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FinancialForce.com, a provider of cloud-based financial applications, recently announced two pending acquisitions. One is Vana Workforce, which makes a human capital management (HCM) application aimed at small to midsize companies. The other is LessSoftware, a supplier of Web-based supply chain management (SCM) applications. The acquisitions are part of FinancialForce’s strategy to build a broad suite of applications that run on salesforce.com’s Force.com platform. The three companies already have joint customers, so they build on established use cases and relationships. FinancialForce.com itself is jointly owned by salesforce.com and Netherlands-based Unit 4.
The acquisitions are consistent with FinancialForce’s go-to-market strategy as well. Rather than sell only a complete suite, it offers customers the option of buying separate applications that address a specific need. For instance, one initial use case was to get FinancialForce’s sales order processing module to bridge cloud-based sales processes offered in salesforce.com to a company’s on-premises ERP system. At the time, many companies were using desktop spreadsheets or paper forms to pass order information. And rather than replicating the typical ERP and CRM forms-driven application design, FinancialForce aims to differentiate its software by designing it to facilitate communications and coordination in executing processes that connect functional silos in an organization – in this case the front office and the back office. Because all of the code within its suite is running on a single platform in the cloud, FinancialForce can offer an interoperable set of capabilities that can be purchased in entirety or in component form.
The two recent acquisitions further this strategy. Vana Workforce provides a necessary complement to FinancialForce’s professional services automation (PSA) capabilities, which it acquired in 2010. It provides, for instance, the skills management and basic HR functionality for staffing and scheduling consulting projects. These capabilities are notably lacking in a large majority (73%) of midsize and smaller businesses, which are an important segment of PSA and for FinancialForce generally. Moreover, since all three of the companies’ software is built on the Force.com platform, integrating them should be straightforward. Using this single platform allows for easier cross-application workflows, single sign-on and a single reporting database from which to generate reports, dashboards and scorecards. The applications enable social collaboration with Chatter, salesforce’s enterprise social networking application, but salesforce needs to develop it further to support narrowcasting and collaboration in context to meet the needs of Finance, the back office and other business functions, as I have pointed out.
Vana Workforce’s Human Capital Management application supports a range of hire-to-retire functions including core human resources management, applicant tracking and recruiting, onboarding, compensation management and learning management. Vana should benefit from having broader distribution and access to development funds to continue developing the suite. LessSoftware’s SCM suite offers a useful set of applications including Configure-Price-Quote (CPQ), Order Fulfillment, Service Contracts, Inventory Management, Supplier and Spend Management. The new owner will rebrand the suite as FinancialForce SCM.
From a business perspective, FinancialForce has flexibility in acquiring customers, selling whole suites or one or several parts that customers might need, especially as add-ons to their Salesforce implementation. And this product strategy is facilitated by use of the Force.com platform, which allows its main development focus to be on process design and capabilities, not the plumbing, and an indirect sales channel, which reduces the need for its own sales organization. However, I calculate that FinancialForce needs both a significant proportion of full-suite deals and a sufficient volume of component sales to achieve healthy margins. One challenge with implementing this strategy is that in many geographies – especially North America – the consulting partners that sell and implement business software usually focus on a single silo, whether it’s finance, HR, sales or logistics. Resellers of financial software may have little experience in implementing HR software and may not have much interest or skill in selling human capital management. And since the buyers of these functional components work in different departments, the ability to cross-sell is not a given. That noted, in some cases this is probably not going to be an issue. For example, partners that implement PSA software can readily master the Vana HCM components and seize the opportunity to expand their project scope. And there are plenty of consultancies served by FinancialForce and its resellers that do not have HR management capabilities, which they could acquire now.
There are many different types of companies that ought to consider FinancialForce to address their needs. One group is midsize companies that are looking for a financial management system in the cloud like California Blue Shield Foundation that we have previously awarded our Leadership Award. A second comprises professional services organizations that are looking to automate time-consuming administrative functions as well as enhance the effectiveness of their project staffing. A third is companies that need to connect their sales processes with finance and SCM capabilities to support more effective execution of these processes. These acquisitions should help FinancialForce serve all of them.
Robert Kugel – SVP Research
PROS Holdings, a provider of price and revenue optimization software, has an agreement in principle to acquire Cameleon Software, which offers configure, price and quote (CPQ) applications. The combined company is likely to benefit from a broader geographic presence (PROS is based in Houston while Cameleon is in Toulouse, France) for their sales and marketing efforts. However, the longer-term strategic value of the merger lies in the combination of the related categories of price optimization and CPQ to improve sales effectiveness and financial performance.
Price and revenue optimization, which I have written about before, is a business discipline used to effect demand-based pricing; it applies market segmentation techniques to achieve strategic objectives such as increased profitability, greater market share or both. Software to manage price and revenue optimization first came into wide use in the airline and hospitality industries in the 1980s as a way of maximizing returns from less flexible travelers (such as people on business trips) while minimizing the unsold inventory by selling incremental seats on flights or hotel room nights at discounted prices to more discretionary buyers (typically vacationers). Today, it is a well-established part of any business strategy in the travel industry and is increasingly used in others including retailing (chiefly through mark-down management), financial services and many business-to-business verticals. PROS started in the travel and hospitality industry, which accounted for 44 percent of its 2012 revenues, but its recent growth and focus have been more in manufacturing, distribution and services; those customers accounted for 56 percent of 2012 sales.
For its part, CPQ software emerged to make the process of configuring complex products more efficient. This issue is of particular importance for industrial companies that sell to other businesses. A Class 8 truck, for example, has multiple options for mechanical parts such as the engine, transmission and braking system, as well as comfort features for the cab such as air conditioning and the radio/audio system. Assembling the various piece-parts of an offering manually, determining that the configuration is a valid one (for instance, whether transmission Y actually works with engine X) and calculating a basic offer price can be time-consuming and error-prone. CPQ software enables those quoting a price to quickly develop even multiple proposals for a prospective buyer. This is a well-established software category. Our benchmark research shows that about half of all companies with 1,000 or more employees use it, another one-third intend to deploy it and only 17 percent have no plans to use it.
Although valuable on its own, when CPQ software is joined to price and revenue optimization in an end-to-end, lead-to-order process, it increases the effectiveness of that process by giving sellers more ways to intelligently manage volumes and margins through altering the cost of individual components. For instance, the base price of a unit may be priced with little or no markup if the goal is to generate margin on the other parts of the sale. (This is similar to many retailers’ strategies except that the price of each piece of the transaction may be negotiated and the prices involved are often considerably greater.) Optimization software can enable sellers to achieve their revenue and margin targets by using purchase behavior patterns to better assess the buyer’s price elasticity. Indeed, the choice of certain components themselves may provide sellers with clues about the buyer’s overall price sensitivity: For instance, those wanting certain features, brands or grades may be less inclined to negotiate and therefore should be quoted a higher price. (Similarly, certain online merchants have been found to charge buyers using Apple products more than others.) Thus when price optimization is part of the business logic in using CPQ software, it makes the software more helpful to the user.
Viewed from the other side of the combination, adding a native CPQ capability to price and revenue optimization software makes the analytics far more actionable because it can support an end-to-end process. Although PROS has had CPQ capabilities in its Quote2Win application, they are not as robust as what’s available in Cameleon, which provides configuration capabilities and guided selling. PROS has published APIs to facilitate integration with CPQ systems, but integration out of the box with a full-featured application is certainly better. One of the biggest barriers to more widespread adoption of price and revenue optimization is that products don’t always enable user organizations to easily embed the analytics and data that drive optimization directly into the sales process.
Businesses that first adopted price optimization (and which have the deepest penetration) include travel, hospitality and retail mark-down management. Their common characteristic is that all are (or started out as) relatively simple products (say, a round-trip seat or a dress) for which prices are set, not negotiated. Business-to-business (B2B) transactions, however, often are more complex because the product often is a bundle of physical goods, services, warranties and ancillary provisions such as delivery. Moreover, typically these transactions involve some negotiation allow the sales representative a degree of freedom in setting prices and discounts. Having the actual price being quoted is critical for to capture and use in the sales process as our research in sales forecasting found that pricing data is one of the top components in 48 percent of organizations but so is the configuration of products to 22% percent of organizations and want it to be included in the sales forecast. Because the process is more complicated, prospective users of price optimization may find it daunting to adopt the strategy. In theory at least, adding a robust CPQ capability should make it easier for a company to implement a successful price and revenue optimization strategy in a reasonable period of time.
Decades of experience have demonstrated the value of this software category. Without the benefit of price optimization applications, it is almost impossible to assess a customer’s demand elasticity to determine an optimal offer price. Margin may be lost unnecessarily when sales people default to discounting to ensure a sale. Simple up-sell and cross-sell strategies can be beneficial, but they can fall short of what’s optimal and – increasingly – what’s possible. Having software to better gauge price sensitivity and control more elements of a negotiation with greater visibility into its profitability can help companies achieve an optimal balance of revenue and margin. The process can be even more effective when it’s coupled with sales incentive management software. All of which points to improving the sales process and our latest research in sales found that inconsistent execution is the largest impediment in 53 percent of organizations that is motivating management to invest into sales technology like CPQ and pricing optimization.
Organizational issues also have inhibited adoption of price and revenue optimization strategies in industrial companies as well as the use of this category of software. Responsibility for managing profits usually involves both the finance and sales organizations. Both have roles in handling profitability, but the process is typically simplistic (using up-sell and cross-sell strategies with little regard to the profitability of the components), imperfectly coordinated between Sales and Finance and almost never optimized. Ideally, CEOs and COOs should be initiating an optimization effort, but I find this is rarely the case. Using analytics to manage pricing and support a sophisticated strategy is an important business innovation that industrial and other business-to-business verticals should embrace. Finance organizations – specifically the financial planning and analysis (FP&A) group – should take the lead, especially if they want to demonstrate the ability of Finance to deliver more strategic value to the company. Successful price and revenue optimization strategies can provide a sustainable competitive advantage. Companies of course need a pricing strategy; understanding the benefits of price optimization software can help them see what’s possible and develop an implementation plan.
Robert Kugel – SVP Research