In the movie Wall Street Gordon Gekko attempt s to buy-out and liquidate Blue Star Airlines in order to extract $75M from their over-funded pension. Gordon Gekko sings the turn-around tune to union leaders yet his true intentions to liquidate become apparent to all and the showdown between Gordon and his naïve protégé Bud Fox (his father is a union leader at Blue Star) begins. After having dinner with an old friend from the enterprise software world I realized a form of liquidation is now hitting the enterprise software business. These companies are getting “Blue Starred.” Buyout firms are extracting value from enterprise software leaving business users with systems that barely work.
First, lets begin with some context on the enterprise software business. During the golden years (nineties) of enterprise software – companies like Siebel, Peoplesoft, ePhipany and many more brought software from the back-office (order processing and billing) into the hands of sales reps, customer service, marketing, and human resources (commonly referred to as the front-office). The license based enterprise software revenue model works like this. They sell $1M worth of software licenses and then charge companies annual maintenance fees (approximately 20% of the original license cost) for patches and incremental versions of the software. So, a $1M license software deal actually translated into $2M over five years ($200K annual maintenance fees times five years plus the original license deal of $1M.) Once a customer installs the software they are effectively locked in for many years. These maintenance revenue streams are highly profitable as they not paying sales commissions and support costs are spread across thousands of customers.
With that context, it’s pretty clear what buyout firms are doing. Acquire an enterprise software company with a significant customer base, cut new product development, move support to a low-cost labor market, and milk the maintenance revenue stream.
Yes, this is part of the natural product lifecycle – these are companies on their death-bed. But the unfortunate part of this is that users (customer service agents, payroll admin, and hiring managers) are stuck with barely usable (try using Oracle Applications) and now largely unsupported tools.
Given the improvements in user experience (Apple) and collaboration tools (Facebook, LinkedIn, etc.) over the past five years these older software tools are a massive productivity drain for millions of users. There needs to be a better and faster way to flush out mostly defunct enterprise systems and migrate users quickly to something usable. There is hope, companies like Yammer cleverly bypasses traditional IT purchasers and first hooks the people that matter most — the users.