The Company attributes the shortfall in revenues primarily to delays in the closing of certain new contracts…
 
The company said second-quarter earnings were impacted by delays in closing large license transactions…
 
In spite of a well-qualified pipeline of approximately $10 million, delays in closing caused the shortfall in our license revenues…
 
The company believes that its revenues and net operating results are being adversely affected by decision making delays and a further slowdown with respect to IT-spending, particularly larger practices that require enterprise-level solutions…
 
 
Sounds familiar?
 
This is just a random collection from some recent press releases issued by enterprise software companies.  Note the recurring themes: “certain new contracts”, “large license transactions”, “license revenues”, “large practices”, “enterprise-level solutions”.  The big deals – they can make you or break you – what is your bet? 
 
Enterprise software companies, regardless of size, tend to gravitate towards large deals. This is not surprising when you consider how many software executives and the venture capitalists supporting them started their careers with large companies such as IBM, Oracle, and PeopleSoft. Others made their fortunes in the technology bubble days, when closing a million dollar sale was an easier proposition. And quite frankly, we all got greedy and cocky during those days.
 
It’s amazing what a few bad years can teach you.  Nowadays, software executives and investors alike have a new appreciation for the value of a continuous revenue stream.  One venture firm that has taken a leadership position on this issue is BA Venture Partners (BAVP).  Last August, I was excited to share with our readers an article by BAVP’s Sharon Wienbar on the value of Software as Service.  Wienbar’s experience since then has only lifted her enthusiasm with Software as Service: “we have made several new service/subscription investments and continue to believe in the model,” she says (feel free to contact Sharon if you have a pitch that fits).
 
Whether the software is delivered as service or in a licensed mode, Wienbar prefers companies that sell at lower transaction prices: “we still look for companies that can generate high value over the lifetime of a customer, but I really don’t like seeing companies rely on elephant-size deals.”
 
I believe Wienbar and BAVP are dead right.  For a young company, the big deal can be more of a breaker than a maker.  Here are some reasons why:
 
Sales Implications
 
“Closing a small deal takes just as long as closing a big one, so why bother?”  This is a common argument of the large deal proponents.  According to Wienbar, this is not necessarily the case: “with the right offering and sales process in place, we are seeing sales cycles for deals in the $25-75k range shrinking to 2-3 months, while larger deals can take over a year to close.”   
 
Another issue is bargaining power.  In the software world, power is generally with the buyer.  When your quarter rides on a large deal, bargaining power is completely on the customer side.  Customers know the game and leverage their position to exert huge discounts.  They also understand the pressure of quarter-end, and delay purchase decisions to further their negotiation power.  
 
Financial Implications
 
In an 18-month sales cycle, a two months slippage is more likely to happen than in a three months sales cycle.  “Counting on a small number of large deals to make your quarter is a real risky proposition,” says Wienbar.  
 
For a small company, these deal delays can be deadly.  Even if the company can keep operating, deal delays often result in cash flow crises, forcing management to make short-term decisions that hurt the company in the long-run. 
 
Market Implications
 
The number of companies that can afford a million dollar software license is limited.  Furthermore, much of the application landscape in the large enterprise space is dominated by a small number of suite providers.  While focus is a must, it is better to focus by choice than to be confined to a small market as the endgame.  Solutions that can be easily implemented at lower upfront cost can open up a whole new market opportunity that existing vendors have a hard time reaching. 
 
Companies that sell large and expensive solutions have been trying for years to extend their reach to smaller companies, with very limited success.  On the other hand, companies that have targeted small to medium businesses have demonstrated their ability to penetrate large enterprises through departmental solutions.   
 
Product Implications
 
Focusing on large deals could be a hindrance to your product as well, causing your understanding of market needs to be influenced too heavily by a small number of customers.  Even worse, these large corporate customers are used to homegrown applications developed to their exact specifications by internal IT departments.  Having been spoiled in that environment, they often demand extremely esoteric features that would not be appealing to others.  Read more about it in Daniel Shefer’s article below. 
 
Human Implications
 
Aside from being a business entity, a company is a collection of individuals.  Being in any startup is not for the faint hearts.  At times, working under pressure can produce great achievements.  However, stress levels at companies that rely on large deals often reach unhealthy states.  This impacts not only the individuals involved, but also overall company performance.  As the entire company focuses on closing the next big deal, many other important aspects of the business are neglected.  In a young company that is usually thin on resources to begin with, this can cause ongoing erosion in overall performance and productivity. 
 
 
HOW DO YOU BUILD YOUR BUSINESS FOR SMALLER DEALS?

• The Sales Force

 “Success metrics are different in the small deal environment,” says Wienbar.  “The key factors are transaction volume, repeat orders, and retention, especially in the Software as Service model.  This makes for a real tricky combination of skills that is required of a salesperson in this environment.  On one hand, they need to be transaction-oriented so they can close enough deals to make the numbers.  On the other hand, they need to be relationship-oriented to get the follow-on orders and ensure customer retention.”

• Telesales

When Ron Cowan joined Acuity as Director of Corporate Sales, the company relied on traditional, enterprise-level outside sales force to close six figure deals of its chat and e-mail management software.  The inside sales force was relegated to selling a smaller product for under $10,000.  “There was a huge gap in the middle that was not addressed by either sales force.  I was convinced that we could fill this gap with the inside sales force and close $50-100k deals over the phone,” says Cowan.  The CEO was skeptical.  “We had a bet whether we could do it or not,” tells Cowan. 
 
Cowan studied what the outside salespeople were doing and implemented a structured version of the process for the inside sales force.  They used their own product to demonstrate its capabilities over the web, something that was a novelty at the time.  To simplify the sales process and avoid a pre-sales site visit, Cowan structured the professional services portion of the deal into a number of fixed-cost packages. 
 
Last but not least, Cowan empowered the telesales people to sell as high as they could.  “The company didn’t believe these people could actually sell; I wanted to prove that with the right product package, process, training, and tools they could do just as well as the highly regarded outside salesperson.”  
 
The results?  Cowan’s team closed a good number of deals in the $50-120k range, all without a single site visit.  Using this approach not only reduced the cost of sales, it helped shorten the sales cycle and reach territories that were not well covered by the outside sales force.  These additional sales helped boost revenue ramp up, which ultimately contributed to the acquisition of Acuity by Avaya.

• Marketing

To reduce cost of sales and shorten the sales cycle, marketing should provide customers, sales channels, and the company’s sales force with supporting material that clearly articulates product benefits, demonstrates its features, and positions it against the alternatives.  In addition, marketing must generate a constant flow of leads to maintain the transaction volume required to support target revenues on a continuous basis.

• The Product

A product that can sell at high volume is more difficult to design than a product that will end up in a limited number of implementations.  Price is important, but only once everything else is in place.  More important is that the product is easy to understand and implement.  You want the buying decision to be as close as possible to a “no-brainer”.  Ensuring customers actually use the product and benefit from it is of outmost importance when you rely on follow-on sales or deliver software as service. 
 
How do you come up with such a product when you already have a complex product that sells at a high price point?  How do you avoid cannibalizing your existing sales with a lower-priced product? 
 
This could be a topic for a whole new article, but here are a number of ideas I can think of:

• Scrutinize any product enhancement request.  Is there a potential to turn this request into a new module that could be sold as a separate product?  Is there enough value in this product to justify it?
• Are there any existing product functions that can be packaged as a separate product?
• Have you identified any unmet needs in your target market that are not directly related to your current product offering, yet close enough that you can apply your skill sets to solve with a new product? (see Case in Point in the side bar).
• Talk to your professional services.  Is there anything they keep doing that can be packaged as a product or standard service offering? 

 
 
There is much more to be said on the topic.  This was just a quick overview of some of the reasons why you might want to stay away from a model that leads you to rely on large deals (Ihaven’t really touched on the definitions of large vs. small deal; is it different for each company and market?), and what are some of the things you can do to stir your company in a different direction.  OK, I didn’t say it was easy.  In my mind, though, it beats the alternative.  What do you think?