Time Capsule: Services-Heavy Vendors: The High-Flying Offense Turned Boring Ground Game

I wrote weekly editorials for a boutique industry newsletter for several years, anxious for both audience and income. I learned a lot about coming up with ideas for the weekly grind, trying to be simultaneously opinionated and entertaining in a few hundred words, and not sleeping much because I was working all the time. They’re fun to read as a look back at what was important then (and often still important now).

I wrote this piece in June 2007.

Services-Heavy Vendors: The High-Flying Offense Turned Boring Ground Game
By Mr. HIStalk

Enterprise software vendors go through three lifecycle stages:

• Stage 1 – We’re going to develop and sell the greatest software application in our market.
• Stage 2 – The software market is fickle and cutthroat now that new entrants are in play. We’ll keep our product competitive but, in the meantime, we’ll ramp up a highly profitable services business like all those consulting companies that are pulling down easy money.
• Stage 3 – Our legacy software applications are getting killed by Stage 1 competitors, so we’ll just milk the services side and maybe someday develop some new applications if that cash cow ever dries up and the market forces us into it.

If you’re a vendor, what stage is your company in? If you’re a provider, where are your vendors?

It’s important, because in all but Stage 1, there’s not much innovation going on. Once the services money starts rolling in, no one wants to risk it by investing in innovation. The big money is made in Stage 3, where the capital investment is paid off and the gravy train is rolling in.

It’s like the Super Bowl. A team often gets there by fearlessly airing the ball out and running reckless blitzes, beating all comers. Once they’re in the big game, they suddenly drag out a conservative ground game and prevent defense that causes spectators to nod off in their $1,000 seats. Often, they lose.

You see that a lot with publicly traded companies that are scared to death of one bad quarter. Instead of playing to win, they’re playing not to lose.

Conservative customers keep encouraging them. They give Stage 3 companies preference, using the same criteria that a grandmotherly investor looks for: solid financials, a long list of customers (even if they’re largely indifferent ones), and well-groomed executives who talk about vision but mostly worry about financial ratios and earnings reports.

In other words, customers claim to want innovation, but when it comes to their own IT capital, they invest in those companies least likely to innovate. Vendors say they want innovation, too, but they usually just take the easy way out and buy the Stage 1 upstart and smother them with their stifling culture.

A Stage 1 company might offer the best chance of creating a truly brilliant product, but getting a critical mass of customers is hard. The company could run out of capital, lose its visionaries, sell out to a big competitor, or otherwise stumble and never realize its potential. If there’s a 60 percent chance of that vs. a 100 percent chance of a boring but serviceable Stage 3 product, most hospitals will take Door Number 2.

According to KLAS surveys and watercooler discussions, few hospitals really like those multi- million dollar systems they keep buying. Certainly the results they obtain from implementing them are largely unimpressive.

That isn’t surprising if you buy the idea that vendors are all striving for Stage 3, having long outgrown their starry-eyed beginnings. Recurring revenue is the Holy Grail. Software only needs to be good enough to keep the service revenue coming. The one-shot capital bump from licensing is small potatoes in comparison.

The market won’t change unless threatening new companies enter at Stage 1. A constantly replenishing supply of them is needed because they, too, want to hit the Stage 3 Promised Land.

You’ll know if we ever get enough Stage 1 vendors nipping at Stage 3 heels. The Stage 3 powerhouses will suddenly get mad enough to start airing the ball out again. That ought to wake up the bored fans.