the business of software, distribution, and system integration

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The Business of Software, Distribution, and System IntegrationJay Jeffreys, PERusty Steele Schneider Electric

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Presenters

• Jay Jeffreys: Software Distribution Channel Manager. Business process and MES consultant. ISA senior member.

• Rusty Steele: MES Business Manager with 22 years experience in marketing and sales of automation products/services to utility and industrial markets.

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The Business of Software, Distribution, and System Integration

• Delivering complex business process solutions to industrial customers

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Channels to market over the years

Source: Managing Channels of DistributionKenneth Rolnicki, 1998

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Channels to market over the years


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Solutions to Market – Value Map

Supplier

End Customer

Distributor

System Integrator

DirectSales

Sales force

Sales

Sales

Sales

Sales

Sales

Integration

Integration

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The Business of Software

• Selling quantifiable intangibles

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The Software Business

• Software is largely an INTANGIBLE commodity

• Blank CDs – worth pennies:

• Industrial Software – worth thousands:

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• Software companies sell value in the customer’s operations– Deliver tangible, quantifiable improvements in the customer’s bottom line

– … by reducing the customer’s cost of manufacturing operations or

– … by making the customer’s product more valuable to their customers

• Software companies stay in business…– By generating a recurring revenue stream in good times and bad!

– Never stop improving the product – sell license upgrades!– Help the customer get running – sell services!– Be part of the customer’s operations – sell support!

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Software Business – Mix Model

• Best-in-class software companies (including SAP, Oracle, i2, and some of our competitors) tend toward a balance of

Reference: The Business Of Software, Michael Cusumano, Free Press 2004; ISBN 0-7432-1580-X

License revenues (new sales)

33%

Support (tech support contracts, training…)

33%

Services (Custom development, project mgt…)

33%

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Software Business – cost model

• Cost of goods sold is nearly zero!• R&D costs are significant• Marketing costs are significant

License Revenues $1.00

Unit cost $0.01

Software sublicenses $0.05

R & D $0.30

Sales & Marketing $0.40

General / admin $0.10

Profit on license sales $0.14

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Software business – sustaining revenue

• Notably absent from the previous slide are things like:– Maintenance, repair & obsolescence

– Software does not wear out

– Software does not need to be replaced after a lightning strike– The computers it’s running on, yes, but not the CDs or licenses!

– Software only becomes obsolete when Microsoft says so

• Also absent from the software distributor’s business model are– To-stock orders; distributors carry near-zero inventory

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Unique business, unique challenges

• Prove the value• Quantify the value• Deliver the value

• Become part of the customer culture– Lean culture– Continuous improvement– Empowered users– Six sigma quality– Turn data into information into knowledge into WISDOM

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What are we selling?• Visibility• Empowerment • Integration• Safety• Scale – geographic and commercial

• Regulatory compliance• Continuous improvement• Analysis and control over operations

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What sort of vendor am I?

Product Service

Tangible Intangible

Transactions Projects

In Stock Just In Time

Supplier Contro

l

Hardw

are

Man

ufac

ture

r

Softw

are

Man

ufac

ture

r

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The Business of Distribution

• Matching local needs with vendor capabilities

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Why not just buy from the manufacturer?


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Distributor Financial Model: Critical Profit Variables (CPVs)

Source: NAED 2009 PAR Report

High profit NAED Distr.

Typical NAED distr.

MeasureCPV

49.153.7Collection period, days

• Faster collection of AR

5.14.2Inventory turns• Better inventory utilization

17.6%19.3%Operating expense%• Reduction in expense percentage

23.7%21.6%Gross margin %• Improvements in gross margin

$578k$521kSales per employee• Strong sales growth

• National Association of Electrical Distributors – www.naed.org

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Distributor Financial Models: Cost of Doing Business

• NAED average US electrical distributor

- - - bottom line 2.3%Gross / Operating Profit:

19.3%Total operating expenses:

Business 5.7%Administrative expenses:

Doing 0.6%Info Tech expenses:

Of 3.1%Property expenses:

Cost 1.3%Delivery expenses:

8.6%Selling expenses:

- - - top line21.6%Gross Margin:

Source: NAED 2009 PAR Report

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What sort of distributor do I need?

Product Service

Tangible Intangible



Distributor Retail

er

MRO

Count

er S

ales

Rep SW

Solutio

ns

Distr

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Distributor Coverage Models:Software

• Consultative sales• Exclusivity

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Distributor Coverage Models:Hardware

• Close support

• Conflict

• 3 bids & a buy

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Distributor Coverage Models:Overlap and Conflict

• Consultative selling entity makes significant engineering investment• Customer procurement organization may then require bid cycle• Transactional seller stands to undercut consultative seller

– No investment to recover

• How do we protect and preserve the consultative seller and encourage their long-cycle investment in a customer?• We can offer

– Point of sale margins– Rebates– Enhanced support

• BUT:

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Distributor Coverage Models:Legal Constraints

• Sherman Antitrust Act– Makes it a crime for distributors to agree among themselves on pricing for a project or a customer

• Robinson – Patman Act– Makes it a crime for a vendor to give one distributor an unfair advantage over another with any

thing of monetary OR intrinsic value: discount, service, support, etc.– UNLESS one distributor differentiates themselves from others by earning entry in a special

program which must be offered to all.– Special training, business planning, growth targets, etc. which not all will CHOOSE to participate in

• Distributor Certification Programs– Quantifiable, objective criteria– Require careful management– Do make long-cycle, consultative sales worthwhile

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The Business of System Integration

• Crafting specific solutions for specific customer needs

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What Kind of System Integrator Am I?

Product Service

Tangible Intangible



System Integrator Contro

l

Panel

Builde

r

Autom

ation

SISpe

cifyin

g

Engine

erIT /

Mfg

Consu

ltant

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The Business of System Integration: Consulting Practice Model

“When service hours become an organization’s primary product, all sorts of interesting things happen.” … High Value IT Consulting: 12 keys to

a Thriving Practice, Purba & Delaney, McGraw-Hill 2003

•Service hours cannot be stored until they are sold– An hour of time not sold is gone forever

•Resource leveling is hard– Long hours in crunch times affect morale, quality and value to the client– Projects can end suddenly, making employees non-billable– Fixed costs must still be paid

•Skills become obsolete– Technology advances; training is expensive; staying ahead is vital– A specialist on a long project may be obsolete when the project finishes

•Competitors can come from nowhere– Low barriers to entry– “Anyone with a business card can be a system integrator” …Vance VanDoren,

Control Engineering magazine, personal communication.

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What defines a successful integrator?

• Successful system integrators who consistently make money over the long haul tend to have a recognizable set of processes in place

• The Control System Integrators’ Association has defined, quantified and audits firms for their consistency and dedication to eight practice areas

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1. General Management

2. Human Resources Management

3. Marketing, Business Development, Sales

4. Financial Management

5. Project Management

6. System Development Lifecycle

7. Supporting Activities

8. Quality Assurance Management

What defines a successful integrator? - CSIA’s eight practice areas

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1 General Management

1.1 Strategic Management

1.1.1 Is the integrator clear about its purpose, strategic objectives and goals? Does the integrator have a mission or vision statement? Strategic objectives?

1.1.3 Is the integrator’s long-range plan formulated and understood?

1.1.5 Does management receive key performance indicators in a timely fashion? Do they monitor percent completion?

1.2 Organizational Structure

1.2.8 Are meetings effective, whereby agendas and objectives are set, timing respected and everyone attending participates and contributes?

1.4 Computer System Management

1.4.1 Does the integrator have any written policy for its computer systems, such as allowable software, monitoring rights, maintenance procedures, insurance coverage, and security?

1.4.6 Does the integrator have a system of adequate backup (every day, off-site storage, assigned person, rotated backup media)?

1.5 Corporate Risk Management

1.5.3 Does the firm carry adequate errors and omissions insurance when required?

1.5.4 Does the firm have a documented disaster recovery plan and has it been tested?

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2 Human Resources Management

2.1 Administration

2.1.7 Does the integrator have established job descriptions which are effectively communicated to the employee and reflected in the employee files?

2.1.8 Does the integrator have policies and procedures in place for addressing employee retention?

2.1.10 Does the integrator enforce a drug-free workplace?

2.2 Recruiting and Selection

2.2.1 Does the integrator have a standard policy for methods of recruiting and selecting new employees? Has it been reviewed for compliance with all applicable regulations? Are recently hired employees asked for suggestions to improve the process?

2.2.6 Are new employees given orientation? Are there written descriptions of benefits and a list of people to contact for assistance in different areas?

2.3 Performance Management

2.3.1 Does the integrator have a standardized and documented performance management program for all employees?

2.4 Training and Development

2.4.7 Does the integrator have a training program on the company’s internal methodologies, practices, procedures and tools? Does the program include documented employee assessment and record keeping?

2.4.8 Does the integrator have a training program that addresses the soft skills required of technical people? Does the program include documented employee assessment and record keeping?

2.4.9 Does the integrator have a training program that addresses the hard skills required of technical people? Does the program include documented employee assessment and record keeping?

2.4.10 Does the integrator have a training program that addresses the skills required of management? Does the program include documented manager assessment and record keeping?

2.4.12 Safety Training Program exists

2.6 Employee Communications

2.6.3 Does senior management participate in periodic meetings to review the state of the company and get input from all employees?

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3 Marketing, Business Development and Sales Management

3.2 Business Development

3.2.5 Does the integrator conduct business level planning with their client? Does this planning include the business goals as well as the technical architecture?

3.2.6 Is there a system in place to log, follow up, track and forecast bookings?

3.2.7 Does the integrator have a practice for evaluating projects and clients prior to making a decision to pursue?

3.3 Sales Management

3.3.4 Does the integrator have guidelines for defining the precise scope of work and supply? Do they fairly represent the integrator’s capabilities?

3.3.5 Are the basis of proposal and scope of work provisions clearly written to delineate what the integrator will do and will not do in order to minimize risk?

3.3.6 Do estimating and pricing policies and standards exist?

3.3.8 Does the integrator have an administrative review and approval policy?

3.3.12 Does the integrator have standard commercial documents that address commercial issues, terms and conditions, billing policies and procedures (including per diem), and warranty?

3.3.13 Are requests for proposals, contracts, purchase orders, etc. that are prepared by the client specifically reviewed for words or phrases that unfairly allocate liability contrary to the policy of the integrator and its insurance ?

3.3.16 Does the integrator have contract language to state ownership of application software?

3.3.17 Does the integrator have contract language to manage ownership of intellectual property?

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4 Financial Management

4.1 Measures of Financial Performance

4.1.1 Are financial systems in operation which provide an easy-to-follow audit trail for verification of all financial records using GAAP (Generally Accepted Accounting Practices)?

4.1.6 Are clients measured as to the profitability of projects?

4.2 Financial Planning

4.2.2 Are budgets prepared to correspond with the financial statements?

4.2.4 Is cash flow forecast based on current and future requirements as related to lines of credit and cash?

4.3 Billing Procedures

4.3.1 Are procedures in place to ensure changes in scope and additions are billed properly?

4.3.4 Is A/R monitored and aged, with overdue accounts pursued with the necessary level of aggressiveness (i.e., frequent calls, service charges, etc.)?

4.4 Management of Credit, Expenses, Cash, Purchasing and Security

4.4.1 Does the control systems integrator have a policy which establishes financial controls to ensure purchasing authorization and cash control responsibilities are isolated?

4.5 Project Financial Reporting

4.5.1 Does the control systems integrator have a project control/job cost system to match the project size and level of project involvement?

4.5.5 Does the job cost system require a forecast-to-complete?

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5 Project Management

5.1 Project Contract Management

5.2 Project Procurement Management

5.3 Project Planning

5.4 Project Risk Management

5.5 Project Resource Management

5.6 Project Communications Management

5.7 Project Scope Management

5.8 Project Schedule Management

5.9 Project Budget Management

5.10 Project Change Management

5.11 Project Quality Management

5.12 Project Closure

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6 System Development Lifecycle

6.1 Internal Kickoff

6.2 Requirements

6.3 Design

6.4 Development

6.6 Factory Acceptance Testing

6.10 Site Acceptance Testing

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7 Supporting Activities

7.1 Process Development and Maintenance

7.1.1 Does the integrator have a systematic approach to the development and maintenance of key business processes?

7.2 Standards and Templates

7.2.3 Does the integrator have communication Standards and Templates? Do they include transmittals, faxes and e-mail?

7.3 Project Methodologies

7.3.2 Does the integrator have a documented guideline to differentiate project work from other billable activities?

7.3.3 Does the integrator have a documented method for the creation, performing, and updating of Project Methodologies?

7.5 Risk Management

7.5.2 Does the integrator have a formal process for identifying, and assessing potential risks?

7.6 Configuration Management

7.6.2 Does the integrator have a documented process for CM of internal assets, including items such as policies, procedures, standards and templates?

7.6.3 Does the integrator have a documented process for CM for projects?

7.7 Reuse Management

7.7.2 Does the integrator have a formalized collection and control mechanism? Are the reuse assets managed in a controlled manner on a company-wide level? Are the elements well organized and easy to find? Are the reuse elements current and up-to-date?

7.7.5 Are items in the reuse program legally protected?

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8 Quality Assurance Management

8.1 Continuous Measurable Improvements

8.1.1 Is the integrator's culture such that improvement is continuously sought? Is there a continuous improvement program in place?

8.1.3 Does the integrator verify and document that its own policies, practices, and standards are followed for all process areas? How do they handle corrective action?

8.1.7 Does company perform in-house safety inspections and audits?

8.2 Client Satisfaction Measurement

8.2.1 Does the control systems integrator verify and document that the client is satisfied with the project?

8.3 Client Service

8.3.4 Does the control systems integrator have an established procedure to deal with complaints, and follow through to ensure that the problems have been resolved to the customer’s satisfaction?

8.4 Project Quality Assurance

8.4.1 Does the control systems integrator have an internal project quality assurance program? Are project quality audits performed?

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What do value chain stakeholders need in a system integrator program?

• Customers need:– A source of trained and experienced solution providers– A way to gauge and manage project risk– Safe, successful projects that contribute to their bottom line

• System Integrators need:– Economical access to vendor solutions– Support and infrastructure required for successful implementations– Recognition for proven technical expertise– Opportunities for company differentiation– Opportunities for increased market visibility

• Vendors need: – Increased loyalty for vendor-specific solutions– Enhanced acceptance and wide-spread utilization of the company’s

products

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What do System Integrators value from software vendors ?

• Very important:– Technical support (prioritized access to support)– Vendors who do not compete with their S/I’s– Training– Free/Low cost demos

Source: Bull’s Eye Research 2010 Market Study

• Moderate to Low Importance:– Inexpensive Development Software– Sales Leads– Joint sales/marketing activities– Special discounts

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Where do we all fit in?

Product Service

Tangible Intangible



Supplier

Distributor

System Integrator

Retail

er

MRO

Count

er S

ales

Rep SW

Solutio

ns

Distr

Contro

l

Panel

Builde

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Autom

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SISpe

cifyin

g

Engine

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Contro

l

Hardw

are

Man

ufac

ture

r

Softw

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Man

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ture

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IT /

Mfg

Consu

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[email protected]

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