Friday, November 2, 2007

Top Challenges for Product companies

In a rapidly changing landscape of product engineering paradigms and market structures, ISVs face stiff challenges in facing competition, market demands and time to market. Understanding these challenges and forming the right strategy to counter them is important for survival and sustenance.

1. Maintenance revenue

In order to meet the needs of customers, ISVs tend to build in every little feature into the product. By doing so, your customer is happy and continues to pay your maintenance fees. Over a period of time, this approach to building software products results in bloated products that become very large and complex to upgrade and maintain.

Majority of the code in software products is hardly used used. The challenge for ISVs is to make a product for majority of the customers and customize for the rest. To execute this strategy the ISV has adopt an architecture that can support such a code base and implementation model and then adopt a services business model to deliver to customers who need the customizations.

For lot of ISVs, maintenance is a major part of the revenue. They tend to build in every little feature in the product and thus over a period of time they get into large and complex products which are difficult to upgrade and maintain. Question is, are you passing on this maintenance costs to customers as your revenue? How long will the customers keep paying this maintenance revenue and how long will you keep on adding complexity into your product probably will affect your product lifecycle. A management decision indeed!

2. Focusing on selling licenses

Maximizing revenues from licenses is a well known profitable business line. Services revenue – which forms part of the System Integration that goes into delivering a complete solution to the customer, has been carved out as a separate ball game which is handled by the System Integrators (Sis). Most of times SIs end up with 50-60% profit margins whereas the ISVs are left with just about 20% to 30%.

Hence the challenge for ISVs is to plan to not just focus on licensing revenue but to also be part of the services play which is proving to be more profitable. ISVs must plan to have the required implementation team and professional services arm in place, apart from the core product development team to provide the service required. Unfortunately by doing so an ISV may alienate the Sis and VARs who are channel partners and a part of the ecosystem. The challenge is to maintain healthy relations with this ecosystem and at the same time become more profitable in the services line of business.

3. Spending on Innovation

Innovation is probably the most overused word in the industry, so much that it has become a cliché.

Innovation is however in its truest sense essential to an ISV’s business success. ISVs strive for application innovation, product innovation, platform innovation, design innovation, marketing innovation, integration innovation, process innovation, value migration innovation, acquisition innovation… you name it!

When it comes to innovation, the ISV typically looks at the R&D budget as a benchmark in measuring innovation. However R&D commitment is just the beginning and is not really an indication of innovation spend. Up to 95% of R&D budgets are being used by ISV’s to build new features in current products to keep current clients onboard. This leaves a very small amount for boosting competitive positioning in the market where a major innovation budget needs to be. Optimizing the R&D budget remains a key challenge therefore.

4. Leveraging partner ecosystems

Concepts like SOA, SAAS, Open source, etc are evangelized very effectively by the large vendors as they quickly tie them into their sales and marketing strategies. Small and medium ISVs who have the technology know-how and delivery capability can sometimes get lost in the wave that follows such disruptive technologies.

The challenge for an ISV is to come up with an effective partnering model with the partners. For example, by creating pluggable or extensible products on top of a partner’s existing solution and services offering, customers can buy your best of breed functionality while enjoying the benefits of the big boys. This of course goes back to the challenge of innovating to come up with the right product that can be plugged into the vendor ecosystem and to keep abreast with a partner’s offerings and integration options.

5. Product development outsourcing goal

Experts say that ISVs should have at least two thirds of their product development lifecycle off-shored or outsourced. A large portion of that work needs to be entrusted to a services partners whose core expertise lies in that area.

Motivations for outsourcing is moving from pure cost arbitrage to value arbitrage – in which specialized companies can provide increased value in developing products with increased time to market and better quality. Hence the challenge for ISVs is to set up a seamless multi-shore development model which taps into the best talent, best cost structure and best quality wherever it exists in the world. There are plenty of options available in Asia and Europe – IndiaChina are known to be fore runners. and

Finally, ISVs should be ready for the next wave of competition from product companies that will emerge from countries like India and China – who can offer the product at half the cost! Its time to leverage your positioning and move on with the first mover advantage before that happens!


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