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With the deluge of economic and structural challenges flooding the global economy, it can be a bewildering task for software businesses to figure out what to do next, what to focus on and what to ignore. A new Accenture report, “Priorities for Software Companies to Manage Through Challenging Times,” cuts through that complicated clutter for the software industry.

 

Based on Accenture’s experience with customers and industry research, the report suggests that software companies consider focusing on three primary areas: products, customers and the value chain.

 

 

Accenture recommends that software companies take steps to strengthen their product portfolios and resist reacting to decreasing revenues and slimmer profits by making across-the-board cuts in research and development. Instead, they should carefully evaluate their product portfolios, weed out low performing and unprofitable products, and invest in core products with the highest potential for growth and profit over the next two years. When there is compelling pressure to cut R&D spending, it should be channeled toward those multiyear product development projects with slim chances of ever delivering an investment return.

 

Software companies also need to improve the economics of product develop­ment. As research and development costs continue to rise, software companies should consider adopting several practices that can help reduce product development costs while cutting product time to market. Two such activities are boosting the use of open source software, and capitalizing on feedback from online communities and social networks to drive new product ideas and provide feedback on existing products.

 

Companies also need to industrialize the product launch process to make it more repeatable and reusable. Such a process leverages and builds on lessons learned from previous launches, incorporates best practices, and builds vital product development institutional knowledge. Key elements of an indus­trial­ized approach are clear progress milestones, along with decision criteria and decision trees. Each of these works in concert to accelerate the launch and allow more time to be spent on creative, value-added activities.

 

 

Improving customer relationships is key for mitigating revenue leakage. Accenture believes the software industry faces a global issue with enterprise customers failing to comply fully—whether deliberately or in error--with their software providers’ license agreements. A recent Software Business Alliance Piracy study estimated that approximately $50 billion is lost annually to revenue leakage and piracy. This is, in effect, lost money that software providers earned but are not collecting.

 

To recoup these missing license fees, which would amount to an immediate increase in revenue without having to gain a single new customer, software companies should conduct a comprehensive analysis of all their existing contracts to determine which customers comply and which do not. One major software vendor discovered that such an assessment can deliver a significant boost to the top line. The company conducted a global study of its licenses and found it was owed more than $1 billion in license fees.

 

Although identifying revenue leakage is important, preventing it in the first place is at least as critical. To do this, software companies must address shortcomings in the contracting process, as well as strengthen monitoring and tracking capa­bilities so the vendor knows precisely what each customer should be paying and whether those fees have been collected. Better entitlement reporting to customers, and the ability to automate compli­ance management by linking software usage to contractual terms are other licensing improvements. In essence, to boost its customers’ compliance, a software company must help and support those customers in software asset management.

 

 

To improve their value chains, Accenture recommends that software companies con­sider opportunities in external sources of value such as distribution channels, outsourcing, value chain collaborators and acquisitions. For example, there are numerous possibilities for software companies to team with noncompetitive but complementary businesses to reduce the cost of distribution or even create new distribution channels for software products. By “piggybacking” their products with other software or with hardware vendors, these companies can expand their distribution opportunities at a much lower cost than by cultivating those channels on their own.

 

In my experience software companies typically excel in product development and marketing but are less effective in operations. Having been relatively profitable businesses in the past, they lag behind other types of organizations in streamlining or deeply scrutinizing their operations or making hard choices about what to keep in-house and what to assign to a third party. Therefore, software companies that have not yet outsourced many of their back-office functions, such as finance, human resources and information technology, should evaluate those options to determine how it may improve their operational efficiency. In Accenture’s experience, outsourcing non-core operations can reduce operating costs while improving operational efficiency.

 

The ongoing maintenance of older products is another area ripe for outsourcing. Doing this can reduce operating costs as well as free resources to focus on creating new products. By following this path, Accenture has found that a software company can lower its cost of ownership by as much as 50 percent.

 

The global economic downturn also offers opportunities for mergers and acquisitions in order to acquire key assets at potentially bargain prices.

 

Several practices can smooth the integration process and help software com­pan­ies generate greater value from their mergers and acquisitions. The first two practices are basic: fine-tuning M&A strategy and screening methods to help ensure acquisitions fill strategic gaps; and targeting strong companies that have been dragged down by the overall market and/or by weaker companies in their peer group.

 

Once a company has identified potential acquisition targets, it should accurately identify synergy potential. This requires a skillful blending of industry-comparable benchmarks (to determine the magnitude of what’s possible) and opportunities specific to the merging companies such as consolidating R&D capabilities. By marrying these two perspectives, a software company can determine if both the industry benchmarks are realistic and the targets specified are aggressive enough.

 

Finally, effective execution is critical to realizing the full potential of the merger. In Accenture’s experience, three steps can help companies successfully integrate. The first is establishing an integration team with a well-defined charter and scope, as well as a full-time staff of experienced, knowledgeable managers. Second, companies must determine requirements to minimize the gap between regulatory approvals and the day the integrated operations can begin. The third step is developing a set of metrics to help the integrating organizations ensure that operational and financial targets are being met.

 

 

Challenging times provide an opportunity for software companies to test their business models, and to identify and address gaps in product line-ups, pitfalls in customer relationships, and hoped-for sources of value that have failed to deliver. Those companies that emerge from the downturn as market leaders will have taken their hunt for value a step further, finding novel ways of working across their value chains to distribute products and deliver services. They will also have used this period as an opportunity to study closely their past, present and future mergers and acquisitions, discovering ways of wringing maximum value from these arrangements.