The New Software Industry: Michael Cusumano

Michael Cusumano is with the MIT Sloan School of Management, and has written several books on the changing software industry; he spoke today about the changing business of software.

In general, there is a decline of new enterprise software product revenues, and growth in services and maintenance sales. There are a number of new business models, including SaaS and ad-supported software.

Software companies tend to move from being product companies to services or hybrid product/services companies (maintenance revenue is usually included in services). However, there’s a different evolution curve that shows where companies focus on product innovation, then on process innovation (e.g., making the product more efficiently), then on services innovation.

The number of publicly-owned software companies peaked in 1997 at around 400 companies. IT services firms peaked in 1999 at around 500 companies. Web companies, which can be launched with significantly less capital (due to distribution mechanisms and development tools/methodologies), had a peak in 1999 before dropping in the crash, but are now climbing to an even higher peak.

Cusumano showed a graph of three business model dimensions: revenue model, delivery model, and customers, with traditional software product vendors at the origin of the graph, and various other models scattered throughout the cube. He also asked the question, is the rise in services and new business models temporary or permanent? The “temporary” argument says that we’re in a transition phase between platform and business model innovations; the “permanent” argument (with which I agree) says that software is now commoditized and prices will fall to close to zero as we embrace SaaS and ad-supported models.

Being an MIT geek, Cusumano had slide after slide of data analysis about his research on software product companies. For example, average product company revenue crossed over in 2002 so that services revenue was larger than product revenue; also, firms at 24+ years of age have more services than product revenue. The age phenomena contributes to the date-based phenomena, since many of the large enterprise product vendors are reaching this level of age maturity now. There’s an interesting cycle where services are very attractive for revenue generation, but then reach a point (in terms of % of revenue) where they are performed relatively inefficiently and, due to lower profit margins, are not as profitable as product; eventually, as companies become better at providing services (e.g., reusability), it swings to a more positive contributor to profitability. Market cap follows a similar pattern, although the centre (when services are undesirable) portion of the graph is broader.

Similar things are happening with hardware companies: more than 50% of IBM’s revenue, for example, is from services.

He had some interesting comments on the way that software product companies should incorporate services into their business model: it should be planned and exploited as opposed to just happening by accident, as it does with many product companies.

He ended up with some key questions:

  • How to manage the mix of products, services and maintenance efforts and revenue within a product company.
  • How to “servitize” products, to make them less generic and more customizable.
  • How to productize services; a great point that he made here is that it’s best served by creating two professional services organizations with different mandates.

The New Software Industry: Ray Lane

I’m at the Microsoft campus in Mountain View attending the New Software Industry conference, put on by Carnegie Mellon West and the Haas School of Business. I interviewed a few of the people from CMU West a few months ago about the new Masters of Software Management program, and ended up being invited to attend here today. Since I’m down here for TUCON this week, it was just a matter of coming in a day early and fighting the traffic down from the city this morning (although I left San Francisco at 7:30 this morning, I still arrived late, around 9:15).

Unfortunately, I missed the brief opening address which, according to the program, featured Jim Morris, Dean of CMU West, and Tom Campbell, Dean of Haas, so my day started with Ray Lane of Kleiner Perkins (formerly of Oracle) talking about the personal enterprise, or what I would call Enterprise 2.0.

Lane started with a discussion about how the software industry is changing, including factors such as packaging (including SaaS) and vertical focus. I found it interesting, if not exactly surprising, that he has a very American-centric view of the industry, so that he’s really talking about the software industry in the U.S., not the global industry; he spoke about India and China gaining market share in software as some sort of external force as opposed to part of the industry.

He had some interesting points: a call to action, which including leveraging community power via mashups and other collaborative methods; and a look at how platforms are moving from monoliths to clouds (i.e., services exist in cloud and are called as required). He covered some basic about Web 2.0 and web-driven capabilities. Since I’ve been so immersed in this for such a long time, there wasn’t much new here for me, although he had some interesting examples, particularly about collaboration and user-driven content.

He talked about the “personal enterprise”, where consumer web applications inspire new enterprise applications, or what many of us have been talking about as Enterprise 2.0. He makes a great point that somehow, being at home allows us to just try something new online, whereas the act of going into the office makes us want to spend a year evaluating rather than just trying something, and how we need to change that notion.

He gave seven laws for Enterprise 2.0 applications:

  • serves individual needs
  • viral/organic adoption
  • contextual personalize information
  • no data entry or training required
  • delivers instantaneous value
  • utilizes community, social relationships
  • minimum IT footprint

I’d love to expand further on each of these, but I’m trying to get this conference blogging back to something like real-time, so that will have to wait for another post.

He finished up with some examples of personal enterprise applications, with some discussion about what each of them contributed to advancing software industry business models:

  • Services: Webex, Skype, RIM, Google
  • Applications: Salesforce.com, NetSuite, RightNow
  • Collaboration: SuiteTwo, Visible Path

Access to the Microsoft guest wifi is tightly guarded and requires an hour or so turnaround to get login credentials, so this first post is coming out late and the other will trickle along throughout the day. All of the posts for this conference are available here.