Why Software companies should optimize and strategize in 2023?

Allan Harold Rex - Growth Manager, CAW Studios

It is not an exaggeration to state that software companies are currently confronting the most challenging headwinds they have encountered since the first decade of the 21st century.

For some organizations, particularly those that are relatively young, this may indeed be their first experience navigating such a crisis.

What has led to these deterrents for the last 2-3 years?

Businesses can't keep doing the same things and expect to grow in the future.

Here are a few reasons why:

• Global unrest: The war in Ukraine and the collapse of the real estate market in developed countries are just two examples of the many challenges businesses is facing today.
• SG&A costs and EBITDA concerns: SG&A costs (selling, general, and administrative expenses) are rising, and many businesses are struggling to maintain a healthy EBITDA (earnings before interest, taxes, depreciation, and amortization) margin.
• Dried-up VC funds and lower valuations: Venture capital funds are drying up, which is making it harder for startups to raise money and grow. This is leading to lower valuations for companies across the board.

Why do we need to segment software companies in order to categorise problems?

Titans:

These are the companies that get all the media attention, like Microsoft and Google. They experienced rapid growth during the pandemic, but now they're facing challenges because of the backlog of work that has built up in their cloud services.

Why are the Titans now trying to increase revenue while also dealing with a cloud backlog?

Managing both traditional and cloud-based product lines, as well as separate development teams, is a complex challenge for many organizations. In addition, these companies are having to deal with a reduction in global staffing capacity and shaken market confidence due to widespread layoffs. As a result, corporate leaders are facing daunting obstacles as they try to balance operational needs with the critical priorities of keeping employees motivated and customers satisfied, while also pursuing innovation.

In other words:

The Titans are trying to do too much with too little. They're trying to grow their revenue, but they're also dealing with a backlog of work and a reduction in staff. This is putting a lot of pressure on their corporate leaders, who are trying to keep everyone happy and innovative at the same time.

Why is this important?

Segmenting software companies can help us to better understand the unique problems that each segment faces. This can help us to develop more targeted solutions and to better understand the overall landscape of the software industry.

For example, the Titans are facing very different problems than a small startup that develops mobile apps. The Titans need to find ways to manage their cloud backlog and improve their efficiency, while the startup needs to find ways to grow its user base and attract investors.

By understanding the unique problems that different segments of the software industry are facing, we can better develop products and services that meet their needs.

Current Public

Companies, especially those who underwent initial public offering (IPO) within the past ten years, strive to accelerate the launch of novel and upgraded products into the marketplace via low-code/no-code tools and advanced technology.

Partnerships play a vital role in achieving optimization of new product development. Meanwhile, attention has shifted towards evaluating existing merchandise and infrastructure to identify opportunities for monetization or cost reduction.

In terms of finances, numerous businesses experienced a decline in market capitalization following the pandemic, leading to subpar shareholder returns. Enhancing profit margins also constitutes a challenge due to clients' reluctance to commit funds toward financing fresh product advancement and innovation amid the prevailing economic conditions.

Original Scalers

Companies accustomed to transaction lifecycles ranging from 3 to 5 years, now find themselves facing prolonged durations as anticipated revenue acceleration fails to materialize. In fact, many such companies are advised to conserve cash until at least 2025.

These companies have trouble hiring extra workers and developers when they need them because they don't know if they will still be needed later. This makes it hard to compete against bigger companies that already have all the people they need.

Digital Natives

VC-backed businesses, especially those close to going public or being bought, face problems like delayed funding and having to save money. They also struggle to compete with older, more trusted companies that people choose to spend their money on. Some of these young companies want help finding other partners to take over work that doesn't make much money, but needs to be good quality so people will keep using their products. Additionally, several of these startups require aid breaking into big corporate clients, possibly in areas they specialize in currently or new markets where there could be more growth potential.

How to leverage for success in 2023?

Control 1: Leverage Professional Services via Partners

Problems with Professional Services:

• Traditionally high cost / low margin for companies.
• Margin drag compared to platform licensing.

Instead focus on:

• Selling high gross margin products.
• Use partners to free up management bandwidth to drive core business.

USD 1,598.41 billion is the projected size of the Global IT Professional Services market by 2030, with a CAGR of 9.1%

How to leverage professional services via partners?

• Establish a robust partner ecosystem to facilitate collaborative ventures.
• Utilize this ecosystem to selectively outsource specific services or potentially delegate all services to a trusted partner.
• Explore the option of allowing partners to white-label all services, enhancing your brand's reach and visibility.

Control 2: Right shore Engineering

Why you should right - shore engineering services?

High growth in the past few years lead to establishment of centers in high cost locations.

This has created high overhead cost > sub optimal delivery >leading to rupture of the Brand image of software companies.

• Avoid high cost locations to find the right blend of talent ,costs and resources.
• Contract partners on BOT Terms ( Build - Operate - Transfer).
• Find partners for recruitment outsourcing or full outsourcing in countries, like Philippines, Mexico, Ukraine and India.

The ESO, Engineering Services Outsourcing, market is expected to hit USD 5.18 billion by 2030. The market is expected to expand by 21%.

Control 3: Use Framework Tools to Develop your Professional Practice

Use frameworks designed by Harvard business school professors, like these:

1. The Practice spectrum, and

2. The Client portfolio matrix

1.Understanding the Practice spectrum.

In order to understand practice spectrum, you need to understand what is

1. Commodity Practice: These encompass straightforward problems that can be executed without errors. IT giants such as TCS, Wipro, and Infosys have leveraged this practice to achieve scale and growth.
2. Procedure Practice: These entail problems that are not inherently complex, but require a certain level of expertise to ensure operational excellence. Companies like Accenture have adopted this model for scaling their operations.
3. Gray-Hair Practice: Organizations proficient in scaling businesses typically employ this practice. Companies like Deloitte, McKinsey, and similar firms utilize this methodology.
4. Rocket Science Practice: This practice is highly specialized and avant-garde, typically employed by firms addressing niche, complex problems.

2. What is the Client portfolio matrix?

The Client Portfolio Matrix is a systematic analysis that utilizes four quadrants, positioned between the cost to serve clients (CTS) and clients' willingness to pay (WTP).

Based on the position of each client within this matrix, they can be categorized into different groups.

• High CTS (Client Technical Sophistication) - high WTP (Willingness to Pay): These clients typically rely on professional services to execute high-stakes projects. They prefer relying on professional services rather than developing in-house expertise, considering it more cost-effective to maintain a partnership.
• Low CTS - high WTP: Clients in this category are willing to pay a premium and seek long-term partnerships. They often find it cost-effective to manage a partner rather than handling the services internally.
• Low CTS - low WTP: These clients can be challenging to retain and are susceptible to being enticed by competitors, even with a minor price difference. Typically, this segment comprises approximately half of a professional services' clientele.
• High CTS - low WTP: Clients falling into this quadrant are generally high-risk and may have a detrimental impact on the practice if retained against their will.