Is There a Panacea for Enterprise Software Pricing Yet

Joking aside, while enterprise software is apparently reaching commodity status, no one can determine with certainly what a fair price should be for a solution that fits the needs of most enterprises. If the price is dependent on the functional fit, then should a highly functional enterprise resource planning (ERP) or supply chain management (SCM) cost $1,200 per user? Should it be more? Less? Working on the assumption that the product fits the prospective customer's needs "like a glove"—and the importance of this fit cannot be overemphasized—what would be a fair price? Note that we're not necessarily talking about a "fair" price. After all, in the free market, pricing is based on supply and demand, the customer's state of urgency, and the perceived value of the product.

The real problem is how to compare one vendor's pricing against others in a like-for-like manner. After all, total cost of ownership (TCO) calculations should not be rocket science. One has to start by determining application software license fees (which occasionally include third-party software license fees). To this, add professional services costs (which typically includes training, implementation services, and so on), hardware costs, and annual support and maintenance costs (which may also include support for third-party software and hardware, such as bar code readers in the case of radio frequency [RF] applications).

Certainly, there might always be some optional software or service costs, but basically, TCO revolves around total software- and service-based costs. So what is the problem? Well, let us first tackle comparing common license fee pricing methods. When we are involved in the software selection process, we normally help clients come down to a few finalist solutions based on functional and technological fit, whereupon they then ask us to help them negotiate the best contract price, and finally select the winner. Yikes! Deciphering the US Tax Code is a simple task compared to that!

Plenty of vendors, of course, may produce nominal price lists for their software modules, but if chief information officers (CIO) at prospective user enterprises (or professional negotiators acting on their behalf) want to know the actual pricing benchmarks that similar customers have paid, they either must have insider knowledge, or a hotline to some of the vendor's reference enterprise customers. And of course, they can only gain access to this information when such details are not protected by confidentiality or non-disclosure agreement (NDA) clauses. Even then, these figures are typically muddled by an absence of like-for-like pricing models.

One vendor charges license fees per user (named, concurrent, or casual) and per module (or per bundle of functional modules in a suite). Another bases prices on server/central processing unit (CPU) size. And still another bases prices on its perception of how large (read "wealthy") the customer is, the likelihood of implementing a total functional footprint, and the total number of users the customer might ever want to have. What can one discern from all this? Such a scenario is truly comparing "apples with oranges," and then dumping berries into the mix. However, some vendors will rightfully say that they cannot simplify pricing because different customers want different pricing systems, and they have to do what customers want.

For example, many customers resent the notion of paying for functionality they are not likely to use. In some instances, even if a large corporation needs expanded functionally down the road, they will only pay for the modules they need at the time of selection. Lengthy implementations of (for example) financial management and consolidation, or human capital management (HCM) systems over several divisions and several hundreds (or even thousands) of users worldwide, may make an enterprise reluctant to embark on another lengthy implementation adventure right away.

Thus, a vast majority of business application software vendors still generate most of their revenues by selling their software licenses based on the number of named or concurrent users or seats, typically on a per module or per suite basis. They may also generate revenue based on an excessive "wall-to-wall," "all you can eat" functional scope. The accompanying implementation service, post-implementation service, and support and maintenance services also add to the "pot." These are all are priced as a percentage (and more often multiples) of the software license fees.

However, from the user perspective, there is a fitting analogy: in one trip to the store, no one will ever buy a lifetime's worth of snacks and coffee. We are selective, and over the course of a lifetime, we will buy different products based on what we feel we need or want. Software applications should be treated the same way. To return to our analogy: the stockpile of snacks will ultimately go stale, and the coffee will lose its flavor, or go rancid. Little is consumed, except hard-earned money.(see Application Erosion: Eating Away at Your Hard Earned Value). The same happens with software that is not used.

However, purchasing software la carte is easier said than done. The trouble comes from the "fine print" addendums in software purchase contracts, which are often longer than the main contact itself. These clauses are typically designed to protect the vendor from any future liabilities or to "nail" the gullible customer with extra costs. The fine print will customarily include a statement to the effect that the contract includes only the stipulated basic functionality. Any additional modules will use a different pricing structure, whereby the client will likely pay far more at the end of the day than if the whole application license had been purchased up front. Smaller enterprises (given their smaller number of users, and less complicated implementations), typically want most of the available functional footprint implemented at once, with the option to expand to additional functionality later. These customers might appreciate the option of "wall-to-wall" functionality up front.

Another pricing option variation is based on what users use, and not on what they can get. This is the so-called "pay as you go" option. Typically, enterprise software comes with parametric "switches" that can be set based on a need. For example, a small-to-medium enterprise (SME) user might set a switch to use multicurrency, consolidate financials, use warehousing management, or use standard or actual costing. Based on a contractual agreement, these switches can be set at the "software factory" to limit the functionality that is available to the user. If an enterprise decides later to activate a function, such as warehousing management, the enterprise would have to pay. While feasible, this requires serious contract management and tracking, and an argument could be made that SMEs that use less functionality require less support.

This brings us to the next fine print item, the point which is possibly among the most controversial: service and support calls. With some large software customers reportedly spending obscene amounts of money just to patch their existing software, the cost of poor software quality is becoming painfully apparent to software customers. Vendors typically provide a short period of time—from ninety days to a year—as a "warranty period," within which software fixes are available for free. After that initial period, software customers must pay for service and maintenance, on an annual subscription basis, or on a per-incident basis. As a result, many customers feel taken advantage of, and those who select the solution are presumed "guilty" of paying for the vendor's ineptitude to deliver quality software in the first place.

From this vantage point, many wonder whether the urge to hastily implement these systems prior to the Y2K deadline was so big that it blinded common business sense. Consequently users have ended up on the losing end of their contractual rights, and have become the victims of exorbitantly high costs for enterprise software use, upgrades, and administration.

However beside user frustration, vendors are facing the pressures of cutthroat competition, which is pushing prices downwards. Users also have strong expectations that improvements in software quality should allow vendors to significantly extend the "free" period to something closer to the expected life of the software.

Software customers have a legitimate right to expect their vendors to stand behind their products for a few years or more. During this time, vendors should back product capabilities based on the user's requirements (these capabilities are all too often easily "promised" by aggressive sales personnel). This backing would also make certain that the cost of the software product would remain fixed (and known) during that time. Through this approach, software vendors would have more difficulty in passing the expense of poor quality software to their customers through arbitrary rate increases for software maintenance. Rather, they would have to focus on producing better software to reduce their support costs, in order to remain viable players in the market.

Business-related issues related to software use inevitably arise daily. These issues may result from flaws or bugs in the software, a misunderstanding about how the software works, or both. In any case, software customers want to be able to contact a qualified expert to discuss the issue and resolve it in a timely fashion, with minimal impact on their business. The customer does not really care whether the issue arises from a bug, user error, or lack of knowledge.

Software vendors need to provide unlimited access to support services, including experts trained in the detection and fixing of design flaws in the software, as well as having the ability to explain (in lay terms) how to get the software to perform the functions required by the customer. To that end, no one wants to plow through the fine print to understand how many free-of-charge calls are permitted. Instead, it would be more reasonable to allow for unlimited calls during a multiyear warranty period.

Business processes and practices do undergo constant change (see What's Wrong With Application Software? Business Changes, Software Must Change with the Business). For example, changes in business strategy (such as shifts to lean manufacturing) can mandate changes to business processes. Regulatory changes, such as those stemming from the US Food & Drug Administration (FDA), the Heath Insurance Portability and Accountability Act (HIPAA), or the Sarbanes-Oxley Act (SOX), can also mandate changes to business processes. Software vendors have an obligation to keep their products from becoming obsolete even in these contexts, and customers have the right to expect that they can use updated products to address these issues, including reasonably easy and cost-effective upgrade processes.

One can only imagine the public outcry and revolt if car manufacturers decided to charge car drivers an annual fee—a percentage of their nominal car model price, say—indefinitely, for future developments! At this stage, software vendors are participating in a practice similar to that of pharmaceutical companies. Pharmaceutical companies justify the exorbitant prices of critical medications for consumers by professing the need to reinvest part of their hefty profits for future developments, but even in this case, customers know what they have to pay when they are at the counter. Maybe if enterprise software development could come up with a cure for cancer, AIDS, or Alzheimer's, or implement some other supreme benefit to humanity, then software users would also put up with the recurring service and maintenance costs.

Web-enabled Sales Tactics

From Inquiry Qualification to Suspect Development

Marketing's demand generation strategies have been significantly realigned over the last few years to encourage the use of the Web for registration and fulfillment activities. Enough information has been published about business to business (B2B) marketing of technology products that I'll simply recommend a Google search or exploring www.technologyevaluation.com for more information on how to generate more web inquires. It's marketing's job to attract first time visitors to your web site; this is the Problem awareness stage in the buy cycle methodology that we summarized in Part One. Unfortunately many sales people criticize their marketing department for generating so many "junk Internet" leads. Why, because the sales lead qualification process has been so unproductive to the point where it's actually counterproductive. We all know there is gold in those Internet registrations. Panning for that gold however, requires a different qualification process with a new set of metrics, so the message to marketing should be turn up the volume of those Internet registrations!

During the Understanding stage, as described in Part One. , as the buyer understands the problem and contemplates taking action to solve it, we begin qualifying buyers by creating a filtering process to identify the serious evaluators from other casual web traffic. Getting visitors to return for second and subsequent visits is a collaborative function between marketing and sales to create next buying stage transition offers that only appeal to the needs of the serious buyer. The objective is to create a series of follow-up offers that engage the self-directed buyer to further explore your solution, to reveal their interests, and to influence their buying process. Offer content is king in the on-line world and sending a free automated e-mail will achieve this much more effectively than the old qualifying phone call that delivers no immediate value to the buyer. For example, a next day follow-up offer to a white paper download would read something like, "Thank you for your recent inquiry. Please call Jane Doe, your sales executive, if you would like further assistance evaluating our solutions. You may also be interested in reviewing our Express RFI Service which outlines our solution capabilities and can easily be used to accelerate your project's needs analysis activity."

Smart web sites know how to identify these return visitors and to learn their interests from prior activity, so that it can deliver a more relevant and engaging visitor experience. Amazon.com is a good example of a site that tracks user history to create a profile that enables the site to personalize its service. The goal at this phase is to identify early stage sales opportunities, such as organizations with unusually high volumes of inquiry activity. By integrating this information with the CRM system, sales people would have access to this list of high probability suspects to further research off-line. Low activity visitors are classified as dormant opportunities and can be added to a quarterly awareness email campaign. The rules of engagement at this stage follow these general guidelines:

1. Respond to an inquiry via the same communication channel through which the inquiry was made.
2. Make it easy for visitors to transition from an impersonal on-line to a personal dialog with tools such as instant messaging and click-to-chat, or to move to an off-line discussion with a clearly displayed telephone number.
3. Delivery speed is paramount with any on-line offer. Immediate is best, the day after tomorrow is unacceptable.
4. Only request information that is in the buyer's self-interest to supply.
5. Follow-up every accepted on-line offer with related follow-up offer.


A well designed web site provides an ideal medium to collect buyer data. To transform buyer data into actionable information, it must be integrated into a customer relationship management (CRM) system to provide salespeople with a complete view of their prospect. The design of an effective Web-enabled sales system is akin to a multiplayer computer game where buyers are the players and salespeople are the coaches. As with any game, the content changes as buyers progress though each stage. The "buying game" tracks who downloaded what offers, what information they entered, and which web pages players reviewed. By consolidating all the information by organization in a CRM system, salespeople will be able to identify the companies that are in play.

A few key points will help to understand how the buying game concept applies to creating a winning influence strategy for the sales department. The first guiding principle is give to get. Give players (buyers) what they want to encourage them to continue down your buying path, and in return, get the information needed to maximize the buyers' value. The second principle is to create a learning game that gets smarter as it collects information. Welcome the buyer back and remember what he or she accomplished in the last visit. As with every game, there is a scoring system that coaches (salespeople) can use to easily monitor and help improve the performance of their players.

There are a few design issues to keep in mind for the web site:

* There are no rules.
* Players can joint the game at any point.
* Players can then proceed in any direction, and can skip around as they like.
* Not all players are buyers.

Finally, it's important to remember that your sales web site must fit into the overall buying game that a project team will play as they navigate the on-line world. Companies that deliver the most influential value at each buyer engagement are in the best position to eventually win the deal. The Research phase, as described in Part One is when about 80 percent of the vision is solidified into project documentation. Since most project teams are chartered to implement new business processes they find themselves learning as they go. They have two choices: they can either hire a consultant to show them the way or they can search the Internet for materials that will guide them down a proven path. Buyers are attracted to six categories of on-line project accelerator materials at this stage:

1. How to buy roadmaps.
2. Third party product reviews
3. Opportunity value calculators
4. Selection criteria check-lists
5. Needs assessment frameworks
6. Product overview materials

Sales and marketing organizations that don't offer these materials are missing the golden opportunity to transfer their value proposition into the project team's working documents. These project enablers can significantly influence the rest of the purchasing process. During the research stage, qualified buyers are transitioned from the public web site to a more in-depth members only site and then to an exclusive evaluation portal once a sales person is actively engaged with the account. Using Web portal technologies, the sales department can create a secure environment that provides buyers with convenient access to privileged information and tools. A portal also enables salespeople to control and monitor the buyer's on-line experience more closely as the sales opportunity develops over time. As the buying organization progresses through each subsequent stage, the salesperson continues to configure the portal with additional value enabling and information gathering materials.

When is the best time to engage with a buyer? It's the magic moment when the buyer is visiting your web site. That is the time when buyers are giving you access to their needs and their full attention. Sales, your challenge is to seize these golden opportunities to probe for information, deliver value, and to influence the buying process. Granted your salesperson will not physically attend this virtual sales engagement, but a sales meeting did happen, and your buyer was influenced by the experience. Do your salespeople know what sales meetings their buyers have completed on your web site? Do they have access to the information that was collected? Nothing is more expensive than a missed opportunity.

When you begin your next sales negotiation, think about the valuable buyer information you never bothered to collect from your own web site while the buyer was collecting information on you. Both the marketing department and the customer support department have implemented efficient and effective web strategies which have improved service levels and reduced costs. Now is the time for the sales department to fill the void and regain their influence on the customer's decision process at each stage of the new on-demand buy cycle.

The Web-Enabled Sales Process

Today, nearly every business to business (B2B) information technology company I talk to is mad that its attempts to increase new account sales have failed. This has grown into a huge problem—to the point where a significant number of companies have decided that they are not going to take it any more, and have totally abandoned new account growth strategies. However, by leveraging new technology, understanding the buy cycle value chain and enabling today's self-directed buyer, sales organizations can significantly increase revenue and reduce costs.

Since the tech bust that followed Y2K, technology companies have become more and more frustrated by their attempts to win new business. Sales departments across the industry have tried all the traditional sales strategies: improving the quality of the sales force by replacing non-performers with proven professionals; improving staff knowledge by conducting sales training programs; and reorganizing into specialized industry verticals. They have expanded market coverage through reseller programs; created dedicated telemarketing teams to generate more leads; and implemented customer relationship management (CRM) systems to improve relationships with prospects and customers. Yet with each initiative, the cost of sales has escalated, and with each quarter end new account revenue results have been more and more disappointing.

Consequently, sales management teams have been under intense pressure to keep their attention focused on the final act of closing the deal. The problem is that the sales department has spent too much time repairing the symptoms of the sales problem and has avoided dealing with its root cause: regaining the ability to influence the purchasing decision process. To effectively influence the purchasing process, sales must find new ways to identify buyers earlier; to collect buyer information; to gain buyer access; and to provide added value. Yet, this task is particularly daunting for business to business (B2B) enterprise system providers where decision processes span months. Sales tactics that worked well in the past to identify, access, and influence decision makers are no longer effective.

In the past, salespeople controlled the sales cycle by managing the flow of information. Today the information available on the Internet has empowered buyers to structure their own buying cycle. This shift is comparable to the days when the automobile engine replaced the horse as our primary source of transportation power. The horse couldn't compete with the speed, convenience and low cost of the automobile. The same can be said for the Internet, which has given buyers shopping tools and conveniences that didn't exist a few years ago. The time has come to completely reengineer the go-to-market strategy to make it compatible with the buyer's preferred mode of communication. Buyers will always be attracted to the least risky, most convenient, and lowest cost information outlet. The Internet fits these criteria and has become the primary channel that buyers use to complete many of their early stage buying tasks, and it continues to be an important channel of influence throughout the entire process. As a result, yesterday's successful consultative salesperson is being excluded from much of today's buying process.

I'm not suggesting that the Internet will make the salesperson obsolete. Personal selling will always play a vital role in managing the overall enterprise relationship whether it is conducted via the mail, on the phone, in person or across the Internet. What I am suggesting is that sales department personnel should think twice before they dial the phone or pack their bags to visit a client, and instead should consider clicking a mouse to deliver more effective support to prospects evaluating solutions on-line.

The prominence of the Internet has grown exponentially in a few short years. According to the PEW Internet & American Life Project, between 1999 and 2000 the Web became the "new normal" way of life. Back then few of us realized how easy it would be to shop on-line. Now we can simply log-on, search a few ideas, review product features, compare prices, select a vendor, and have a product arrive at our door the next day. As we enter 2006 over 70 percent of us enjoy a rich media experience from our home, which is driving an on-line shopping growth rate of over 30 percent a year. Life in the on-demand world, as characterized by the iPod, allows us to tune-in to our interests and tune-out everything else. We have all learned to screen phone calls, to skip commercials, and to block spam so we can tune-in to exactly what we want, when we want it.

Each morning when we arrive at work we bring these newly acquired habits and expectations with us. Is buying big, complex enterprise level systems really that different from personal shopping? It can be compared to the process of buying a major capital item, such as a house or a car. There is an old auto industry adage that the busiest day of the week on a car dealer's lot was Sunday, the day the dealership was closed. Has the Internet become the modern equivalent of visiting the dealer's lot on Sunday? According to a ZDNet Research statistic "in 2003, 94% of US consumers shopping for a car went on-line to do research, get quotes from dealers and to order brochures. This compared to 67% who actually visited a dealership when making a decision on which car to buy." While eventually the buyer will go to the car lot to test drive and buy the car, the preliminary research to create a shortlist is being done on-line.

It's human nature to avoid unsolicited sales contact. People are very uncomfortable with the emotional aspect of the buyer-salesperson relationship. It is not high-pressure sales tactics that are the source of this anxiety. The problem is that a person's sense of obligation grows as a personal relationship develops, and so to does the pending dread that all but one of these relationships will have to be broken. As the song goes, "breaking-up is hard to do", and we know that salespeople don't accept no easily. In the past, buyers sacrificed service and drove to the dealer's lot on Sunday to avoid these awkward situations. Today, buyers are avoiding the fear of relationships by simply going on-line, and are getting access to better information than what salespeople ever provided. In nearly a third of car buying situations the buyer's decision is already made before he or she arrives at the dealership. The same applies for decision-makers who are seeking enterprise level solutions. As a result, many salespeople will never get the opportunity to position their solution, and a lucky few will not get their opportunity until much later in the buying process.

So who's qualifying who these days? When salespeople get a lead, they instinctively make the qualifying phone call to determine the prospect's pain, power, vision, value, and control. Qualification is the first step in the old sales cycle because a time consuming and expensive discovery or needs assessment engagement is assumed to be next. However, today's buyers don't want a vendor's assistance at this early stage. With the help of on-line information sources, buyers would rather research and complete their own unbiased needs assessment study. The irony with the old qualifying call is that by the time a salesperson qualifies an opportunity, he or she will be too late to have a significant influence on the purchasing process. According to a 2004 lead qualification study by KnowledgeStorm, traditional qualification parameters are missing a significant market opportunity. The study estimated that 40 percent of early stage buyers were disqualified by sales because they hadn't determined the answers to the qualifying questions yet, and the study estimated that another 40 percent refused to answer these questions just to avoid sales contact. As a result, salespeople are missing the opportunity to influence 80 percent of today's buyers during the most impressionable stage of a project. Would salespeople dare consider the possibility that they can do more selling without being there? The eureka moment struck me, when I realized that the more a buyer can do without personal sales assistance the better.

Many marketing and sales departments think in terms of the "end game" of the value proposition of their solution. All too often they forget that the winner is always the team that scores the most points at each play of the game. A selling approach designed around the buyer's information consumption process keeps salespeople focused on earning value points throughout the buy cycle. For example, a buyer's end game problem may be solved by your supply chain optimization product, but right now, the buyer just needs to schedule a realistic project plan. If your competition has a better plan to offer than you do, then it just scored an influence point. As the saying goes, "it takes a lot more than a better mouse trap to win a deal". In other words, salespeople need to follow the buy cycle and fulfill the buyer's needs at each consumption point along the way.

The decision process for an enterprise level system is defined by the corporate project life cycle within which the purchase falls. As with any business initiative, these projects can germinate from a variety of sources, but once sponsored as an official project it follows a relatively predictable decision process. To stay focused on the customer's buy cycle we use the PURCHASE acronym to designate eight separate purchase decision-making stages. The following is a brief description of each stage along with a few appropriate value offers that sales can provide:

1. Problem. In a pre-contemplation mode individuals search the Web to gain an awareness of the latest problem solving innovations, industry issues and business trends. These education seekers are willing to register an e-mail address to gain access to interesting on-line information. Marketing departments are currently doing a good job of providing business issue white papers, customer case studies, and product brochures. However, sales qualification resources are being wasted on the inquiry registrations that are generated from this segment. Automated follow-up offers should be sent to these inquiries to determine their interest level with an option to subscribe to a newsletter or register for preferred access to additional information.

2. Understanding. In this contemplation mode, a group of individuals unite within an organization to understand a specific problem in an effort to propose a possible solution strategy. They continue to search and gather the information necessary to build the business case required to establish an official corporate initiative with executive sponsorship. The sales strategy for this stage is similar to the problem stage with an additional element. Data mining will analyze buyer web site activity by organization to identify suspect accounts with increased activity levels for sales to research and possibly target offline as a high probability suspect.

3. Research. In a preparation mode a project team works to formalize a project structure to deliver a solution to the organization. The group's psychology immediately transitions to that of a more pragmatic early adopter mindset. The focus shifts from understanding the problem to creating the vision and charting a path to a solution. Since this is new ground for the organization, the team searches the Internet for project enablers such as evaluation roadmaps, third party reviews, budget calculators, needs assessment templates, and project plans. While today's self-directed buyer may be keeping the salesperson physically out of the process, they are happy to use their project-enabling resource downloads. Smart sales organizations are transferring their value propositions into the working documents of project teams in the form of needs assessment spread sheets, return on investment (ROI) calculators, and other project templates. High quality project enabling materials can provide a valid business opportunity to engage earlier than the competition to begin building a trusted personal relationship.

4. Comparison. The project team transitions into the evaluation phase with a clear vision, and a shortlist of qualified vendor organizations. Salespeople are engaged to visit for the first time to continue selling where their on-line sales collateral ended. At this point the buying team knows exactly what they want to see to complete their final evaluation. The concept of a "non-disclosure level" evaluation portal should be introduced by the salesperson at this stage. Salespeople should empower the project team with access to a standard array of high quality e-collateral portal content (presentation, demonstration, and testimonials) designed to address the standard evaluation issues so they can focus on solving the prospect's higher value business problems. By creating a collaborative environment with an empowered project team, project members can become an inside sales force motivated to get the organization's buy-in for their project. By monitoring portal activity, sales can evaluate its competitive position based on each contact's individual activity level.

5. Homework. Preparation for authorization is a very active internal stage when key project team members work to justify a recommended action plan and preferred solution. They prepare the detailed capital authorization documents, and begin planning the implementation. Often the salesperson is told he or she is one of two finalists, just to keep them honest through negotiation. But truth be known, there is a third alternative, a "no-decision." A delay or no-decision is the typical outcome when the project team submits a weak business case to management. By offering expert help with the use of the project enablers transferred in the Research stage, the sales team can earn the opportunity to collaborate on the internal business case.

6. Authorization. This is an internal sales activity where the project team has to sell its business case to a very conservative, risk-adverse executive group that is emotionally disconnected from the project. Given the amount of senior management scrutiny, project team members are highly motivated to win approval for their project. While this phase may drag on longer that expected, sales organizations have three primary objectives; to monitor their competitive position, to maintain team member enthusiasm, and to defend against competitive attacks. By linking the business case to portal based e-collateral, sales can monitor approval activity levels. By offering pre-implementation e-learning materials an enthusiastic project team can get a head start on the next phase of the project which will also distract members from having the time to listen to competitive attaches.

7. Signing. This stage begins as the buyer prepares to negotiate the deal and continues until the first payment is received. Pre-negotiation posturing has been going on for a while as buyers focus on mitigating risk issues and threaten sellers with the other viable alternative. Buyer information is invaluable at this stage. The project team members are instructed to be very vague as the buying negotiator "holds his cards very close to his chest". By maintaining engaging installation and pre-implementation content in the evaluation portal, sales can monitor buyer usage activity to determine their level of commitment. Nice words from the buyer that is not accompanied with corresponding activity is an early indication of a serious sales problem, while tough talk and a high activity level are indicators of a strong position.

8. Expansion. Once the solution is successfully implemented the organization looks to leverage the solution's success across other areas of the business. At this point the new customer is transferred to a customer support portal which would include an evaluation capability for additional products and services.

Understanding the different stages of the buy cycle and finding the appropriate value offers is only half the job. The next challenge is getting access to the right people and collecting the right information to deliver the best value. Let's think about this for a minute. The people you want to access are those visiting your web site. They are right there registering for exactly what they want. The golden opportunity lies with the visitor on your web site: you have the access, they have the need, and they are willing to provide information, if you can deliver immediate value.

Who Could Object to Faster, More Responsive Supply Chains?

If anything is certain in today’s global supply chains, it is the constant change and volatility that does not let anyone relax—not even for a moment. This unsettling pattern is the result of the globalization trend and its related evolution of supply chains.

Enterprises can choose one of two types of integration in the supply chain management (SCM) constellation: vertical or lateral (horizontal) integration. APICS Dictionary (11th edition) defines vertical integration as

the degree to which a firm has decided to directly produce multiple value-adding stages from raw material to the sale of the end product to the ultimate consumer. The more steps in the sequence, the greater the vertical integration, and a manufacturer that decides to begin producing parts, components, and materials that it normally purchases is said to be backward integrated. Likewise, a manufacturer that decides to take over distribution and perhaps sale to the ultimate consumer is said to be forward integrated.

In other words, vertical integration, or vertical SCM, refers to the practice of bringing the supply chain inside the four walls of one organization. Traditional vertical integration, or the ownership of most (if not all) parts of a supply chain, is the method of SCM that long preceded the relatively recently coined term "supply chain." By bringing most of the supply chain activities in house and putting them under corporate management, vertical integration has basically solved the problem of who should design, plan, execute, monitor, and control supply chain activities.

One often-cited example of vertical integration, as described in the APICS Certified Supply Chain Professional (CSCP) Learning System; Module One—Supply Chain Fundamentals (2007), is the automobile company built by Henry Ford, which often receives credit as being especially successful using this approach. In the early days of the automotive industry, Henry Ford pursued a strategy of owning and controlling as many links in the automobile supply chain as possible, from rubber plantations to raw material for tires, right on through to dealerships that distributed finished cars to the public. In an attempt to create a self-sufficient enterprise, the automotive giant also owned iron ore mines, steel mills, and a fleet of ships, as well as the manufacturing plants and showrooms that built and distributed the cars bearing his name.

The primary benefit of vertical integration is control, since a department or wholly owned subsidiary with no independent presence in the marketplace cannot, for example, deal with competitors to sell its components or services at a higher price. Its operations should, theoretically, be completely visible to the parent company, as well as be synchronized with other company functions by directives from the top. The corporation’s schedules, workforce policies, locations, and amounts produced (i.e., all aspects of its business) are controlled by the overarching management.

Vertical integration may still exist nowadays as a viable way of managing a supply chain. Wireless phone companies are an example of the type of business that operates this way. They purchase the phones, stock them at retail outlets, sell them, provide coverage, and handle warranty service.

Vertical integration generally went out of vogue as corporations expanded and as global supply chains became over-extended. Indeed, lately it has become quite difficult for any complex corporation to bring together the expertise needed to excel in all elements and countless activities of the supply chain. Therefore, most modern corporations have turned to outsourcing those aspects of their business in which they believe themselves to be least effective. Even Ford Motor Company, the pioneer of vertical integration, has been no exception to this trend. A couple of years ago, the company’s management publicly acknowledged that “the days of being 100 percent self-sufficient and capable in today's world of high technology and engineering are gone.”

Rather than bring all supply chain functions in house, large manufacturers and service providers are now more likely to adopt a horizontal, or lateral, supply chain strategy, whereby separately owned entities focus on their individual core competencies and deal with each other through discrete transactions or by longer-term contracts. The complexity and expense of managing all the activities in a global supply chain often drives top management to sell off assets not directly contributing to the core business. Ford divested itself of the production of many components in house, as did DaimlerChrysler in shedding its Mopar division, and General Motors (GM) in letting go its component supplier division.

Lateral arrangement has thus replaced vertical integration as the preferred approach to managing the many diverse activities in the supply chain. Once corporate ownership abandons the idea of vertical integration and turns to outsourcing various activities, it loses control of those aspects of the supply chain, and it has to deal with separately owned companies as suppliers or customers. Nevertheless, this has been the dominant trend in the evolution of SCM in recent decades in the Western world.

There are some compelling reasons for relying on a lateral supply chain, starting with the ability to achieve economies of scale and scope. Namely, regardless of how large and resourceful a corporation is, its internal supply chain functions lack economies of scale when compared with the potential capacity of an independent provider of the same product or service. Another reason is the ability to improve business focus and expertise, since vertical integration in a globally competitive market brings about the complexity of managing disparate business units spread across international borders, time zones, continents, and oceans. Conversely, an independent partner company that focuses entirely on its particular business can develop more expertise than an in-house department can, leading to more attractive pricing, higher quality, and quicker time to market.

Additionally, with the advent of the Internet and advanced communication technology, many of the traditional barriers to doing business at a distance and in a distributed manner have been eliminated. Near instantaneous communication means that information can be shared collaboratively through, for example, videoconferencing, instant messaging (IM), or voice over Internet protocol (VOIP), around the globe. Thus, as the world becomes one single, huge marketplace, it makes sense to deal with established companies that intimately know their local markets. Horizontal supply chains are also the logical extension of outsourcing, as they are closely related to the “virtual corporations” trend.

In the virtual corporation, the firm capabilities and systems are merged with those of the suppliers. This results in a new type of corporation, one where the boundaries between the systems of the master firm and of the suppliers disappear. Virtual manufacturing is the changed transformation process that is usually found in the virtual corporation. Because the firm’s and the suppliers’ systems are merged, the components provided by the suppliers are not related to the firm’s core competency; however, the components managed by the firm are related to core competencies. One of the many benefits of the virtual factory is that it can restructure itself quickly to respond to changing customer demands and needs. Likewise, the dynamic nature of a virtual corporation also allows for change to its relationships and structures in response to the customer’s changing needs.

Virtual Supply Chains Have Their Limitations

Although it may be easy to become infatuated with the attractiveness of lateral supply chains and virtual organizations, the unfortunate fact remains that synchronizing the activities of a network of independent firms can be extremely challenging. What each member enterprise might gain in scale, scope, and focus, it may lose in the ability to see and understand the multitier supply chain processes and their interdependencies, as well as the ability to control them.

Horizontal integration indeed brings about the complexity of the global supply network, with multiple connections around the world and information shared on networks, all connected along the chain. The outsourcing of manufacturing operations is a growing trend, and it offers numerous cost-savings and other benefits for original equipment manufacturers (OEMs) and brand owners. However, there is a trade-off, as outsourcing manufacturing operations also increases complexity because it creates virtual enterprises, where data and operations reside within the disparate systems of third parties.

Further challenging the channel masters is the increasing volatility of customer demand. This unpredictability makes it critical for the supply chain to be more agile and responsive in order for companies to be successful. Brand owners are accountable for their brand, quality, and customer satisfaction. Meeting the increasing number of compliance regulations requires them to coordinate their trading partners’ activities as well as to quickly and confidently respond to any and all changes. To do this, brand owners need multi-enterprise visibility across their supply chains, both internal and external.

The electronics industry is a good example of a business sector that has been particularly affected by the increase in outsourced manufacturing. Brand owners, OEMs, and contract manufacturers (suppliers) all face the implications of growing global competition; shorter product life cycles; intense innovation, which results in the constant launch of new products into the market (despite failure of most of these products); complexity of products’ features and distribution operations; and unpredictable demand.

These days, the electronics industry (like most industries) must operate in an evermore challenging consumer climate: product or service quality must be a given; product price often gives way to availability or special product features; and hard-to-please, well-informed consumers are a mere click away from learning about competitive offerings or from posting their dissatisfaction with a seller’s poor service at heavily visited consumer advocacy web sites.

In other words, in the cutthroat and competitive marketplace of the electronics industry, electronics companies are realizing that the factors upon which they compete (so called “order winners”) are changing. With numerous competitive options and vast consumer resources to research and compare products, no selling company will survive with an inferior product, unjustifiably high prices, or a non-responsive supply chain (i.e., suboptimal customer service).

Furthermore, while outsourcing and lateral supply chains provide the nominal price advantages of sourcing from low-cost countries (see Understanding the True Cost of Sourcing), on the downside, they often come with longer order lead times and frequent disruptions because there are so many intermediaries between the brand owner and the contract manufacturer (such as distribution centers, inventory hubs, regional sales centers, consignment inventories at retailers, etc.).

Add to this frequent customer requests for product configuration changes (often after the initial order has already been placed) and frequent in-house engineering change requests (ECRs) due to the need for constant innovation and ever shorter product life cycles, one could only imagine the ramifications for enterprises still relying on inadequate, traditional, forecast-based planning and related push-oriented manufacturing strategies (i.e., along the “if we build it, they will come” mantra).

Electronic companies that still rely on such outdated concepts can certainly “pick their poison” (means of failure): decreased customer satisfaction (increasing customer erosion); missed revenue or earnings per share (EPS) goals, which, in turn, lead to inability to win new bids; poor key performance indicator (KPI) metrics (in terms of poor inventory turns, wrong inventory mix, excess and obsolete inventory, margin erosion, etc.), and so on.

The electronics industry today is made up of the type of virtual enterprises mentioned earlier, where brand owners, contract manufacturers, and lower-tier suppliers are interconnected partners in a coordinated operation. In such an environment, one member's actions will affect many other members, and as such, major decisions cannot be made in isolation. In fact, decisions require consultation and input from all those that can influence or be influenced by them. Thus, the market drivers discussed above have made the supply chain an increasingly influential part of a company's success or failure, but they have not made the supply chain manager’s job any easier.

Internet-based technological advances have not necessarily changed the “old” mind-sets and practices of relying on traditional supply chain applications, which have major visibility and information gaps. Namely, while “the best laid plans of mice and men” can be made, typically, as the saying goes, they “often go astray,” meaning everything unravels when “the rubber meets the road” (when those plans are executed). Only those manufacturing, distribution, and supply chain environments that are extremely fortunate might experience only minor or manageable changes occurring between the planning and execution stages. Unfortunately for most companies, such changes are hardly ever minor. Rather, they are endless variances between planning and forecasting (the “ideal world” of ivory towers) and fulfillment (which takes place in the treacherous “real world” of the manufacturing and distribution trenches).

For all the investment made in sophisticated demand management tools, almost proverbially, the only sure thing about a forecast is that it will be, by and large, wrong. Forecasts routinely miss actual demand (in fact, they are rarely better than 70 percent accurate, according to some findings within industries with volatile demand, such as consumer electronics). This can result in disastrous inventory pileups, missed financial targets, and supply chain conflicts among brand owners and their supplier networks. Overly optimistic forecasts can lead companies to lose touch with actual demand signals, and leave billions of dollars in excess inventory in the pipeline. The example of Cisco Systems’ multibillion-dollar write-off of obsolete inventory in the early 2000s still speaks volumes in this regard.

Conversely, a lesser-known fact is Apple's overly pessimistic forecast of the initial iPod sales a few years back. Although some might think that discovering that the actual demand for your product far exceeds your forecasted demand is a good problem to have, it was only because of Apple’s lean and flexible supply chain structure that the runaway success of iPod has not turned into an embarrassing disaster.

Thus, since alignment of demand and supply is an increasingly difficult challenge in the unpredictable electronics environment, companies should not spend a great deal of time and resources trying to predict customer demand. That is to say that planning has become less effective. A much more important capability for organizations now is to be able to rapidly and astutely respond to what is happening at the moment.