Archive for the ‘Pricing’ Category

Is VMware’s Hyper-Growth Phase Over?

October 19, 2008

VMWare’s Opportunity to Expand Into and Potentially Disrupt Adjacent Markets

By George Gilbert and Juergen Urbanski

We’ve talked to a fair number of VMware customers and investors over the past few weeks.  In the process, we’ve repeatedly been asked whether VMWare is done with its phase of hyper-growth.  While it isn’t likely to grow anywhere near triple digits again, it is likely to grow into a strategic platform provider for both data centers and desktops, though this will require solid execution in a tough macro environment.  Its opportunity comes from its chance to both expand and disrupt a series of large adjacent markets.  The ripple effects of this sea change in computing will also affect many markets which VMware has no plans to compete in, though that will be fodder for future posts.  (Disclosure: the authors own shares in VMware)

VMware’s biggest near-term challenge is that it over-sold both units and high levels of functionality with their enterprise license agreements.  These ELA’s were an attempt to encourage customers to deploy more virtual servers with richer functionality ahead of Microsoft’s entry into the market this past summer.  While this may have had some success in making adoption of Microsoft technology more challenging in some accounts, it has actually had unintended side effects.  It left VMware competing with its own inventory of licenses already on the shelves of its customers.  While VMWare works its way out of that near-term hole, some have lost sight of the bigger picture opportunity.

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When, If Ever, Will SaaS Crack Core, Mission Critical Processes In The Enterprise

July 17, 2008

It’s no secret Software as a Service (SaaS) has generated tremendous excitement among many customers for its apparently transformational adoption model and ownership experience.  Unlike client-server applications, SaaS delivers faster time to value often via a viral buying cycle as well as lower risk deployment.  The early adopter focus has been on small and midsize businesses (SMBs) because SaaS makes it economical to reach them with broad penetration for the first time.  Where SaaS has carved out successes in large enterprises, it has largely been in more independent, non-mission critical departmental functions who have no capex budgets such as HR, CRM, or marketing, not end to end suites.  Despite the undoubted progress that SaaS is making, we believe the adoption of core, mission critical processes (Financials, order management, industry-specific processes such as manufacturing or securities processing) in large enterprises is still many years out for a variety of technical and business challenges.

SMBs have been the early SaaS suite adopters because traditional vendors couldn”t reach them

SMBs have been the low hanging fruit for early SaaS adoption because they’ve historically been underserved by application vendors.  Small deal sizes and bare bones cost of ownership requirements typically were critical stumbling blocks.  The small deal sizes mean vendors have to reach them with a much lower cost channel than direct sales.

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When Applications Talk To Each Other Via SOA, What Happens To User-Based Pricing

June 16, 2008

Alphabet soup of evolving application design patterns: SOA, EDA, BPM

It’s clear that SaaS doesn’t represent a threat to client/server pricing.  Consider what SOA might represent. In case the terminology is new, here are the definitions first. Bear with the abstractions. To be technically correct, we have to include Event-Driven Architecture (EDA) and Business Process Management (BPM) technologies as well for customers to get the full value out of autonomous services communicating with each other with few users involved.

  • In the case of enterprise applications, SOA means functionality in the form of business processes that are made up of services that communicate with each other’s interfaces by exchanging data. These interfaces might be implemented as Web services. The supplier electronically submitting an invoice to a customer is the relevant example here. 
  • EDA allows services in an SOA to be more loosely coupled. They can communicate by publishing and subscribing to events without either side talking directly to the other. A retailer tracking delivery of goods to its distribution center via RFID would be an example here.
  • BPM orchestrates services and includes users in a workflow where necessary to manage a complete process. A BPM agent for a supplier may be managing the order to cash process when a customer places an order that goes beyond their credit limit. The BPM agent may escalate this exception to the finance department as well as the sales account manager for resolution.

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Why SaaS Isn’t The Real Threat To Enterprise Application Pricing

June 16, 2008

Whether subscriptions or perpetual licenses, it’s still about user-based pricing

Imagine for a moment that you are at IBM and a small supplier of components from the Far East has just submitted an invoice. It just shipped an order of printed circuit boards to IBM’s networking equipment division in upstate New York. IBM receives it and a clerk in its invoice processing department enters the invoice into its ERP system. Whether IBM bought a client/server or software-as-a-service (SaaS) ERP system doesn’t matter. The clerk has to fill out and navigate as many as 20 screens to enter the invoice so the purchase to payment process can move to the next step.

But go back to the distinction between client/server and SaaS applications. Conventional wisdom says that SaaS applications such as SalesForce.com and their subscription licenses represent a threat to the perpetual licenses and the business models of traditional client-server companies such as Oracle or SAP. Stretching payments out over multiple years, as SaaS does, makes it harder to show the profitability and growth that comes from the upfront payments of perpetual licenses. The reality is somewhat different. As many know, SaaS actually takes in significantly more revenue over the product’s lifecycle. But the pricing models have much more in common than their differences. They both charge based on the number of users accessing the application.

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Roadmap to Improving IT Services Profitability

June 11, 2008

Pricing excellence can lift the profitability of services businesses by 300-500 basis points. Getting there requires a well-structured, multi-functional approach with strong executive sponsorship. The size of the prize though is well worth the pain.

CONTEXT

The Professional Services (PS) business at product-led enterprise technology vendors often fails to live up to its potential. Managed properly, PS can play a key role in enabling customer loyalty, deepening account relationships, and channeling insights from the frontline back into product development. At many vendors, though, the PS business falls short of delivering on these objectives and is plagued by low overall profitability.

This post lays out an approach to improving PS profitability which we have refined over the course of working closely with several Fortune 100 technology providers.

CHALLENGE

Managers in Professional Services businesses often focus on reported utilization, i.e., volume, as the primary driver of improving overall profitability, followed by a focus on structural labor cost (e.g., on-shore vs. off-shore mix). Compounding the profitability challenge, billable utilization is often affected by the need to remediate product quality issues in the field.

RESOLUTION

Pricing though can yield large potential for improving aggregate profitability but is often an undermanaged area, as it resides at the intersection of services product management (strategic pricing), the services field (tactical pricing) and services operations (enabling infrastructure).

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