The race is on for equipment manufacturers in IP telephony, storage, electronic gambling/gaming, manufacturing control, security, and medical devices to become more like a software company, if not an outright software company. Due to a variety of factors including increased market competition, commoditization of the underlying hardware platform, end-customer appetites for virtual appliances and increased investments in software to establish differentiation, many equipment manufacturers are becoming software companies. In fact, most of these companies now invest more of their R&D budget in software, and not in the underlying hardware. In most cases, the actual hardware component is usually purchased from another supplier.
This wide-scale trend is underscored by comments we hear from these companies, such as…
- "We are moving to software as a business, and no longer giving it away."
- "Our CFO wants recurring revenue streams, just like a software company."
- "We need to establish a software business model."
- "The hardware is just a vessel to sell our software."
What these companies are finding is that the operational excellence that they have created in their hardware supply chain seems to elude them as they move to a more software-centric business model.
For equipment manufacturers, the automated systems and processes that were developed to produce a physical device, don't work as well for software, and as a result, many processes have become manual, and, ERP and CRM systems are being endlessly taxed and stretched. Customer records become inaccurate, and visibility into the "installed base" becomes difficult at best. Even the sales culture and compensation models are challenged. Traditionally, the sales forces of these companies were used to selling the physical devices, and giving away the software "as a kicker", today that is no longer the case.
Software operational excellence seems elusive to these equipment manufacturers, yet ironically, there is a supply chain discipline required even in the software world. It's just that the paradigms for an equipment manufacturer are slightly, yet profoundly different than those required in a software world. When working with equipment manufacturers, the companies seem to have many of the concepts and ideas, but they seem to be wrapped into a giant ball of assumptions that are often incorrect, and undermine how a software business is approached. These assumptions become institutionalized in an inefficient manner, and then often get "fixed" in incorrect ways, leading to more confusion and problems.
Next Week is Step 1 – How to Think Like a Software Company.
In the following weeks, we'll explore various ideas, business and software licensing models, and processes to enable the transformation to a world-class software company!