By Bruce Hadley, SoftwareCEO
In our frequent visits to the Inc. 500 list, we look for software company best examples; but, occasionally, we connect with some out-of-the ordinary surprises.
Case in point: We recently called on Enterprise Computing Solutions (ECS), because they were #62 on last year's list and #187 on the most recent Inc. roster of fastest-growing private companies in the U.S.
Founded in 1994, ECS, in 1997—the first year of its Inc. reporting—had 15 employees and $1.2 million in revenue. In 2002, sales were $33 million with 25 people; five-year revenue growth was 887 percent.
If you're in the software business, that headcount number probably tipped you off that ECS is not an ordinary ISV; their revenues-per-employee last year were $1.3 million, roughly 10 times what you'd expect for a software developer of their size.
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In fact, Enterprise Computing Solutions is not a software developer; the Mission Viejo, CA company is an implementer and hardware reseller for mission-critical systems.
From its own Web blurb: "ECS builds sophisticated IT infrastructure solutions for mission-critical applications, provides enterprise storage solutions that ensure data protection and business continuity, and delivers state-of-the-art server solutions for optimal computing capacity."
So, why feature ECS here? Because CEO David Butler engaged us in a spirited and highly instructional conversation about the software industry—from a hardware provider's point of view.
Admit it: At some point in your software career, you've made (or at least laughed at) a disparaging comment about the "box jocks" who provide the machines that host your software. Secretly or not, you've wondered whether hardware people are a few notches beneath you on the IT evolutionary scale.
Well, listen up, boys and girls: Dave Butler is here to tell you that this kind of tunnel vision hurts you a lot more than it hurts him.
When faced with integrated systems deals—software, hardware, and services—here are ten common (and unfair) assumptions that software vendors make.
Unfair assumption #1: You think the deal is only about you
"Most software vendors don't deal with a guy like me in their transactions," Butler says, "yet, in every one of their deals, there's a guy like me who can either work to their advantage or disadvantage.
"It's no different than any other sales cycle: You have to uncover all the points of influence that could impact your deal positively or negatively. There are going to be third-party points of influence that impact the deal—for example, a hardware infrastructure person—and that would be me.
"You'll have an implementation partner; you might have a leasing company involved in the deal—there are all these other parties out there providing input into the decision process. If the software sales force is pursuing the deal in a vacuum, it won't be by design, and it certainly won't be under your control. You're not managing your sales process and all its variables."
Unfair assumption #2: You think the hardware cost is trivial
"Software people nearly always underestimate the hardware cost," Butler says. "They see it as just a black box.
"What I hear from the software guy is, 'Can you bring in some used equipment? And have it here by Monday?'
"Generally, our rule of thumb is that we take the simple advice that a software company gives, and triple their cost estimates. If it's a mission-critical situation, then the complexity and redundancy goes up again; the total is easily three to five times."
If it's a localized system with no special requirements, then 5 to 8 percent of the total budget will go to hardware, Butler says. But if it's a mission-critical install, figure on 25 percent.
"If you look at ERP systems, for example, the hardware requirements and costs for an SAP system can easily be 10 times greater than they are for a small- to medium-size business system.
"Our goal is to right-size the equipment. If we use the range of 5 to 25 percent of overall budget and come in with 12 percent, that's because we've studied it, analyzed the particular implementation—and because we've done it hundreds of times before."
Unfair assumption #3: You think the hardware effort is trivial
There's more to the hardware side than unpacking boxes and plugging them in, Butler says, and ISVs typically underestimate the time required.
"Typically, the engineering timeframe involves 30 to 90 days to take the customer through all the variables they'll need to create their enterprise hardware strategy. Do you want Intel, do you want UNIX, or do you want Linux in the equation? All these things impact people and processes.
"If you came to me and said, 'I want a two-bedroom home,' as a real estate agent, I'd say that's not enough information. We could be talking about a $1 million condo overlooking the ocean, or we could be talking about a $100,000 mobile home.
"As a hardware provider, if I am to do a very good job with the customer, it will take 30 to 90 days to get through the process, and we will review five solid iterations.
"In addition, one of our jobs is to properly time-phase this, so that the executive knows from year to year what the total implementation is. They'll never get that from a software person."
Unfair assumption #4: You think the hardware guys are after "your" money
"Too often, software vendors assume we're competing for the budget," Butler says. "But if we can get in there early enough to educate the customer, we're a value proposition to the customer.
"We get a lot of people who want to get a bill of materials and throw a bid in; that's not what we do. We can help properly position the budget: We can help set expectations based on the product you're looking for.
"My consultants are setting up criteria for decision processes between redundant servers; that kind of consulting isn't done by software companies. And, I don't do any implementation of software. There really is no overlap.
"Maybe this will sound naive, but I'm assuming we all want to do what's right for the customer." And, it goes without saying, software can't run without hardware.
Unfair assumption #5: You play favorites, often because you don't know any better
Software vendors often find themselves recommending one brand of hardware over another, but these recommendations don't always reflect what's best for the end user.
For example, just because your software has been tested on the Acme Computers or you have a partnership with Acme, doesn't mean that the customer should necessarily install Acme's boxes.
"There are real strategic implications to different hardware choices," Butler says. "I'm an HP partner; if I'm fighting against IBM, I know it's against a very strong solution with equivalent value statements.
"If I'm competing against Sun, on the other hand, I know it's going to be more of a pricing battle. What we find is that there's zero education being done as to how to properly respond when it comes to hardware."
When software companies flub their hardware recommendations, it's usually unwitting, Butler believes, because they don't know any better. But the reason they don't know any better is that, once again, they undervalue the hardware component.
Unfair assumption #6: You think all boxes are alike
"Software people tend to think that a box is a box is a box," Butler says, "and, by the way, I do think that's true, at least to some degree.
"But, my space is mission critical: any application that is critical to your day-to-day operations that you can't live without. I deal with a lot of very large companies, where they measure downtime in terms of dollars. In those situations, anyone who thinks boxes are all the same is hopelessly misguided.
"I've had situations where a system went down for three days due to pilot error. They didn't have a duplicate piece of equipment and process in place to catch that error—something we had recommended to them—and they're making $40 million in products a day, every day.
"Their decision to save $1 million on the system design cost them $5 million in losses a year later.
"The hardware may be the same, but the companies behind those boxes and their attitudes are very different. So, what's the mindset of the customer?
"If it's a Sun-oriented customer, we know it's going to be a difficult deal, and, in the end, there's going to be no margin in it. We'd campaign them very hard on what it takes to be mission critical."
Unfair assumption #7: You fail to capture their customer intelligence
"We are one of the best sources for customer intelligence—and it's a two-way street," Butler says.
"If I'm not teamed with a software company—if I go into a customer and they say, 'Here are our finalists: JDE, SAP, and Oracle'—I'll say, 'Well, it's a lot of work to come up with a hardware plan for each; if you were to tell me whom to focus on, whom would it be?'
"Nine times out of 10, they'll tell me who they're leaning towards. And when I ask the customer why, they can be remarkably candid: 'I don't like the sales guy,' 'They blew the demo,' and so on.
"I can then call up my software friend and say, 'I don't think you've got the position you think you do.' Of course, the software guy could do the same thing: 'We run on HP and Sun and IBM; is there one you're leaning toward?'
"I don't want to make this sound underhanded, because it isn't—but if I was brought into a deal by Oracle, even if we're acting independently, I have a very strong interest in supporting that person and their sales effort.
"The rules of engagement are that you tend to protect your partner; otherwise, you find you don't have friends anymore."
Unfair assumption #8: You think only software people know how to sell
"A lot of software guys tend to be pretty proud of themselves," Butler says. "They think of themselves as the best sales people in the world, and they think of hardware people as stepchildren—as having skills below their own.
"I assure you, I've got the best people in the industry here. I've done $50 million with a Fortune 100 food company in five years. We have an entire methodology that we follow to close the deal, and our hit rate is four out of five; it's a very strong value proposition.
"I have people who sit in on all the meetings with that Fortune 100 company and talk about what software they're going to buy over the next two years. We know what they're going to buy, and what they're going to budget."
Unfair assumption #9: You fail to take to partnership initiatives
"Software companies are really missing an opportunity for cooperative marketing," Butler says.
"If HP is doing a marketing effort, they might come to me and say, 'I want to focus on a Sun replacement program'—a rebate or spiff to get customers to switch. Why not include software in that equation?"
"I think there's a terrific opportunity here for alliances. Why doesn't HP partner with an Oracle or an SAP and target a market? Go after life sciences, say, and go to that niche with a complete solution. Customers don't care about your software; they care about solving their problem. Marketing to the business reasons is a much stronger message than attacking your competitor."
Hardware vendors' public policy is to never endorse one software provider over another, Butler says, "but, at a local level, there's nothing to stop people from getting together to do something."
"At the tactical level, it doesn't have to be as formal," Butler says. "For example, in L.A., I might put some marketing dollars in a regional campaign to join with HP to market a specific capability. If it works, then I'd do it in other territories, without making it into a formal national campaign."
Through hardware partnerships, you can "mobilize a virtual sales force of reps," Butler says. When you choose alliance partners, however, keep in mind that cozying up to one may hurt you with others. Therefore, Butler suggests, go with the numbers: In your market, do you have 40 HP reps and five from Sun? That would suggest you target HP and/or an HP-centric reseller.
Few software companies have the kind of clout to get the attention of hardware stalwarts HP, IBM, and Sun. If you follow Butler's train of thought, however, it may make sense to join forces with resellers like ECS who are strong in a particular region or market.
Hardware resellers typically get co-op dollars from the manufacturers equal to 0.5 percent of the reseller's sales, Butler says. "I get $100,000 to $200,000 a year from HP that I can use however I want.
"If I want, I could use some of that money to go to a software company and say, 'I've built a whole methodology to help you, and, oh, by the way, let's do some marketing—let's go out and target this segment together.'
"You need to define a target market that makes sense," Butler says. "If you're looking for someone who's more than just a broker or peddler, you need to discern whom you're talking to.
"Do they have the complete set of services you need to implement? Go to the manufacturer; go to HP and ask them who could do what you want the integrator and reseller to do. In Southern California, for example, there are 50 companies that can sell HP computers; but, when it comes down to what we do, there are only two.
"Identify the hardware company channel manager in each of the prospective geographies. In the Southwest, a guy named Mark Gerber at HP manages all the companies like me. He's responsible for knowing my value proposition, where I fit in, etc.
"His job is to represent the reseller's interests within HP; if HP's direct sales force needs a certain set of capabilities, he aligns those skill sets. He's a relationship manager. The only company that doesn't have channel managers is Dell, because theirs is a direct model."
Unfair assumption #10: You partner at the wrong level
"It's best to build the relationship [with companies like ECS] at the sales manager-to-sales manager level," Butler says. "CEO-to-CEO friendships are fine, but that's at a much higher level, and that isn't where deals happen; deals happen at the street level.
"I would look for the regional managers and have a get-to-know-each-other event. We show up at your monthly sales meeting, do a 30-minute presentation on who we are, then go out for a soda pop afterwards.
"If we get involved with a software person, we will absolutely get involved with a process that maps into his needs, wants, and desires. We understand the motives of our partners, and I value the future reference.
"On the other hand, if the customer is working with a broker, there are going to be defensive plays; the hardware guy, if he's purely a broker, is going to work very hard to protect his turf."
There's a predictable pattern to ECS's partnerships with software companies, Butler says. "From day one, working with a software person who has no sensitivity to all these issues, they think we're competing for the dollars.
"But, as we start working with them—when we do five, six, or seven deals together—they'll start bringing us in from day one, because it's the surest way to not slow the deal down.
"We've now got a lot of converts. They know that by not working with the hardware partner, they can extend the deal by 30, 60, or 90 days, while I do the job I've got to do. By working together from the outset, I can help them wrap this deal up with a bow."