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I am Joannes Vermorel, founder at Lokad. I am also an engineer from the Corps des Mines who initially graduated from the ENS.

I have been passionate about computer science, software matters and data mining for almost two decades. (RSS - ATOM)

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Wednesday
Mar042015

## Buying software? You should ignore references

Being a (small) software entrepreneur, it is still amazing to witness how hell is breaking loose when certain large software vendors start deploying their “solution”. Even more fascinating, is that after causing massive damage, the vendor just signs another massive deal with another large company and hell breaks loose again. Repeat this one hundred times, and you witness a world-wide verticalized software leader crippling an entire industry with half-backed technology.

Any resemblance between the characters in this post and any real retail company is purely coincidental.

I already pointed out that Requests For Quotes (RFQ) were a recipe for disaster, but RFQs alone do not explain the scale of the mess. As become more and more familiar with selling to large companies, I now tend to think that one heavyweight driver behind these epic failures is a banal flaw of the human mind: we massively overvalue other people’s opinion on a particular subject instead of relying on our own judgment.

In B2B software, one’s references usually come from is a person who works in a company similar to the one you are trying to sell to, and who, when called by your prospects, conveys exceptionally positive feelings about you and extremely vague information about your solution. Having tested this approach myself, I can say that the results are highly impressive: the reference call is an incredibly efficient sales method. Thus, it is pretty safe to assume that any sufficiently large software B2B vendor is also be acutely aware of this pattern as well.

At this point, for the vendor, it becomes extremely tempting not to merely stumble upon happy customers who happen to be willing to act as referees, but to manufacture these references directly, or even to fake them if it’s what it takes. How hard could this be? It turns out that it’s not hard at all.

As a first-hand witness, I have observed that there are two main paths to manufacturing such references, which I would refer to as the non-subtle path and the subtle path. My observations indicate that both options are routinely leveraged by most B2B software vendors once they reach a certain size.

The non-subtle path is, well, not subtle: you just pay. Don’t get me wrong, there is no bribery involved or anything that would be against the law. Your “reference” company get paid through a massive discount on its own setup fee, and is under a strict agreement that they will play their part in acting as a reference later on. Naturally, it is difficult to include this in the official contract, but it turns out that you don’t need to. Once a verbal agreement is reached, most business executives stick to the spirit of the agreement, even if they are not bound by written contract to do so. Some vendors go even a step further by directly offering a large referral fee to their flagship references.

The subtle path takes another angle: you overinvest in order to make your “reference” client happy. Indeed, usually, even the worst flaws of an enterprise software can be fixed given unreasonable efforts, that is, efforts that go well beyond the budget of your client. As a vendor, you still have the option to pick a few clients where you decide to overinvest and make sure that they are genuinely happy. When the time comes and a reference has to be provided, the reference is naturally chosen as one of those “happy few” clients who benefit from an outstanding service.

While one can be tempted to argue that the subtle path is morally superior to the non-subtle path, I would argue that they are both equally deceptive, because a prospect gets a highly distorted view of the service actually provided by the vendor. The subtle path has the benefit of not being a soul crushing experience for the vendor staff, but many people accommodate with the non-subtle path as well.

If you happen to be in a position of buying enterprise software, it means that you should treat all such hand-picked references with downright mistrust. While it is counter-intuitive, the rational option is to refuse any discussions with these references as they are likely to distort your imperfect (but so far unbiased) perception of the product to be acquired.

Refusing calls with references? Insanity, most will say. Let’s step back for one second, and let’s have a look at what can be considered as the “gold standard” [1] of rational assessment: the paper selection process of international scientific publications. The introduction of blind, and now double-blind, peer reviews was precisely motivated to fight the very same kind of mundane human flaws. Nowadays, if a research team was to try to get a paper published based on the ground that they have buddies who think that their work is “cool”, the scientific community would laugh at them, and rightly so. Only the cold examination of the work itself by peers stands ground.

And that is what references are: they are buddies of the vendor.

In addition, there is another problem with references that is very specific to the software industry: time is of the essence. References are a reflection of the past, and by definition, when looking at the past, you are almost certain to miss recent innovations. However, software is an incredibly fast-paced industry. Since I first launched Lokad, the software business for commerce has been disrupted by three major tech waves: cloud computing, multichannel commerce and mobile commerce; and that is not even counting “minor” waves like Big Data. Buying software is like buying a map: you don’t want an outdated version.

Software that is used to run large companies is typically between one and two decades behind what would be considered as “state of the art”. Thus, even if a vendor is selling technology that is one decade behind the rest of the market, this vendor can still manage to be perceived as an “upgraded” company by players who were two decades behind the market. It is a fallacy to believe that because the situation improved somewhat, the move to purchase a particular software was a good one. The opportunity to get up to speed with the market has been wasted, and the company remains uncompetitive.

No matter which approach is adopted by the vendor to obtain its references, one thing is certain: it takes a tremendous amount of time to obtain references, typically years. Thus, by the time a references are obtained, chances are high that the technology that has been assessed by the referee has now become outdated. At Lokad, it happened to us twice: by the time we obtained references for our “classic” forecasting technology, we had already released our “quantile” forecasting technology and our former “classic” forecasting software was already history. And three years later, history repeated itself as we released “quantile grids” forecasting that is vastly superior to our former “quantiles”. If companies were buying iPhone based on customer references, they would just be starting to buy the iPhone 1 now, not trusting iPhone 2 yet because it would still lack customer references; and it would be unimaginable to even consider all the different versions from iPhone 3 to iPhone 6 that have not yet been time-tested.

The need for references emerges because the software buyer is vulnerable and insecure, and rightly so, as epic failures are extremely frequent when buying enterprise software. While the need to obtain security during the buying process is real, references, as we have seen, is a recipe for major failures.

A much better approach is to carry out a thorough examination of the solution being proposed, and yes, this usually means becoming a bit of an expert in this field in order to perform an in-depth assessment of the solution being presented by the vendor. Don’t delegate your judgment to people you have no reason to trust in the first place.

[1] The scientific community is not devoid of flaws, it is still large bunch of humans after all. Peer reviewing is a research area in progress. Publication protocols are still being improved, always seeking to uphold higher standards of rationality.

Monday
Dec152014

## A few lessons about pricing B2B apps

My own SaaS company has always been struggling with its own pricing. For a company now selling its own pricing optimization technology for commerce, this was a bit ironic. Well, pricing of software is unfortunately very unlike pricing goods in store, and the experience we acquired working with our retail clients improving their own prices provided little insights about the pricing of Lokad.

Since the creation of the company, Lokad has been offering a metered pricing, charging according to the amount of forecasts consumed. However, in practice for the last two years, we signed only a handfew contracts where the pay-as-you-go pricing had been actually preserved. In practice, the usage consumption as observed during the trial period was used as the starting point of the negotiation; and then the negotiation invariably converged toward a flat monthly fee.

Starting from today, we have extensively revised the pricing of Lokad toward a very simple list of packages only differentiated by the maximal size for the client companies.

For SaaS companies selling to businesses, the (almost) ubiquitous pricing pattern consist of charging per user; that's the approach of Salesforce, Google Apps, Office 365, Zoho and many more. However, sometimes, charging per user doesn't make sense, because the number of users can be made arbitrarily low, and does not reflect at all the usage of the service. All cloud computing platforms fall into this category.

Metered pricing only works with Über-geek clients

The cloud computing example is misleading because it gives the false impression that metered pricing is just fine. Metered pricing works for cloud computing platforms because their clients are very technical and can digest pricing logics 100x more complex than logics acceptable by "non-tech" businesses.

At Lokad, we have observed many times that the fear of doing a mistake and increasing the invoice tenfold was generally considered as a deal-breaker. Most companies don't even nearly trust as much their employees as software companies do trust their software developers. A metered pricing put an implicit high level of trust on the employees operating the metered service.

Flat monthly / quarterly / yearly fees are the way to go

Through dozens of negotiations with clients, some large, some small, and across many countries, we have always converged toward periodic fees to be paid every month, quarter or year. Sometimes, we did add an additional setup fee to reflect some extra-effort to be delivered by Lokad to setup the solution, but in 7 years of business, we had only a handfew contracts more complex than a flat setup fee followed by a flat period fee.

The lesson here is that anything more complex than setup fee + periodic fee is very prone to accidental complexity providing little or no business value for the software company and its client.

The "freemium" vision consists of offering a free version with limited features, and restricting the access to the more advance features to paying clients. Again, if you consider a software where it's natural to charge per user this approach might work; however, when the software is not user-driven, not granting access to all features just drags down your small clients - who have mostly the same needs than your bigger clients.

We learned that crippling our own apps was just bad. At the end of most negotiations with clients, we were nearly always ending up granting access to all features - like the highest paying plan - for most companies. Naturally, the price point was adjusted accordingly, but nevertheless, we observed many times that crippling the software was just a lose-lose approach.

It's fine to trust your clients by default

For years, at Lokad, we had relied on the implicit assumption that whatever metric were going to be used to define the boundaries between the subscription plans, this metric had to be tracked by the software itself. However, by narrowing our vision to the sole metrics that our software could track, we had eliminated the one metric which was truly making sense: charge according to the company turnover.

Our new plans are differentiated based on turnover, and yet, we have not automated way to measure the turnover. However, is it really a problem? I don't think so. Over the years, we have very (very) few companies trying to game our terms. Moreover my observations indicates that the larger the company, the less likely they are to even consider the possibility of cheating.

The logical conclusion is then to grant access to everything by default, and then to gently remind companies of your pricing terms when the opportunity arise. B2B isn't B2C, for the vast majority of B2B software, even if you don't put any protection in place, the service isn't going to be swarmed by corporate freeloaders.

If it does, well that's a rich man's problem.

Wednesday
Aug282013

## A buyer’s guide for enterprise software

Through a series of Big Data consulting missions that were overlapping with the entire IT landscape, data being all over the place, I have observed software purchasing processes of many large companies. Being also an enterprise software vendor myself, I have been baffled countless times by broken buying processes that lead smart people routinely choose about the worst price-quality ratio that the market has to offer.

In this post, I am trying to gather a survival kit for buying enterprise software. By enterprise, I refer to companies with over 1,000 employees.

## Get rid of Requests for Quotes (RFQ)

The rational goes like this: let’s write down all our requirements, then, we identify all suitable vendors, send them the RFQ, collect the quotes, review demos, and finally select the best option. Fairly reasonable, and yet, as far software is concerned, deeply dysfunctional.

Why? Because writing an accurate specification for software you need is harder than writing the software itself. It’s somehow the Heisenberg uncertainty principle transposed to software. Just try to write a RFQ for a webmail (aka GMail) if you’re not convinced. Specifying the fine print would already takes hundreds of pages, that’s only a webmail. Enterprise software tends to be a lot more complex than webmail.

As anecdotal evidence, writing and managing an RFQ is so time consuming and complex that many companies throw consultants at the problem, increasing costs even further.

Then, when the whole process is in place, guess what happens? All decent vendors walk away. Indeed, if you have a decent product that sells by itself (think Microsoft Excel), why would you bother paying an army of account managers to walk through broken RFQs? In the end, the only vendors left are either the ones so outrageously expensive that they can afford whatever it takes, or the ones selling crappy products that would never get sold without the active contribution of dysfunctional (yet widespread) processes.

My advice: Take your favorite search engine and forge yourself an opinion. It’s easier than you think, and in less than 3h, you're likely to have already a convincing shortlist of vendors. A few tips:

• If all you find about a software is happy talk, software is worthless or vaporware.
• If you can’t find screenshots of the software, then it means that the user interface, and probably the user experience as well, is abysmal.
• If the web documentation is awful or absent, then whatever private documentation exists, it won’t be better.
• If there is no public pricing, then, you will face somebody who’s professionally trained in reverse engineering the exact budget you have. That's going to be a time sink.
• If the company does open source, then bonus points. They are not afraid that other people might have a look at the software code they produce.

## Customizing Off-the-shelf Software is deadly

Joel Spolsky stated that it takes 10 years to write good software, and looking at the development curve of my own company I tend to agree. Well, it took us 5 years to realize that we were not even solving the correct problem (but this will be the subject for another post).

Software is (mostly) a take it or leave it business. Yes, you can request tiny adjustments, but asking for anything substantial is like swimming in molasses, mostly because of hidden costs. Generic upgrades won't work, support staff will be incompetent, design balance will be thrown out of whack, etc. As a result, good software companies, where people truly care and dedicate a good portion of their lifespan in carefully crafting truly valuable products, will actually decline such requests.

In contrast, vendors who will gladly accept customization requests are the one putting little value on the integrity of their product; which has already degenerated into some byzantine architecture through the acceptance of disparate customization requests over time.

My advice: choose your battles wisely. If a feature gives you an edge against the competition then internalize it and treat it as a core asset. Otherwise, it’s easier and cheaper to adjust your own organization to whatever software which reflects the dominant practice - as long the new practice offers a tangible improvement over the old one.

Bill Gates said that you don’t get what you deserve: you get what you negotiate. True enough but you should wisely choose what you want to negotiate. Negotiating over the software pricing is enormously expensive for the vending party. It takes a highly talented workforce, with employees both technically savvy and yet having all the smooth skills it takes to interact with large organizations. In most Western countries, the yearly total cost of a seasoned account manager is above 150k. When you start bargaining with software companies, you also start an adverse selection process. Only the companies willing to afford an expensive sales force remains while others walk away. The vendors who stay are the ones where the business model is geared toward an ever increasing sales force. However, you want to put your money on a vendor that invest the bulk of her revenue in developing good software, not funding an army of people that specializes in reverse engineering budgets. My advice: negotiating the price downward is usually a dead end. If it's out of budget, then discard the vendor and move to the next one. Instead of focusing on price, you should try is to capture as much attention as you can from the core development team. Since you are an enterprise (hence a large prospect), you already got an edge here. For example, you can negotiate a small case study against a series of meetings with whoever are in charge of the core product development. By making sure that the people in charge of the product are familiar with your business, you are vastly improving the odds that the future developments will be aligned to your company needs. Furthermore, you won’t even need to fund or think about those enhancements, the people you’ve met will do this free of charge; because it’s a natural thing engineers do when learning about client's problems. ## More is less and stay clear of platforms The inevitable corollary of RFQ is that the more advertised features the better. Furthermore, the impression is amplified by the vendors themselves who promote an ongoing stream of new features to sustain a form of recurring business (even for SaaS). In the context of enterprise software, more features raise a very specific problem: soon enough supposedly distinct products start to overlap. • Both CRM and CMS (Content Management System) want to capture web leads. • Both the inventory management system and the accounting system want to manage suppliers. • Both BI and Web Analytics want to analyze the sales channels. • ... Overlapping is deadly because data flows within the IT landscape start to look like the Tokyo subway map. Indeed, each time, on both ends of the overlap, divisions want to use their software, and consequently IT gets forced into moving the data around, struggling with inconsistent domain models. Platforms are the worst offender here, because platforms are bound to overlap with practically everything else in the company. Worse, platforms create rampant dependencies making it quasi-impossible to get rid of the platform vendor later on. My advice: favor highly focused app over jack-of-all trade apps. If you get it wrong, it will fail fast, and you will have ample possibility to try again. Most enterprises incorrectly think that managing many vendors is a problem, hence favoring Big Systems. However, dealing with hundreds of apps is quasi-painless - well, for a large company - as long as apps remain decoupled, and as long as you’re not bargaining with an army of vendors. In contrast, it only takes two overlapping platforms to create an IT integration nightmare. ## Time is of the essence In the world of enterprise software, vendor lock-in is all over the place; and yet, all enterprises I met had supposedly everything in place to avoid those lock-ins: contractual reversibility (to be able to revert to back to the previous system), contractual migration support (to be able to move forward to a new system), favorable termination clauses, etc. On the surface, extensive safeguards were in place against any vendor lock-in. How could the reality be so different from the theory? It’s because time is the strongest and most widely underestimated vendor lock-in mechanism. What’s the point of being able to terminate a contract any day if it takes years to de-entangle operations from the vendor? As a rule of thumb, phasing out an enterprise vendor take about 3x as long as phasing the vendor in; and if it’s a platform, then you can reasonably consider your company locked on the platform forever. Indeed, don’t expect vendors to be overly motivated by the prospect of having their products being phased out. At best, the legacy vendor will be slow but ultimately responsive to whatever problems which will necessarily arise during the transition. But that's the best case ... My advice: Internet was a revolution. SaaS was a revolution. Cloud computing was a revolution. Mobile internet was a revolution. Software is a fast-paced industry, even more than consumer electronics. Would you buy a tablet and consider it’s an asset to be amortized over the next decade? Certainly not, it’s the same for enterprise software. No matter what software you are considering, if you can’t roll out in a matter of weeks, then move on to the next vendor. Otherwise, by the time your company is done with its acquisition, the software industry will have moved to its next revolution, you will be left with a freshly obsolete technology. ## Your data is your DNA, take ownership There is one area where COTS (commercial off-the-shelf software) works poorly for large enterprises: it’s the orchestration of the data. By orchestration the data, I am not referring to databases, ESB (Enterprise Service Bus) or equivalent low-level generic data system; I am referring to the layer on top that unify the IT landscape. This layer typically involves a mix of people and some middleware to carry on with the changes. Indeed, COTS necessarily carry strong domain models, that it, the abstract software representation adopted to model the business itself. However, there is (almost) not a single chance that any of those predesigned models would fit a large company made of fusions, acquisitions, restructurings and possibly somewhat heterogeneous branches. Some software, notoriously SAP, can be made to fit practically the domain any large company, but there are so many developments involved, that it hardly counts as off-the-shelf software. My advice: if there is one area where every large company should have a small team of software developers, it’s its own private data platform: an entity dedicated to the collection and the service all the data generated within the IT landscape. Here I strongly favor in-house software developers, because business data is always core business, no matter what your company is doing. Furthermore, for most enterprises, a small tiger team of software developers in charge of the data would typically vastly reduce IT spendings compared to vast teams of recycled IT workforce. Indeed, great control over your data grants you the capability to swiftly phase software in and out, and speed is decisive. In practice, it does not take many people, but it takes talented people. Wednesday Jun082011 ## 3 Low-Competition Niches In Retail Software (guest post) My first guest post (ever) 3 Low-Competition Niches In Retail Software has been published by Andy Brice on his blog Successful Software. Special thanks to Andy and his wife for the tremendous polish, they have brought to my initial draft. Saturday Apr172010 ## Stack Exchange 2.0: epic fail? It's a sad thing to see a pair of brilliant entrepreneurs going for a probable epic fail with best intentions in mind. IMHO, the recently announced Stack Exchange 2.0 has a high probability of failure, and worse (as far I am concerned) it might marginally hurt my business due to the lack of ongoing commitment for the forum I did setup for my own company a few months ago. Let consider the situation: • Stack Exchange is an excellent Q&A engine, something that the market had been waiting for a long time, as illustrated by the success of Stack Overflow. • Stack Exchange 1.0 had a very reasonable business model, announced with an entry price of about120 / month.

Now, Stack Exchange 2.0 for a business plan that urgently reminds me of the 37signals announcement of their $100 billion valuation: When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation.We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit! So let start by discussing the arguments proposed by the SE team to go for a free service: 1. SE had not enough enough beta volunteers. They were expecting "thousands of sites would start to sprout up on every possible topic" (sic) 2. People were prone to create "ghost-town sites that nobody visited" (sic). "Allowing anyone with a credit card to make a site" (sic) wasn't a good idea. 3. People were prone to "multiple sites on the same topic" (sic). Expecting an overnight success Well, as far point 1 is concerned, that was just plain unrealistic expectations. Yes, I am 100% sure that SE 1.0 (Stack Exchange 1.0) could have ultimately had thousands of happily paying customers, but it turns out there is no overnight success. Stack Overflow was a quick success because it benefited from two famous bloggers with huge 100% focused audience. Yet, SE 1.0 is a B2B product, and needs to be marketed and sold accordingly; and it turns out that the SO (Stack Overflow) is definitively not the right audience to market SE. All the SO folks happen to be software developers: little wonder that you get half a dozen SE spawn focusing on startups (but we will get back to this point). Hence, SE 1.0 had not even been marketed yet, not to the relevant audience anyway. Then, the beta branding is sufficient to scare away about 99% of all B2B prospects; software tools are sort of a one-of-a-kind exception here. Thus, to even get a chance for SE to succeed, it would need to branded as v1.0 then start charging for it. Companies don't trust "gratis" stuff, and rightly so. B2B is the contrary of B2C: you have to start charging for it to succeed (open source entered the business the day people started to charge for it). What about the ghost sites? Building a community is a very significant investment. It takes a lot of time, typically years, and thousands of hours of work. SE 1.0 was beta. How could it be expected any reasonable organization to push such a commitment on an unproven solution? For most businesses, a solution becomes proven when someone gets charged for it, and this person claims that is was money profitably spent. Then, the SE team implicitly assumed that low traffic means implicit failure: those guys with credit cards they don't know what they are doing. The market gets it wrong, and we are going to do it better. I am very skeptical when anyone (even bright people) pretend to know more than the market. If somebody is selling Luxury Yatch, then a single answered question might be worth millions of USD if it makes the difference to close the deal. If people (like me) are ready to be pay$100 / month for low traffic websites, then there might be another explanation than those people don't know how to spent their money.

Pushing the point further, how do ghost sites hurt the SE business in anyway? Companies pay for the websites, nobody looks at those websites, nobody gets hurt by those websites. Take the money and stop whining.

Websites on similar subjects are created

Considering that SE was primarily addressed at a near monolithic audience (software developers), it's little wonder to see that many people had the same idea at the same time.

This is old behavior inherited from Economy 1.0: it's called competition.

And so what? Software editors sell their products to companies who happen to compete against each other. This is a healthy situation. At some point the market may decide to elect a "outstanding" winner, but most of the time, market does not, and competition keeps going.

Again, pretending to know more than the market is a wild assumption.

As final point of the analysis of SE 1.0: the outlook was bright, it needed an official v1.0 release, some meaningful marketing outside the software crowd, and SE 1.0 was very likely to become a profitable business. Dropping the SE 1.0 at this point almost look like a bad case of Fear of Success.

Outlook on Stack Exchange 2.0

The SE 2.0 business model claims that service will be offering for free. Yet, there is nothing as free in business. Most likely SE 2.0 will be paid through the advertising tax which happen to be extremely expensive.

In particular, this business model will be way to expensive for most organization to commit any significant resources.

Basically, SE 2.0 is positioning itself in the attention sharing economy trying to re-introduce the old byzantine usenet rules. The intrinsic problem is that creating a community is very different from actually creating business value.

For example, Wikipedia is a worldwide community success, but it's actual business value is zilch: you might donate to Wikipedia, but you can't invest in Wikipedia and expect any financial reward.

Then, SE 1.0 had low profile unknown competitors; SE 2.0 is getting up ahead a direct confrontation with big guys: Google, Facebook, LinkedIn which will - no doubt - deliver their own variants (if SE 2.0 prove to get some traction) to be marketed much more effectively using their social communities.

As a final note, I am hoping, if the SE team sticks to its plans, that the market will quickly fill the room left empty by the now defunct SE 1.0. Contenders are already in place.

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