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I was recently discussing with a friend of mine in a VC firm what the biggest challenge facing young enterprise software companies was.

The answer from the VC side was simple but deadly: companies are still struggling to grow fast enough to generate the required return required to keep their investors happy.  Faced with a business model that is not delivering, businesses can fall into two equally fatal traps:  keep using what is in fact the wrong model for too long or jump too fast into another wrong model without planning for the required changes.

Going back 5+ years, the decisions were simpler as the revenue parameters were license fee, annual maintenance fees and consultancy/training with channel strategy providing the other dimension.  Today, there are much more fundamental choices to be made between the traditional enterprise model, Open Source, Software as a Service (SaaS) and even subscription based pricing.  In actual fact the enterprise model was far from easy on its own– and the appearance of the alternatives makes the job of selecting and tuning the right business model even harder.  Additionally, transitioning between these models can be extremely difficult: Coming back from OSS to license-based is nearly impossible, switching to SaaS requires significant business and technology changes.

The first trap to avoid in reviewing your business model is failing to recognise that in the future each of the models will continue to be viable for the right company at the right time.  Sometimes this can be a tough discussion as some investors have been convinced by commentators who seem to believe that the enterprise software license model is dead and only OSS or SaaS is viable.  More sensible commentators, such as Bill in XAware’s blog provide a plausible rationale for the greater diversity within a bigger picture:

The “enterprise software business model” that software vendors adopted during the 1990s and largely continued to use in this decade compounded this barrier to adoption of SOA. These models treat software as capital infrastructure, emphasizing large up front license payments and professional services heavy implementation. Given large up front costs to acquire new more productive technology and the low labor costs, rational buyers have stayed with older technologies and methods.

Bill believes that increasing skill shortages and labour costs will reignite the enterprise software market – all be it with a broader mix of business models.  Even if you disagree with Bill, it is clear that there is a more complex purchasing environment which means that there is no straight forward answer to what business model should be used.  In particular, it is not sufficient to cry the world has changed and we are all doomed– it is about analysing the value of the solution and how best to deliver that value to the customer and get paid for it.

The trick is to keep the open mind, avoid religious fervour for any particular model and in essence follow good product management practises and focus on the 4 Ps: Product, promotion, price and placement.  Having selected the business model that seems the best bet for the business, the second part (the actual transitioning) is equally short of universal solutions:  It needs to be treated as the business relaunch process it is and planned for across every aspect of the business from dealing with existing partners and customers to ensuring the product works in its new business model.

Of course this all sounds too easy and the decision and planning process can be a major piece of work on its own.  However, from our experience of participating and guiding such processes we find that even when the outcome is steady as you go, it can reignite faith in the business for management and investors alike.

Ronan