A good friend has recently opined that the software business is likely to continue to be spotty. I agree. The nature of the business has changed since the late 90s and is much harder to predict. Thus we get quarters like the last one where Siebel (SEBL) had to warn, while SAP (SAP) continued to do well.
One of the reasons for this change is that the nature of software spending has changed. Four years ago, most software spending decisions still remained with the CIO or VP of IT, perhaps in consultation with business unit managers. Today, even routine upgrades are often a matter of corporate strategy, and often the executive management is unimpressed with the need for pouring more and more money at the stuff. At a recent employer, even regular license upgrades for Microsoft products were put off, because the CFO calculated that the ongoing payments to keep the licenses going were going to cost more than just re-licensing from scratch some years down the road when an upgrade was needed. Of course, many companies are simply choosing to just skip entire upgrade cycles too.
Another real problem is that managing sales has become a lot more difficult in this environment. My friend suggested that the problem was that Siebel's sales force isn’t aware of the new hoops and hurdles to be cleared, and therefore doesn’t push hard enough. While that may be true in any given company and in any given quarter, it’s really not the problem at most companies, especially well-run ones like Siebel.
To understand why problems are cropping up, you need to understand how the sales cycle used to work and how it works going forward. Sales people are given quotas, they go out to the customers and get the customers to purchase. On paper, none of this will change, but in practice the way it is managed has changed a lot.
Historically, sales people had a lot of latitude both in timing the actual sales and in reporting them. They would be encouraged to hold off reporting sales if they were over quota, or if things were slow, they would work with friendly CIOs to bring in early commitments on sales even if every check and balance inside the purchasing company had not really been cleared. Beyond that, the company’s internal reporting and accounting procedures would sometimes slow things down. The paperwork would mysteriously get held up on deals that were wanted for next quarter rather than this one. And everybody would be nicely compensated for pulling a variety of strings to keep the numbers in line.
Ask managements or auditors and they'll all tell you that such tricks never existed, and that sales "management" and "smoothing" of this type never took place. But anybody in the business can tell you that it did, and that it was the key secret to these businesses' ability to deliver consistent earnings.
Today much of this is impossible. “Managing” and “smoothing” the numbers was considered a good thing back in the 90s. Today, it’s harder and harder to do, though it still happens in some places. Having a reserve fund of sales to draw on is definitely taboo.
In effect, what we’re seeing for the first time in many of these companies is the reality as it should be, not as Wall Street and many corporate managers wish it to be. It’s a business that thrives on big deals, and as such is inherently “lumpy” if not an outright roller coaster. As Bill Fleckenstein and Fred Hickey have observed often: it is absurd to think that accurate predictions to within a percent or two – as the Street seems to expect – are a realistic goal. That's been the unspoken reality at every software company I’ve ever worked for or with, and regulatory pressure means it’s going to increasingly be the reality reported by the companies. Deal.
There is an additional problem in software-land -- maybe in all of tech land -- and this one comes to me by way of a friend who is an inside sales manager for a mid-sized software company. Last year she did fantastically because of a rather unique combination of events at one of her clients that was both unexpected and unrepeatable, but nonetheless dumped several millions of dollars of sales in her lap with virtually no work required. As a result, she and the other individual involved in closing that deal were the only two reps in the entire company who significantly exceeded their quotas.
In doing her plan for this coming year, she used last year’s sales less the unusual “one time” deal as her baseline, thinking it was absurd to base next year’s forecast on highly-improbable events.
When she finally received her quota, she was shocked. It was last year’s total, plus ten percent. Management’s directive was that everybody had to sell more than last year. In effect, putting last year’s exceptional performers in a bind where being just great (but not exceptional) will be considered a failure.
I’ve heard similar stories in many places, including this missive from John Succo on Minyanville (subscription required), who was told of an almost identical situation in the storage business. It seems that many software companies in particular seem to believe that they can “set” their number somewhat arbitrarily based on what they wish it to be, then set individual targets and goals equally arbitrarily, and finally act surprised and shocked when such numbers are not met. This kind of “top down” approach sort of worked for a while in the 90s. That’s before we figured out that managers at Lucent, Tyco, Worldcom and elsewhere were just making up numbers to come up with the desired results and counting on a robust market to ultimately bail them out.
It didn't really work then, and it definitely can’t work anymore, but managements are unwilling to be honest about it. Perhaps this is simply the overhang of the 90s, and the managers who came of age in that period. But perhaps is is simply because this would force them to admit to the Street that reality isn’t so smooth and perfect as we might wish. Everybody knows that the Street won't pay anywhere near as much for lumpy results as they will for nice and predictable ones.
Based on a couple of conversation with Siebel insiders, I believe that this “forecast by fiat” system is partly responsible for the failure to meet their numbers, and that had upper management made a bigger effort to reconcile the bottom-up forecasts of their sales force with their own top-down targets, the whole thing could have been avoided, though this might have required a earlier guide-down of their quarterly expectations.
[As an aside, it is strange that Siebel, whose software is designed to help put together accurate sales forecasts, should fall prey to such problems. It appears to be a classic case of another company that wants to sell customers on “do as I say, not as I do.” For more on this, see the comment about consultants below.]
When my friend goes into the office these days, many of her calls are not to prospective customers, but rather to prospective employers. As she says “Right now I can sell myself as the girl who beat quota by 30%, six month from now I’ll be the girl who got fired for failing to make quota. The time to leave these losers is now.”
I will concede that I have never met a salesperson who believed that the quotas handed out where fair, and I've never met an upper level exec who didn't think that salespeople were not too whiny about their targets. However, I've been hearing a lot more of this in the past year or two than ever before. This suggests to me that the divide between the way the salesforce perceives the markets and the way the upper managements perceive the same markets has widened.
Unless software company managements start getting real, there will be a permanent long-term impact. I do not know a single software salesperson who has not at least considered moving on to some other business, and many of them have actually done so. Pharma and medical device sales are particularly of interest to successful sales people coming out of technology, but I know one person who took a job as an account rep with a uniform sales/service company and another guy who is now the sales guy for a regional high-end home theater service and installation company. The best and the brightest are seeing that there are places to work where the employers are better established and the sales management procedures weren’t invented in the middle of a bubble economy. Their loss will be a loss to the software industry as it continues to adjust to new realities.
