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?
“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.”
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.
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.
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?
