 downturn, some companies are in a better and make hard choices about what to percent about technical phone support.3 position than others to make acquisitions keep in-house and what can be done that improve their competitive position better by a third party. Therefore, software Yet few companies, if any—whether and growth prospects—especially entities companies that have not yet outsourced hardware or software provider—have that will bring some key technology. back-office functions such as finance, the resources and capabilities to create Of course, the need to accelerate value human resources and IT should evaluate such services that would meet the needs capture and the exploitation of synergies those options carefully to determine how of customers in a way that would be will be critical. doing so could improve their operational profitable to the company. To address this efficiency. In Accenture’s experience, opportunity—or even to simply improve Several practices can smooth the outsourcing such noncore operations can the current customer service experience integration process and help software reduce operating costs while improving while reducing cost to serve—software companies generate greater value from operational efficiency. Another area ripe companies should explore how they their mergers and acquisitions. The first for outsourcing is maintenance of older could team up with other companies two practices are basic ones: fine-tuning products, which can reduce costs as well in their ecosystem to provide a more M&A strategy and screening methods as free up the company’s developers to comprehensive service and support offering to help ensure that acquisitions fill focus on the creation of new products. to users. As an example, several companies strategic gaps, and targeting strong Accenture has found that by following serving the same customer segment could companies that have been dragged this path, a software company can reduce form a partnership in which support down by the overall market and/or by its cost of ownership by as much as 50 service infrastructure is shared between weaker companies in their peer group. percent. them. A cable service provider, software Once a company has identified potential vendor and home electronics manufacturer acquisition targets, it must accurately Microsoft provides an excellent example all might pool their resources to provide identify the synergy potential, which of the potential of strategic outsourcing. coordinated, seamless support on devices requires a skillful blending of industry- The company’s OneFinance outsourcing and services that are interlinked with comparable benchmarks (to determine initiative, a finance and accounting each other. Such an end-to-end, pain-free the magnitude of what’s possible) and outsourcing arrangement with Accenture, service experience would doubtless delight opportunities specific to the merging realized benefits in just a few months. customers, locking in their loyalty. companies (for instance, consolidating Those results included the design and R&D capabilities). By marrying these implementation of global standardized Besides leveraging outsourcing and value processes across 92 countries, an chain partners, some software companies 3 improved internal control environment have created value via mergers and http://www.accenture.com/Global/Services/ By_Industry/Electronics_and_High_Tech/R_ and the ability to scale much more easily. acquisitions. However, many of those and_I/USFindings.htm Microsoft also gained better predictability deals were consummated when market
9 By embracing today’s challenges and investing in key assets and capabilities during today’s challenging times, these companies are taking greater strides toward high performance in the longer term.
two perspectives, a software company Importantly, leading software companies can determine if both the industry Conclusion will do far more than just survive the benchmarks are realistic and the targets Challenging times provide an opportunity downturn. They will emerge from it with specified are aggressive enough. for software companies to test their new business models, offerings and business models, finding gaps in product relationships that will better position them Finally, executing to realize the merger lineups, pitfalls in customer relationships to overcome hurdles such as software- potential is critical. In our experience, and hoped-for sources of value that as-a-service and stripped-down laptops three key steps can help companies have failed to deliver. And those few sold with minimal software. By embracing successfully integrate. The first is companies that emerge on the other side today’s challenges and investing in key establishing an integration team with of the downturn as market leaders will assets and capabilities during today’s a well-defined charter and scope, as have taken their hunt for value a step challenging times, these companies well as a full-time staff of experienced, further, finding novel ways of working are taking greater strides toward high knowledgeable managers. Second, across their value chains to distribute performance in the longer term. software companies must determine what products and deliver services. They also is required to minimize the gap between will use this time to look closely at the day the merger is approved by the past, present and future mergers and government and the day integrated acquisitions, discovering ways of wringing operations can begin. The third step maximum value from these arrangements. is developing a set of metrics to help the integrating organizations ensure that operational and financial targets are being met. By taking the preceding into account, software companies can be confident they are deriving as many synergies as possible from integration.
10 11 About Electronics customer relationship management and supply & High Tech chain management systems; Accenture’s Electronics business process outsourcing; & High-tech industry software development and group offers management testing; new product innovation consulting, technology-strategy and management; post- and implementation services to merger systems and business all segments of this exceptionally integration. Accenture has dynamic industry. Our industry assisted many of the Fortune group consists of six primary 100 electronics and high-tech segments: Consumer Technology, companies and 40 of the 51 Semiconductor, Communications electronics and high-tech Technology, Enterprise companies in the Global Fortune Technology, Network & Software 500. We have provided timely, Business, and Aerospace/Defense. innovative insights and services To companies in each of these that help our clients become areas, we provide an array of faster-growing, more profitable services and skills, including and more efficient businesses design and implementation of geared toward achieving high enterprise resource management, performance.
Copyright © 2009 Accenture All rights reserved. About Accenture Accenture is a global management Accenture, its logo, and consulting, technology services and High Performance Delivered outsourcing company. Combining are trademarks of Accenture. unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 181,000 people serving clients in over 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended Aug. 31, 2008. Its home page is www.accenture.com.