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Will my strategic software vendor become the next pets.com? 6 Real-World Tips to consider

January 17, 2014

Billion dollar valuations for apps without a revenue stream or a defined model for being in the black and self-sustaining are now common.  Sales reps are being pressured to bring in their numbers, with quotas ramped up and renewals becoming increasing critical as a source of revenue and commissions. A young CEO thinks a security breach is OK while other vendors are launching products with ‘minimum viable’ stamped all over them.  Older sales reps with established networks are being brought in to capture fast initial sales at crazy commission rates, but these reps often can’t fulfill their missions (and heavy draws) and leave. Choosing a vendor is difficult if the product or service is strategic and the relationship (and use) is long-lived or your company is a more sophisticated operating entity than this new key partner. Culture matters and a disjoin between organizations can lead to daily negotiations for what you consider obvious.

On the other side of the table, more than ever, these days being a vendor is a Darwinian experience, where today’s leader is tomorrow’s “wow, haven’t heard that name in a while”.  Even mature and successful vendors who are now larger organizations themselves are being challenged in specific areas by more agile start-ups.  We’re hearing more frequently where a large tech vendor is “being run by Finance” without the Yin/Yang of a resident leader with a vision of the future embraceable by both the market and employees.  Or worse, they’re being driven by people who think slick and glitzy features and not customer value, such as LG’s recent announcement at the Consumer Electronics Show of their washer/dryer with texting capability. Toasters with Twitter followers next?

For newer vendors, pressures have never been greater to push stuff out the door, relying on future updates to complete the product, which does not benefit the purchaser. Early stage investors are fearful of lowered valuations, not just hurting their current interests, but setting the stage for them to be hurt even more if additional funding is required, and so having something out in the market is essential for buzz (and buzz ups valuations in the short term).  For the customer organization, buying an unfinished product creates pressure to help the vendor fix it in real-time, again, making daily intra-company interactions strained when the immature vendor’s culture is more focused on growth than functionality. It’s like being in a foreign country, and while both of you speak decent English, your culture based logic trees are so different, and so each of you reach very different conclusions based on the same inputs, requiring additional negotiation.

What are the considerations in choosing a key software vendor besides straightforward pricing and functionality? Here’s our top 7 based on hard-won experience:

  1. Is their offering ‘minimum viable’ or a business mature product with a full set of functionality to address your business needs? Many Cloud based offerings are shoved out the door to gain market share fast, which is OK for non-mission-critical flashy apps, but death for complex business applications where availability, functionality and throughput are critical. We’ve spoken with a number of highly talented, high credentialed and highly paid developers averaging a decade of experience who are not yet schooled in differentiating between the Phase 1 best functionality vs. overly relying on iterations to get it fully functional a year out.
  2. Steadily growing new customer client base, including add-on products to existing customers. Have they owned the product you are buying for at least 18 months (to provide time for post-acquisition managerial and product alignment shakeouts to settle down)?
  3. How often do they introduce significant new and well-tested functionality? Have they ever taken away functionality during an incremental/iterative release or business model refinement? Is their business-model more focused on shareholder-value than customer-value?
  4. Ability to use only parts of an end to end suite, should you decide the entire suite is not uniformly best-fit. Plays well with others – ease of integrating other/outside modules via well documented (and existing) APIs and XML formats.  Do they have an ‘us vs. them’ culture?
  5. Vendor’s HR culture is nurturing for energetic talent; is the customer facing talent committed to you and willing to do ‘whatever it takes’ for your success? Are they empowered or hesitant to go out on a limb? Do customer facing employees seem happy to be around each other? Do they give straight answers with dates met? Is their average customer facing employee better than your own average employee?
  6. CEO/President’s tenure in the job and Glassdoor rating of at least 70% with an overall company rating of at least 3.0. TechCrunch recently had a blog entry from Cowboy Ventures, describing their research showing a strong current where the most successful Enterprise software (or SaaS) CEO’s are in their mid-late 30’s or older, and over 40% of these companies changed their CEO from a founder to a ‘pro’ pre-IPO. Alternatively, they may not have a Glassdoor score if they are too small or very young. Check via LinkedIn and other sources to see if they have high turnover at the executive and senior executive levels.  Nothing disheartens developers more than working for a company where they feel unappreciated, boxed in, or off on a tangent, so tech companies are only as strong as their developers’ opinions of their leaders. We also recommend reviewing their locations – is Development and R&D located in the midst of a deep talent pool?
  7. Issues can occur based on a poverty of poverty or a poverty of riches.  Some smaller vendors are not built to survive a large financial shock, such as a key customer not paying their bill, causing a cash flow issue.  This could force a company sale or some quick change in their business model or layoffs.  The poverty of riches side is equally vexing.  Since it’s all about growth these days, we’ve seen increasingly where some vendors sell new customers beyond their ability to implement their software per the client’s needs.  Their consulting units are running out of resources, projects are being delayed, and customer service for existing users suffers as resources are pulled to high margin consulting services.

Choosing the right vendor is far more than doing a product fit analysis and negotiating a price. If the product continuum spans immature to stale, the key decision factor is balancing product newness/fit with a vendor who understands how to sell, contract, add functionality, and support a company your size. Most Fit/Gap vendor eval processes do not sufficiently emphasize the relationship, relying more on simple scoring into boxes as less soft-skills/experienced based judgment is required.  The best buying decisions are weighted towards intra-company fit and the multi-year relationship.

Richard Eichen is the Founder and Managing Principal of Return on Efficiency, LLC,  http://www.growroe.com , focusing on companies, initiatives and products where technology is the primary means of delivery and revenue. He is one of their senior Turnaround, Transformation, Program Rescue and Process Rescue leaders.  As a Change Agent, Trusted Advisor, Program Leader and Interim Executive, Rich has over 25 years hands-on experience reshaping companies, Operations, IT/Systems Integration and strategic initiatives.  He can be reached at richard.eichen@growroe.com, and followed on Twitter, @RDEgrowroe

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