The yin/yang dichotomy between problem and opportunity has never been more apparent in looking at the quandary enterprise software vendors face in the race to encourage their customers to upgrade to the latest version of their flagship products. It’s a strange place where Hobson’s Choice meets Schrödinger’s cat, and where, as a result, sales strategies go to die and be reborn.
Here’s the deal: every vendor struggles mightily with getting customers to upgrade, despite dangling myriad incentives, negative and positive, as a means to force the issue. SAP’s recent announcement that it would extend support for ECC another two years – past a 2025 deadline that was literally threatening to kill SAP sales – is only the most recent and visible expression of the problem. Whether you’re a hybrid vendor like Infor, Microsoft, Oracle, or SAP, or a pure cloud vendor like Salesforce.com and Workday, the fact remains that as of this writing, and for the foreseeable future, the majority of your customers are a step or two behind your product’s upgrade cycle.
It’s not just the number of migrating customers a vendor can count that matter, even though most vendors default to counting the logos and reporting individual customer numbers. In many customer organization – definitely those in the $1 billion and up revenue category, and often smaller ones as well – the number of individual instances of a given vendor’s product can be measured in double or even triple digits. Not to mention all the other vendors’ products in any individual customer’s portfolio that are awaiting an upgrade – a number that, when added up, can quickly approach several thousand.
So it’s important to bear in mind that every time a vendor brags that a large customer upgraded to the latest and greatest, it’s highly unlikely that customer has upgraded its entire infrastructure. Indeed, for many companies, an upgrade that is undertaken to support a new digital transformation initiative may only touch a small subset of the enterprise software systems in the company, leaving the majority still lagging behind the vendor’s roadmap.
This is the laggards, logos, and licenses issue, and it’s important to bear in mind when assessing what upgrading customers means not just in terms of strategy, but in terms of vendor revenue and growth as well. Upgrading a single system gets your logo on the upgrade slide, even if there are over 200 other systems in your company that will remain stuck in the past, at least for the foreseeable future. But for many customers, that’s enough for now. Moving the rest of the company can wait. And wait it will: digital transformation, and its accompanying change management requirement, is damn hard, and companies are wise to take it slow and try to get it right the first time.
In fact, here’s the shocking truth about digital transformation: It’s going to have to happen despite the fact that backoffice ERP systems are lagging behind the market’s push to modern, cloud-based, multi-tenant systems. The customers have too much transformation work to do up front – customer and employee facing transformations –to make ERP upgrades a necessary first condition. Customers have little choice but to push the pause button on wholesale upgrades in order to actually transform their companies.
Interestingly, the hybrid vendors can afford to wait as well. While they all pay lip service to the Hobson’s choice of upgrade to the latest or else, the fact is that the 20% or more they make on maintenance is a wonderfully high-margin source of revenue. For some, maintenance makes up a majority of the profit as well, particularly for older on-premise systems. Infor was just given an estimated evaluation of $13 billion when Koch Industries’ investment arm bought out Infor’s other shareholders, and that evaluation is based on a revenue stream from tens of thousands of laggards that is more about maintenance dollars than net new license revenues.
So if logos are a vast subset of total licenses, is that a good thing or a bad thing? Like any good quantum entanglement, the answer is simultaneously yes and no.
The good news for vendors that are accumulating logos is that each one represents a significant upsell opportunity: once the first upgrade is done and, hopefully, done right (not a given, and more on that shortly) the path is laid out for the next upgrade, and the next, and on and on and on. The total number of licenses out there in the market represent a massive revenue boon for the vendor that can get its customers to do that sort of serial upgrading, albeit perhaps at a pace not entirely to the vendor’s liking.
But the logo vs. license issue is also capable of poisoning the cat: With regard to that majority of other licenses that weren’t upgraded, two questions remain: will they ever really benefit from an upgrade? And, will that upgrade be onto the incumbent’s platform or will the upgrade add a logo to a different vendor’s slide deck?
Parsing this issue further, this lag between initial and subsequent upgrades poses two potential problems for the incumbent vendor. If the instance in question is non-strategic and won’t need to be upgraded for the foreseeable future, why should the customer pay that fat maintenance fee just to keep the lights on? For these laggards, maybe a Rimini Street can help cut those costs down without an apparent strategic sacrifice. That’s the part of the problem that threatens to poison Schrödinger’s cat: No vendor wants their patience with laggards to be rewarded by the loss of to those sweet, high margin maintenance revenues to a third party service provider.
If the enterprise software instance eventually will need an upgrade, and if it’s obvious that will happen sooner rather than never, then the incumbent’s position is threatened as well: The longer it takes for the customer to make a decision, the greater the possibility that the decision might favor some lucky competitor. This is partly due to the fact that account control is largely a vendor myth, and when it comes to enterprise software, most large companies have one or two of “everything,” meaning that rival software products and their stakeholders are also camped out in the enterprise and ready to influence buying decisions.
That’s the reality of the enterprise customer space: The real world is highly heterogeneous both in terms of how software is deployed and used as well as how it is acquired: every vendor has its stakeholders in a given company, and those stakeholders are often trapped in their own silos, with limited influence over what happens in other parts of the company but tremendous influence over their specific LOB. For the hybrid vendor that has expanded from its ERP roots into multiple LOBs by acquisition – and that’s all of them – this means that the next shoe to drop may be an LOB product acquired by a LOB exec who has no connection or allegiance to the incumbent ERP vendor.
Ironically, the tendency of the laggards to shift their upgrades away from an incumbent vendor is aided by the increasingly functional integration technology that the vendors are building and buying, or partnering for. As integration improves, the idea that only a suite can provide the right level of data and process integration will fall by the wayside. It’s easy to envision a large company giving its satellite offices and plants a lot of autonomy on what their upgrade strategy looks like as long as the new systems can integrate at an sufficient level. Time and experience will only make this easier, not harder, and that means even more pressure on incumbents to maintain their incumbency in the face of an expanding universe of choices.
So measuring how fast any individual vendor’s flagship product is accumulating new logos is an interesting exercise, but watching just the tip of the iceberg can be more than a little dangerous. Because the other issue at play is the problem of implementation success: It’s still the same old story – which is that a majority of software implementations fail to achieve their expected outcomes – made significantly worse by the fact that in a SaaS world achieving the long-term value of a contract is dependent on one if not two renewals. If the initial implementation was a dud, it’s easy to see that the next one – or ten or 100 – might be about implementing a difference vendor’s product. As I like to say, just as you can get to success a lot faster in the cloud, you can also fail a lot harder and a helluva lot faster too.
In the end, adding licenses to logos still depends on getting the basics regarding implementation success right, and that’s a cultural shift that is much harder to accomplish than anyone would like to admit.
Meanwhile, the vendors continue to push for customers to upgrade for some really good reasons, including the fact that in theory upgrades unleash brand new functionality that improves the customer’s ROI and supports new business models. The fact that upgrades simultaneously improve the vendor’s footprint and provide new sources of revenue is also part of that story, of course. And the hybrid vendors push that story hard precisely because Wall Street wants them to grow like their pure cloud company rivals, and nothing says “I’m growing my cloud business” better than a steady increase in sales based on moving an installed base forward.
But, keep in mind that not every piece of a customer’s infrastructure needs to be upgraded in order to benefit from new functionality and new business opportunities. Pretending an across-the-board upgrade is needed in order to push digital transformation forward is, for the most part, all about the vendor, not the customer.
What I like about vendors’ moves to extend the deadline for end-of-life or maintenance de-support is that the actions recognize the reality that customers need more time to plan their digital transformations at a pace that makes sense to them, regardless of what their vendor wants. I’ve met with quite a number of enterprise software customers who wish their vendors would lay off the upgrade drumbeat and let the customers figure out what’s possible or not given their company’s timeframe, budget, and personnel constraints. The smart customers, and vendors, know that the tech side of digital transformation is the easy part. Envisioning new business processes, getting them re-worked, and then getting the different stakeholders on board is the hard part. Change management is a cruel master, and abides no timeframe other than its own.
The next few years will see a complicated race to bring the laggards out of the cold and into the brave new world of digital transformation. It’s going to be brutal, so brutal that some vendors may genuinely pine for the day when that good old maintenance revenue was still the best ticket to profitability. But if a vendor is really on the side of the customer, rather than just pretending it is, then accepting a pace of change that meets the customer’s needs is the only way to go. The old days of forcing upgrades by relying on strong-arm tactics, including predatory audits and the like, aren’t over yet. But they will be soon, market forces are already bending in that direction. The vendor that fails to adjust its sales goals accordingly will pay the ultimate price, and that means being left behind.
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