A recent trend that we have seen across Intelligent Device Manufacturers (IDMs) is that customer needs, competition and commoditization are forcing them to turn to software as an enabler of future growth. These companies do so either by monetizing their embedded software or by developing stand-alone software that complements their hardware. However, these companies face significant challenges as they transition from hardware-centric to a solution-centric (hardware + software + services) business model.
The key challenges are:
- Business model differences
- Inflexible operations
- Non-compatible policies
- Internal system capabilities
- Organizational culture
Business model differences. Hardware and software business models are vastly different. While traditional hardware models typically involve a point sale and minimal recurring revenue, software business models have a high percentage of recurring and follow-on revenue through renewal of software licenses, enablement of additional features or through support contracts that provide rights to upgrade and update software. It is common for software companies to have a revenue model that is recurring and derived from services to existing installed base (sometimes > 50%), while the revenue model of many hardware companies are related to initial product sale.
Inflexible operations. The best strategy and plans are likely to remain just that if those cannot be executed. It is common to see great ideas of product management, marketing or sales fall flat because of the operational complexities. The challenge is more pronounced for IDMs that want to support both hardware and software business models. These companies should focus on 3 aspects:
- Simplifying customer facing operations: The operations of hardware business, from manufacturing to marketing, are centered on the ability to identify hardware as a discrete unit. This hardware-centric view creates several hurdles in the software realm. For example, we have worked with IDMs that require customers to provide their serial numbers as part of the order process. This not only adds to internal operations complexity but also causes hurdle for sales, channel partners and customers and may even deter a sales. Organizations also need to develop capabilities for customers to seamlessly manage the different software lifecycle events (like purchasing additional licenses, re-hosts, RMAs). It is here that most IDMs fail in their execution. The following quote from a channel partner of a multi-billion dollar IDM in the telecom equipment space sums it well "It takes an act of God to get five additional software licenses"
- Strengthening back-office operations: Supporting a combination of hardware and software business models require sophisticated capabilities to execute the combined hardware and software supply chain. In addition to supply chain orchestration, IDMs should gear up to seamlessly execute complex revenue recognition, attribution and the divergent policies associated with hardware and software.
- Agile Operations: The realm of software is dynamic and new methods of packaging, licensing and monetizing software are rapidly evolving. We find that organizations typically have to support a range of software business models that vary along the following dimensions:
- Time (perpetual, subscription, term, etc.)
- Unit of Measure (hardware centric – per CPU, per device to usage centric – utility, pay as you go models)
- Delivery mechanism (from on-premises to company hosted to 3rd party hosted)
To support these diverse business models, IDMs need to have operational capabilities that are not only robust but also agile. The question of "Can elephants dance?" is not a luxury these companies can afford. They have to.
In Part 1, I covered the first two of the five challenges that I had outlined. In my next blog, I will cover the other three challenges and suggest a few ideas that can help IDMs in their transition.