December 2002

A very Merry Christmas to all our readers from everyone at Cambashi

In this issue...

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Feature Article: A fistful of orders?

Times are tough. IT vendors' revenues from industrial users are down anything from 5% to 30%. Orders are really hard to get and big million dollar orders for new business initiatives are really, really hard to get. The vendors have sent their toughest sales representatives into town, they confronted the user procurement department mano a mano in the saloon, but they've come back bruised from the encounter saying they were beaten by "the user with no budget". Should we hire the "sales rep with no name", send them into town and expect them to pull off a victory in the final reel by bringing home a PO on the last day of the quarter?

For our money, things are different. There's business demand but it's not often the lone sales representative standing there with the order when the smoke clears at the PO Corral. The demand comes when an industrial user wants to implement some business initiative that is being driven throughout a user enterprise. In that case, we do see new orders but they come from team selling at two levels - both to the business initiative sponsor and to the team of managers who will be responsible for the proposed change. That's a lot of doors to knock on and it's the teams with deeper industry branch knowledge and long relationships that are winning orders.

Our thesis is that we've been through a discontinuity in the space time continuum of selling IT to industry. The same thing happened 25 years ago when industry's demand shifted to the purchase of commercial off the shelf software packages from buying programmers to write in-house applications. For 25 years these packages have helped users improve task and departmental productivity. This is coming to an end.

We don't agree with Ovum Holway's gloomy assertion that we won't see double digit growth again. We don't think that the use of IT has reached its natural limit in the economy. Investment by industry in plant and machinery is roughly 15% of value added. IT costs these same businesses roughly 3% of value added. However, some two thirds of IT costs are treated as running costs rather than investment. IT investment is an important but not an overwhelming part of investment.

We prefer to think of IT use by industry rather like electricity use by industry. Just as it took from the 1900s to the 1950s for industry to change the way it worked to cope with electricity there will be a long period where industry improves the way it works by using IT. Also, just as companies like Mitsubishi selling drives for control systems are not seen as part of the electricity industry, some future businesses that only exist because of IT will not be seen as part of the IT industry.

But, for the IT industry to get back to growth, users will need confidence that IT investment will enable them to change their business models and hence deliver ROI. This is simply a variation on the industrial revolution driver where investment replaces labour with capital. The information revolution twist is that these investments could, if systems were better designed to be both predictable and repeatable, be trusted to automate more business activities. That, in turn, will free expensive people to perform flexible and appropriate services which "delight" customers.

These solutions do require a different sales approach. We have to sell to business needs across processes, not for tasks. Buyers will be cross departmental teams, not a single project sponsor. It's too difficult for the lone sales representative to do all this alone. They have to visit people outside their current comfort zone and organise a team of sales and support people to match the buyers' demand to the available solutions.

Cambashi's own workload is beginning to reflect this change. We have weak demand for our classic sales and marketing planning services, but strong demand for our newer sales effectiveness service lines. We've been out on the road giving industry sales training. We're helping sales professionals understand how to call on different line of business managers in industry with information on business drivers, business initiatives and the "pains" managers feel. We've also been joining in account specific planning workshops. It is a pleasure to work with our clients' sales teams. We have been reminded again how much talent there exists among IT vendors' staff. Part of the solution is to get these people, including those not formerly in customer facing roles, commercially aware, energised, and to the point of sale!

Mike Evans

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Planning for 2003: Still arguing over your 2003 quota?

Cambashi's econometric model suggests that 2003 will not be as bad as 2002, with revenue growth of just over 10% in Europe for the Enterprise Applications vendors, although this is still well short of the growth seen in the late 1990s. However, 2003 will see a further decline of 3-5% for the Engineering Applications vendors.

Cambashi's projection for 2002 looks like it will have been another tough year for virtually everyone except SAP. We still expect a stronger performance in the fourth quarter, but users will not be in a "spend it or lose it" mood. The graph on Cambashi's web site shows that seasonality still matters.

Enterprise Applications vendors are expected to see flat European revenues for the 2002 calendar year. Europe will have fared better than the worldwide average, with global revenues expected to decline almost 6% from 2001. License revenues have been hardest hit, Europe falling by almost 9%, while global license revenues will fall by around 16%. SAP's upgrade and cross-sell performance prevented European Enterprise Applications from suffering a serious downturn. Without SAP's contribution, 2002 vendor revenues in Europe would have been 12% weaker than 2001 (see the graphs on Cambashi's web site).
Engineering Applications vendors will have seen an almost 8% decline in revenues in Europe during 2002. In Engineering, Europe is the hardest hit region. While global revenues fell, this was only by around 5%. Both traditional CAD and the newer design infrastructure applications suffered. In 2003, Engineering vendors are likely to have a tougher time than the Enterprise vendors whatever happens.

Despite this gloomy prediction, there will still be niches where there will be growth, even for the Engineering vendors. For example, higher consumer requirements in the food industry mean that food manufacturers have to re-equip. The key is to focus resources towards these niches, rather than attempting to serve the whole market equally.

The key input to Cambashi's 2003 forecast model is the forecast investment from the main scenario in PricewaterhouseCoopers (PwC) European Economic Outlook - see http://www.pwcglobal.com/neweurope. PwC assumes that Germany turns around in 2003 (there is a gloomier scenario where Germany goes into a deflationary cycle and a war causes a new oil shock). This econometric model, applied to EITO data and vendors' quarterly results, predicts vendor revenue growth rates for Enterprise Applications and Engineering Applications.

As with all forecasts, this is not a recommendation to buy or sell shares either in specific companies or application areas.

By the time of our next e-zine we will have most of the Q4 2002 results from vendors and a new investment forecast from the economists to plug into our model. We recommend quarterly planning in the current environment, or at least quarterly arguing about the share of the quota that Europe should carry!

Dan Roberts

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Hot Topic: Euroland and Pricing Transparency?

The subject of European pricing and the implementation of the Euro-zone have never been more topical, with consumer strikes in Greece, and German complaints about the "round-up" effect of the Euro. European Commission price monitoring suggests that overall the Euro has had very little real impact on pricing. In fact, some costs have actually decreased or stayed below the rate of inflation. But what about software, and in particular CAD software?

In theory, the Euro helps to produce an open market, with open and transparent pricing and no regional differences to speak about. Prior to this, each country had it's own price ranges for CAD software, which often bore no relation to the prices charged in a neighbouring territory.

In the bad old, good old days…

The UK was the cheapest place to purchase software in Europe. Since most software came from the USA, and the UK was generally the first-stop for American companies entering Europe, this was not surprising. Pricing policy for these companies for some time was quite simple - for dollars on a price, read pounds. Effectively this meant the uplift was linked to the exchange rate between the US dollar and the UK pound.

SolidWorks was one of the first vendors to adopt a European, rather than country, pricing policy. From the time that the price was fixed, changes in the US$ rate against individual currencies meant that some country dealers found that they were paying more in local currency for each copy of SolidWorks than other regions.

But a consistent European target price was hard to maintain as the short term fluctuations in exchange rates produced a range of over 10% in the price.

…and now, in the shiny new Euro-zone?

Early attempts to set European pricing regimes were thwarted by constantly changing exchange rates that, even over a short period of time, started to diverge. We looked at European pricing this summer, to see if the Euro-zone has effected a more uniform regime on list prices. We found that the euro price tended to be consistent across the Euro-zone and the UK is much closer to the European average than before.

The resellers still experience difficult times when rates move so much in an individual month, yet their supplier expects to be paid a fixed amount in $US per license. For some products Germany was charging a small premium compared to other Euro-zone members and Italy had the lowest list prices. The UK, however, was the lowest of the countries surveyed.

List price is not the whole story

Hidden in the absolute pricing evidence is a change that is taking place in the way in which vendors are selling their products, which in turn has an effect on pricing and in particular, the discounts that are available to customers. Many vendors are changing the way their channel supplies end-users, effectively turning them into agents, rather than re-sellers. The contract for use of software is now directly with the software developer, rather than a local dealer, so that the software vendor has greater control of the end-user price. Previously, dealers may have competed with each other and the end-user could get substantial discounts on the list prices of software. With the new contracts, the software developer sets the final price and the old re-seller, on a reduced product margin, must re-invent the business to provide value-added services, rather than simply product availability and discounted prices.

Conclusions

We expect to see more developers selling directly, either with account salesmen, agents or via an on-line store, to the end-user, whilst more software subscription services are set to replace product upgrade and new version sales and traditional annual maintenance contracts. Whilst the Euro-zone has had an equalizing effect on pricing and pricing transparency, changes in the management of reseller channels are likely to have a much more far-reaching effect on pricing and discounting than the introduction of the Euro itself.

Nick Ballard

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Book Review: Convergence Marketing
by Yoram Wind, Vijay Mahajan and Robert E Gunther, ISBN 0-13-065075-7

Idly looking at the bookshelves while waiting for a plane, as one does, I spotted this impressive looking tome and determined to read it and write a review. I managed the first 100 pages on a long train journey and put it to one side to finish later - as one does. Needless to say this hasn't happened. The book does explore an interesting topic - how the individual goes about the business of selecting and buying things in a world that offers them a variety of new ways to learn about products and services, choice about how and where to buy and new ways to interact with vendors and other purchasers. The core idea is that we are all centaurs.

Rather than being half human and half horse, we are a mix of traditional and modern when it comes to the way we act as a consumer. This is important stuff but to my mind this isn't the interesting question - the reality is self-evident. Rather, the emphasis should be on understanding the factors that pre-dispose us to behave in one way or the other when faced with a purchasing decision, the ways that we are now learning to mix both approaches and the how these trends will develop. If this was covered in the last two thirds of the book then I apologise to the authors. The summary? This book raises some interesting questions but provides too few answers, or you have to work too hard to get to them. Sadly, when it comes to books the old adage remains true - you can't judge a book by its cover.

Bob Brown

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Noticeboard:

The Cambashi Seminar 2003 - Sales and Marketing of IT to Industry

Please put this date in your diary for next year - April 9th, The Cambashi Seminar 2003 - your opportunity to keep up-to-date with market trends, and meet other industry players.

The theme is about coping with change and complexity during tough market conditions. Brian Frame of Texol Technical Solutions will tell us what makes for a successful relationship with an IT supplier. Julie Fraser of Industry Directions Inc will provide the US perspective on the market. Further details will be posted on Cambashi's website at http://www.cambashi.com/events/seminar2003/index.htm

Email seminar@cambashi.com to register for The Cambashi Seminar or to request more information.

First delegate rate - £450
CSF Members - £405
Second delegate rate - £185

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