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Ten Steps to Optimizing Your Software Licensing Revenue


A Practical, Proven Transformation Program for Intelligent Device Manufacturers

Ten Steps to Optimizing Your Software Licensing Revenue


Executive Summary
Todays global technology marketplace is challenging, competitive, and dynamic. In response to these market conditions, technology vendors are re-thinking their business models and product strategies. There are no textbook examples of business success that demonstrate the value of complacency and inertia. It is instead properly focused and well-executed change that empowers organizations to achieve superlative performance during periods of market upheaval. If youre a intelligent device manufacturers, an attractive business transition strategy is to move into the software business by becoming more software-centric in how value is delivered and monetized. By delivering more value to your customers in the form of software, your company can increase margins, build competitive differentiation and recurring revenue streams, more precisely target multiple market segments, and dramatically increase customer satisfaction. Cumulatively, these advantages can have a substantialand even transformationalimpact on your companys bottom-line business performance. So how can your company become more software-centric? How can your company leverage software to drive revenues, efficiency and flexibility? How can it most effectively reap the rewards of software-based revenue streams, while avoiding the risks associated with entering a new business? Based on our experience helping many of todays leading technology vendors successfully move from an exclusively hardware-based model to one that optimizes software revenues, Flexera Software has developed a practical, proven approach for such a transformation: 1. 2. 3.
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Understand the difference between delivering hard goods and digital goods 5. Understand the software value lifecycle 6. Instrument business processes to support the value lifecycle 7. Implement a customer self-service portal 8. Define and execute a software product management and go-to-market strategy 9. Implement appropriate sales training and compensation policies 10. Report, review, and respond By following these ten steps, your company can build a thriving software business, even if it has never licensed or monetized software before. And, by doing so, it can more adaptively compete in a global marketplace where customer requirements and expectations are constantly changing and where rapid responsiveness to those changing requirements and expectations is essential for long-term business growth.

Why Software?

Before outlining how to you can optimize the performance of your companys software business, its a good idea to review why its to your advantage to focus on software in the first place. For starters, you probably already deliver a lot of embedded software in your device to make it fully functional. Here are some of the main reasons to shift your strategic focus to software and to monetize that investment: Greater Lifetime Customer Revenue When you deliver value to your customer in the form of software, you can create recurring revenue streams that improve your companys top- and bottom-line performance. You can do this through subscription licensing, maintenance/upgrade fees, usage metering, or any other appropriate model. So instead of just being limited to onetime hardware purchases, you can build multiple (and fairly predictable) sources of ongoing annuity income.
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Socialize and build consensus for the transformation Understand software licensing methodology and its uses Determine appropriate compliance policies and enforcement mechanisms

Ten Steps to Opt imizing Your Software Licensing Revenue

Better Alignment of Product Feature/Cost with Target-Market Customer Requirements When you focus on delivering product functionality as a set of software entitlements, you gain much more granular and flexible control over how you package and sell that functionality. So you can efficiently create lower-end products at lower price-points, mid-market products at moderate price-points, and premium products at higher price-pointsall with the same basic code and hardware. All you change with each different product is which software capabilities you license to the customer. The Advantages of Try-Before-You-Buy Sales By enhancing your control over software license rights or software entitlements (the customers right to download, use, and update software), you can also boost sales and shorten your sales cycles with a TryBeforeYouBuy model. Under this model, you can allow prospective customers to try your products during a trial periodwhile ensuring that they will not be able to continue using the product if they dont purchase the necessary software licenses. Easier Cross-Sell and Up-Sell A software-centric product model also eases cross-selling and up-selling, since customers can immediately activate newly-purchased product capabilities by simply entering a license key. You can also offer these capabilities on a TryBefore-You-Buy basis to overcome customer objections, just as you would with an entirely new product installation. Streamlined Distribution with Electronic Software Distribution-Enabled Self-Service It takes time and money to pre-configure your hardware devices with the right software. With the right approach to entitlement management, on the other hand, you can quickly and easily drop-ship devicesand then allow customers to retrieve the software they need via a selfservice portal for electronic software distribution (ESD). This cuts your costs and improves customer satisfaction. Accelerated Revenue Recognition Under an exclusively hardware-centric business model, the revenue on any given sale can be substantially delayed by the process of building and shipping units for freight-onboard (FOB) invoicing. With software, on the other hand, you can often recognize revenue shortly after an order is placed by simply providing customers with access to your software and any associated license keys. Embrace Virtual Appliances and Cloud Computing to Enter New Markets If your software can run on standard enterprise computing platforms, you can enter new markets by licensing it to run on your customers virtual machines and/or internal cloud

environments. This gives the customer the benefit of a lower costsince they eliminate hardware-related expenses while preserving your profit margin. Software-only solutions can also be delivered under a software-as-a-service (SaaS) and/or external cloud model, which represent a rapidly growing worldwide market. The above is not even an exhaustive list. By provisioning your devices with software or offering standalone software solutions, you can more quickly bring new capabilities to market, leverage your technical advantages through a wider range of OEM licensing relationships, and more flexibly enhance your own product offerings with the intellectual property of your partners and suppliers. Together, these business advantages build a very powerful case for becoming a more software-centric company and in some cases making the eventual move to a software-only company to deliver value to customers.

Ten Steps to Optimizing Your Intelligent Device Revenue Using Software

While a shift in business strategy to a software-centric value proposition offers numerous advantages, it is not easily accomplished. To optimize the results you achieve from such a shiftand to avoid the mistakes other companies have made as they have similarly transitioned their business strategiesit is important to follow a proven, practical process. Based on the experiences of other hardware manufacturers, there are ten specific steps that you should plan on making to ensure the success of your own companys transition to software sales. These ten steps are: 1. Socialize and Build Consensus for the Transformation The transition to a more software-centric company can be a challengeand will require collaboration from all areas of your companyso it is important to get everyone on board before undertaking the initiative. Everyone should be educated about the advantages your company is pursuing, so they have a clear sense of why the effort involved is worthwhile. The people who will be required to participate in the process should also have ample opportunity to voice their concerns and objections. By clearing the air and ensuring the entire transition team is on the same page, you can make sure that personal reservations dont derail your effort once your initiative is underway. This consensus-building can also better ensure that department managers are, in fact, committing the resources that you will need later on in the process.

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Ten Steps to Opt imizing Your Software Licensing Revenue

2. Understand Software Licensing Methodology and Its Uses With hardware, customers own a physical object that they can pretty much do with as they like. With software, on the other hand, customers dont actually own anything. Instead, they purchase the right to use the software based on the terms and conditions of their licensing agreement. So, when marketing and selling software, its important to understand how you can structure licenses to satisfy your customers needs and achieve your business objectives. Licensing parameters to consider include: License Term Software licenses entitle customers to use the software for a specific time period, and they confer associated entitlements (such as maintenance and support) for that period. You can therefore decide which entitlements to offer for which periodand/or whether some entitlements should be perpetual. License Metrics Software licenses also limit the scope of the customers use. You can limit the use of your software by device, by number of named users, by number of concurrent users, by location and/or by some capacity metric such as number of channels or bandwidth/throughput. Licensed Features You can also be selective about the specific software features you package into the licenses you offer at your various pricepoints. This allows you to better align value delivered to revenue realizedand to more effectively target specific license packages to specific types of customers. Using these basic licensing parametersalong with associated promotional programs and discount structuresyou can begin to address different market niches in all kinds of creative ways. For example, you can offer special service provider licenses that allow your channel partners to cost-effectively support multiple customers with a single fixed- or variable-cost license. Or, you can grant customers the ability to scale up their implementation temporarily to handle periods of peak demand, such as end-of-quarter or end-of-year. Of course, you probably wont want to introduce too much complexity into your licensing schemes either since this can be confusing to your salespeople and burdensome to your finance department. But an understanding of these fundamental parameters and how they relate to your go-to-market strategy is important as you begin your software initiative.

3. Determine Appropriate Compliance Policies and Enforcement Mechanisms In addition to understanding the parameters of software licenses, you and your company also need to understand how to put licensing to work in the real world. There are two main components to the practice of software licensing: compliance and enforcement. Your goal here is to develop a compliance philosophy and employ an associated enforcement mechanism which balances revenue recovery with a positive customer experience. Compliance refers to whether a customer is or is not using your software in accordance with the entitlements they paid for in their license agreement. If youre going to sell software, you need to decide what your compliance policy is going to be. This policy should be explicitly described so that there is no miscommunication between you and your customers. At one extreme, you could decide to simply trust your customers to monitor their own software usage and keep it within the terms of their license. At the other extreme, you could decide to exhibit zero tolerance towards license violations and deny usage for any non-compliant use of the product. Most software companies take a more nuanced approachand may in fact have different policies for different customers, depending on factors such as size, product, and geography. But a clear license compliance policy is essential if youre going to be in the software business. Enforcement refers to the mechanisms and methods by which you support your compliance policies. One aspect of enforcement is the use of mechanisms such as software license keys and password/login access to detect if and when a customer is in non-compliance. The other aspect is the response of your software to the detection of non-compliance. Again, these responses can range from simply notifying the customer that usage has exceeded the terms of the license to the automatic lock-out of non-compliant usage. It is obviously not very wise to use the latter type of enforcement with large, trusted clients who are using your software for mission-critical tasks. On the other hand, mere notification may be insufficient in markets where non-compliance is an endemic problem. 4. Understand the Difference Between Delivering Hard Goods and Digital Goods With hardware, your company ships a product to a customer or a channel partner. Once that physical product is delivered, you can invoice it. If for some reason the customer or dealer is not satisfied, the product has to be physically shipped back to you before you can issue a refund.
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Ten Steps to Opt imizing Your Software Licensing Revenue

Software delivery is typically quite different. Instead of shipping physical goods to the customer, you may instead simply 1) notify the customer that the software is available for download or 2) provide them with a license key to unlock access to functionality of software that they have already installed (or, in the case of SaaS, that they simply access via the Internet). Two concepts in particular that you will need to bear in mind are entitlements and fulfillments. Understanding these concepts, and the impact to your business, will probably have an effect on how you design your supply chain systems. Entitlements are the commitments your company makes to future value as the result of a financial transaction, such as a purchase. This can make a software purchase somewhat akin to a debit card. The purchase of a software license may entitle your customer to use your software within certain restrictions, to receive patches and upgrades for a certain period of time, and to receive a certain amount of technical support.  ulfillments occur when your customer actually F obtains the software bits, license activation keys, support event resolutions, or other items of value to which they became entitled when they made the payment stipulated in their license agreement. These fulfillment events can obviously occur months or years after their purchase of the corresponding entitlement. In addition, information required by the customer to perform the fulfillment, such as a particular Machine ID onto which the software may reside, may not be available at the time of entitlement. Therefore, such information should not be required at the time that the entitlement is created, as it could introduce unnecessary delays in revenue recognition. An entitlement can provide the basis of multiple fulfillment events over time (for example, a sequence of free point upgrades). And again, in stark contrast to the hardware business, revenue in the software business can be realized at the time of entitlement rather than being deferred until fulfillment. This distinction becomes important because systems that support the ordering and entitlement creation will typically be separate (but linked) from systems and processes that support the fulfillment activities. Often existing hardware supply chains are not designed to separate entitlements and fulfillments, often resulting in the need for some process and systems enhancements. A clear understanding of this distinction will be important for Step 5.

5. Understand the Software Value Lifecycle With hardware, the exchange of value between you and your customers is largely completed in a single transaction where you ship them physical goods. Of course, you also continue to provide value in the form of service and supportbut the bulk of the value in each exchange comes from a single initial transaction. With software, the exchange of value between you and your customers is more continuously extended over a multi-event lifecycle. As noted above, this lifecycle consists of multiple entitlements and fulfillments that may all be related to one transaction (i.e., the purchase of a particular type of software license). The events in a software lifecycle may include: Conversion from a try-before-you-buy license to a full production license Software upgrades, updates, and/or bug fixes Migrations from a competitors product to yours (which is a common practice for marketing to accommodate your customers when they acquire a company that was already using a competing product) Renewals of existing license and/or maintenance agreements Up-sells to versions with richer functionality (e.g., from Personal Edition to Professional Edition) Transfers of an existing software license to different machines, platforms, locations, or departments Returns software licenses due to administrative or technical errors So, in addition to understanding the concepts of entitlement and fulfillment, you and your company need to map out all of the various specific entitlements and fulfillments that will characterize your companys software value lifecycle. 6. Instrument Business Processes to Support the Value Lifecycle Because the software value lifecycle is so different from the conventional hardware value transaction, your company will have to implement and/or modify many of its business processes. Your ERP and CRM systems are probably set up to manage a traditional quote-to-invoice (Q2I) or quote-to-collect (Q2C) process. But there are a variety of use cases that you will have to add to manage the prospect-to-support (P2S) process associated with your new, more complex software value lifecycle.

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Ten Steps to Opt imizing Your Software Licensing Revenue

These P2S business process use cases can be divided into nine main categories: Non-revenue pre-sales entitlements Revenue entitlements Includes pre-sales demonstrations and try-before-you-buy evaluations. Includes new product sales, conversion of try-before-you-buy to production, sales of add-on product sales, etc. Adapts to type of customer, channel, and other relevant transaction parameters. Includes processes that enable revenue entitlementssuch as an upgrade entitlement for a customer who has purchased a support agreementas well as processes for adding new customers and products to CRM and ERP systems. Includes processes such as changing customer addresses or corporate parent (in the event of M&A activity). Includes processes by which customers receive software, license keys, access to SaaS/cloud services, etc. Includes processes by which customers can manage their own software license assets and perform many administrative tasks like moves, transfers, and software asset management. Includes processes that define how the customers support entitlements are fulfilled under various entitlement and situations. These use cases define the methods by which your company captures the information it needs regarding its various P2S activities. Includes processes and methods for consolidating the P2S process of an acquired company with your own.

Administrative entitlements

Entitlement administration Licensefulfillment License lifecycle

Customer support Business intelligence Transition planning

All of these use cases must be properly tooled in your ERP, CRM, and other systems in order to maintain an accurate view of the customer, ensure effective product delivery, and accurately execute financial operations such as revenue recognition. 7. Implement a Customer Self-Service Portal In addition to making the necessary changes to your internal IT systems, youll probably want to support your software business with a competitively featured customer self-service portal. A self-service portal can reduce your operational costs, enhance customer satisfaction, accelerate recognition of revenue, and increase customer acceptance of your software products. Self-service portals can include: Online payment/transaction processing Downloads of software and software license keys Signup for maintenance and support entitlements My Account views into current entitlements, completed, and pending fulfillments, etc. Online tech supportincluding trouble-ticketing, chat, and FAQs Social networking and user community facilities Customer self-service portals typically function as an extension of an entitlement management and fulfillment
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systems, which insulates your core ERP and CRM systems from their real-time processing workloads.  8.  efineandExecuteaSoftwareProductManagement D and Go-to-Market Strategy With the preceding conceptual foundation and IT capabilities in place, you can now begin to define and execute your software product management and go-to-market strategy. Your software product management strategy will be shaped by the answers to questions such as: How will we structure and brand our various software product lines? What are our target marketsand how can we best package and price different sets of software functionality to address the requirements of those targets? How are our competitors structuring their product lines and packaging their functionality? Do we need to counter-program against their strategy? What new incremental functionality should we be working on? What old functionality should we be preparing to discontinue? Where do we have to maintain backward compatibility?

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Ten Steps to Opt imizing Your Software Licensing Revenue

With which third parties should we be engineering integration? How can we best engineer our solutions for SaaS, managed service provider (MSP) and cloud computing markets? Your go-to-market strategy will be shaped by the answers to questions such as: How will we announce and promote our new software business and branding? What kind of discounting and/or entitlement incentives will we use to promote sales? What distribution channels will we use for our various products and target markets? What discounting and aggregation programs will we implement to incent our channel partners? How will we position our solutions and their respective value propositions against those of our competitors? Will we make special offers to customers who want to replace our competitors software with ours? How will we tier and structure our technical support entitlements? Once youve made these decisions, you can start plugging appropriate product names, SKUs, pricing and other values into your ERP, CRM, entitlement management, fulfillment management, and customer self-service systemsand building out the marketing materials and programs you need to support your sales effort. 9. Implement Appropriate Sales Training and Compensation Policies At traditional intelligent device manufacturing companies, salespeople are practically hard-wired to focus on selling hardware and to treat software as a secondary value-add. Such companies typically think in terms of selling physical devices on a cost plus basisand understand their value proposition as revolving primarily around device capacity, capability, and total cost of ownership (TCO). In competitive situations, software may even be discounted to near zero in order to close the hardware sale. The transition to a more value-centric approach to software sales will require a variety of changes to your sales model. These changes will likely include: Sales training that aggressively addresses the entrenched hardware sales culture. This may start with sales managers firstand then subsequently get rolled out to front-line salespeople and account managers. Key points of this training will include an understanding of the concepts of entitlements, fulfillments, and the software value lifecycle.
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Salespeople need to be educated about how customers make software-buying decisions, how to take advantage of try-before-you-buy licensing, and other aspects of the software sales cycle that are materially different from that of hardware. To succeed, you must get sales management buy-in and the management must exhibit leadership in the selling of software and software value. Sales compensation that appropriately incentivizes sales people to build your companys current and future software revenue streams. It may be particularly worthwhile to weigh compensation in favor of software licenses and license renewals rather than on a single bookings targetgiven the importance of your companys shift in strategy and the fact that renewals represent a high-margin sale with a low cost of sales. 10. Report, Review and Respond A transition from a hardware-centric business model to a software-centric one is a complex undertaking. So even with the best planning and execution, your company probably wont get everything absolutely perfect right out of the gate. Thats why its important to be able to capture the full range of business performance data necessary to fine-tune your strategy and tactics. By consistently reviewing that data, you can make the adjustments necessary to optimize software revenue and margins, retain your customers over the long haul, and grow your share of target markets. Key performance indicators (KPIs) to review may include: KPI Salespeople who are lagging in license and license renewal sales Customers or territories where license metrics are lagging in proportion to size Low demand for a particular solution packagedespite high demand for closely related packages Low conversion rate of try-beforeyou-buy license Poor channel performance Potential remedy Provide additional sales training Address possible compliance/enforcement issues Re-structure, re-price or discontinue package

Fix technical problem or flaw in user interface Re-structure channel discount and/or provide better marketing support Improve product, improve documentation, or offer bigger/more economical support packages

Rapid consumption of technical support entitlements

Ten Steps to Opt imizing Your Software Licensing Revenue

These ten steps provide the basic roadmap for a successful transition to optimized software revenue. The specific way your company will navigate these steps will depend on the type of software youre selling, who youre selling it to, your current business culture, and the resources at your disposal. But by following this roadmap, you can substantially mitigate the risks associated with such a transitionand accelerate your overall time to benefit.

Resources for Your Business Transition

The Right Partner In addition to hiring veteran managers into key positions, your company can tap into the collective expertise and experience of the software industry through the right vendor and consulting partnerships. The right partner can support your transition project with proven best practices developed over the course of many similar transitionsand help you avoid the mistakes that other companies in your position have made in the past. The result can be an easier and less costly transition that yields greater results in less time. The transition to software can be a challenging one. But it can also be extremely rewarding in terms of long-term business performance. The above resources can play a central role in achieving that performance. Its interesting to note that three out of four of them involve people. Ultimately, it is the commitment, creativity, and hard work of people that enable companies like yours to succeed in the software business. But thats true of any business. The difference with the software business is that it can generate the healthy margins, recurring revenue, and global market reach that make the required effort more than worthwhile.

In addition to following the right process, it will also be important for your company to have the right resources in place to ensure a successful transition. Here are four resources in particular to think about as you plan the launch and optimization of your software business: A Strong Mission Champion As noted in Step 1, a successful move to optimized software revenue is a highly collaborative effort that will require the involvement of leaders across your company. However, you will also need the right champion or champions for the move. This may be you. Or, depending on your position and political influence at your company, it may be essential for a C-level executive or board member to drive your companys effort. Often, a combination of leaders are necessarysome of whom ensure that everyone fulfills their role in the move, and others who take primary responsibility for the in-the-trenches work of transition management. But without strong championing, a strategic effort like this can get derailed by inertia and departmental resistance. Key Management Hires from the Software Industry While many of the managers at your company may be able to successfully make the transition from an exclusively hardware-centric business model to one that capitalizes on the market opportunities for software, some may not. And it may not be in your companys best interests to rely entirely upon those abilities, anyway. Thats why, as part of their transition effort, many companies recruit veteran managers from the software industry for key positions in product management, marketing, and/or sales. The wealth of experience and contacts these managers have can be invaluable in steering your company down the right path. The Right Technology It takes software to sell software. So your company will have to acquire best-in-class solutions for software entitlement management, electronic software distribution, application installation, and other core processes in the softwarevalue lifecycle. Because these software solutions will be so deeply ingrained in your software business, it is probably smart to start evaluating alternative products as early in your transition process as possible. Youll certainly need your evaluation and acquisition of these solutions to be completed well before Step 6, so that your overall effort isnt delayed by your technology implementation cycle.

About Flexera Software

Flexera Software is the leading provider of strategic solutions for Application Usage Management; solutions delivering continuous compliance, optimized usage and maximized value to application producers and their customers. Flexera Software is trusted by more than 80,000 customers that depend on our comprehensive solutionsfrom installation and licensing, entitlement and compliance management to application readiness and enterprise license optimization - to strategically manage application usage and achieve breakthrough results realized only through the systems-level approach we provide. For more information, please go to: www.flexerasoftware.com

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