Software's Clear and Present Danger
Declining maintenance revenues are threatening the livelihood of many software vendors. ISVs can protect their maintenance revenue stream - and even grow it - by becoming more customer centric.
By Chris Dowse and Ben Galison, Neochange
Jan. 16, 2009
Long the software industry's cash cow, maintenance and support revenue provides high margins that are the funding engine for new product research and development. The maintenance revenue stream is also used as a basis for company valuations in mergers and acquisitions and financing arrangements. Protecting maintenance revenue is a hot topic for independent software vendors (ISVs); a 2006 Neochange article on the subject had over 3,000 downloads.
Software vendors must act now to improve customer relations and improve effective user adoption in order to maintain - and even continue to grow - maintenance revenues in the future.
The Threat to Maintenance Revenues
Multiple forces have converged to intensify the threat to maintenance revenue. The industry's shift toward buyer perceptions of value has brought downward pressure on both price and sales volume, eroding the revenue basis on which the maintenance percentage is calculated. Tough economic conditions have created more sales declines and upgrade delays, making ISVs more dependent on maintenance as a larger share of their total revenue. Struggling ISVs are especially vulnerable, relying on maintenance revenue to fund operations as the recession makes venture funding and bridge financing more challenging.
New end user monitoring technology (EUM) adds to the peril. Unprecedented transparency into software usage exposes underused applications and enables visibility into whether customer are getting actual ROI on their application investments. In today's cost-cutting environment, software with low levels of effective usage puts maintenance contracts at risk of cancellation or discount.
The good news is that ISVs can protect their maintenance revenue stream - and even grow services revenue - by becoming more customer-centric and making customers visibly successful through effective adoption.
Companies can increase customer effective usage of software products through an integrated, sequential program of improvement. For sustainable impact, each company's detailed approach should take into consideration its organizational capabilities and areas of greatest risk, but the basic sequence can be summed up as follows.
1. Mobilize Internally: Improve Customer Experience throughout the Company
On the surface, the concept of becoming a more customer-centric company is hardly new. Yet aspects of this shift are essential to achieve and sustain the changes that provide a foundation for maintenance revenue protection. Without a core operation that can effectively support and service its customers, protection efforts will be band-aids at best, doomed to fail in the long run.
Ensuring a positive customer experience builds customer loyalty - an important part of protecting maintenance revenue. Surprisingly, it can also reduce operating costs for the ISV.
Customer experience improvement needs to come from both the Support and Services functions, the primary touch-points for existing customers. By focusing on effective internal adoption of the CRM, PSA, and other delivery systems, ISVs can streamline and improve the quality of customer interactions to deliver better service levels.
The results can be impressive. One Fortune 500 company used its CRM adoption initiative to identify annual benefit equivalent to nearly 3% of its annual revenue. Over 40% of the benefit was hard cost savings achieved by reducing support staff user errors, improving workflow navigation, and simplifying customer facing screens to simultaneously lower problem resolution times and improve customer retention. A second Fortune 500 company was able to increase professional services staff productivity by 11% through more effective PSA adoption while increasing the delivery quality of services.
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Software vendors must act now to improve customer relations and improve effective user adoption in order to maintain - and even continue to grow - maintenance revenues in the future.
The Threat to Maintenance Revenues
Multiple forces have converged to intensify the threat to maintenance revenue. The industry's shift toward buyer perceptions of value has brought downward pressure on both price and sales volume, eroding the revenue basis on which the maintenance percentage is calculated. Tough economic conditions have created more sales declines and upgrade delays, making ISVs more dependent on maintenance as a larger share of their total revenue. Struggling ISVs are especially vulnerable, relying on maintenance revenue to fund operations as the recession makes venture funding and bridge financing more challenging.
New end user monitoring technology (EUM) adds to the peril. Unprecedented transparency into software usage exposes underused applications and enables visibility into whether customer are getting actual ROI on their application investments. In today's cost-cutting environment, software with low levels of effective usage puts maintenance contracts at risk of cancellation or discount.
The good news is that ISVs can protect their maintenance revenue stream - and even grow services revenue - by becoming more customer-centric and making customers visibly successful through effective adoption.
Companies can increase customer effective usage of software products through an integrated, sequential program of improvement. For sustainable impact, each company's detailed approach should take into consideration its organizational capabilities and areas of greatest risk, but the basic sequence can be summed up as follows.
1. Mobilize Internally: Improve Customer Experience throughout the Company
On the surface, the concept of becoming a more customer-centric company is hardly new. Yet aspects of this shift are essential to achieve and sustain the changes that provide a foundation for maintenance revenue protection. Without a core operation that can effectively support and service its customers, protection efforts will be band-aids at best, doomed to fail in the long run.
Ensuring a positive customer experience builds customer loyalty - an important part of protecting maintenance revenue. Surprisingly, it can also reduce operating costs for the ISV.
Customer experience improvement needs to come from both the Support and Services functions, the primary touch-points for existing customers. By focusing on effective internal adoption of the CRM, PSA, and other delivery systems, ISVs can streamline and improve the quality of customer interactions to deliver better service levels.
The results can be impressive. One Fortune 500 company used its CRM adoption initiative to identify annual benefit equivalent to nearly 3% of its annual revenue. Over 40% of the benefit was hard cost savings achieved by reducing support staff user errors, improving workflow navigation, and simplifying customer facing screens to simultaneously lower problem resolution times and improve customer retention. A second Fortune 500 company was able to increase professional services staff productivity by 11% through more effective PSA adoption while increasing the delivery quality of services.
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