Forrester Information and Knowledge Management: The New Software Industry – Forces At Play, Business In Motion

Forrester Information and Knowledge Management: The New Software Industry – Forces At Play, Business In Motion

This blog entry from Forrester brings back the discussion about the business model of the software industry. What is the impact of SaaS in the industry? Are mature software companies forced to increase the contribution of services to their revenue streams more than new licenses do?

The most important question to ask here, I believe is: what are customers buying? Do they buy tools or do they buy the outcome of using those tools?

If you think they continue to buy tools, the traditional packaged licensing model applies. If you think they buy the result of applying that software to their business, then it's not that clear.

The presentation from Michael Cusumano describes in detail the evolution of software firms and the combination of software and services. He appears to detect a rule that applies to software companies: when they reach the age of 23 years old, services (including maintenance) surpass license as the larges contributor to company revenue.

The interesting factor is that, although services can have positive contribution to the net profit, investors typically place too much value on products over services. Is this sustainable?

However, there is a terminology confusion with the "service" concept: do we talk about the services economy, or are we talking about IT-enabled services? One of the most attractive ways of looking at it is: when to "servitize" products and when to productize services.

Whenever you can codify or formalize specific actions, those can become IT executable services, with clearly defined rules of execution. That means you can "productize" a service. Whenever you need to add differentiation and pay for utilization not for capacity, you have an opportunity to "servitize".

The transformation in the software industry is notorious and fascinating. Can this be transplanted to other industries?