Aligning Business Models And Technology Architectures Ore Dev Conference 2008

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Luke Hohmann, Enthiosys CEO, on the many ways to match customer value to software pricing and value exchange mechanisms. How can we match what customers need with appropriate models and units?

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  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Jan 22, 2007 Copyright (c) 2001-2007 by Luke Hohmann Think of “failure” in terms of degrees, not absolutes. For example, you might ship the system on time (a huge success) but be unable to extend it in any reasonable manner for future requirements (a failure).
  • www.enthiosys.com Jan 22, 2007 Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann There are innumerable variations on these basic business models. Common variations include such things as minimum fees, pre-payment options, conversions, penalties, and so forth. Different modules can be offered at different rates/fees.
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2007 by Luke Hohmann
  • www.enthiosys.com Copyright (c) 2001-2008 by Luke Hohmann
  • Aligning Business Models And Technology Architectures Ore Dev Conference 2008

    1. 1. Aligning Business Models and Technology Architectures Luke Hohmann CEO, Enthiosys Feb 27, 2008
    2. 2. <ul><li>Founder/CEO of Enthiosys </li></ul><ul><ul><li>Agile product management consulting </li></ul></ul><ul><ul><li>Customer needs, roadmaps, business model </li></ul></ul><ul><ul><li>Product management mentoring and training </li></ul></ul><ul><li>Agile product guy </li></ul><ul><ul><li>VP Bus Dev (Aladdin), VP Eng &Product Dev’t (Aurigin), VP Systems Eng (EDS Fleet Services) </li></ul></ul><ul><ul><li>Board of Agile A’liance </li></ul></ul><ul><li>Author, speaker, blogger </li></ul><ul><ul><li>“ Innovation Games” </li></ul></ul><ul><ul><li>“ Beyond Software Architecture” </li></ul></ul><ul><ul><li>“ Journey of the Software Professional” </li></ul></ul><ul><ul><li>agile PM blog at www.Enthiosys.com </li></ul></ul>About Luke Hohmann
    3. 3. Agenda <ul><li>Great products make money </li></ul><ul><li>An overview of business issues </li></ul><ul><li>Seven ways software generate revenue </li></ul><ul><li>Understanding licensing </li></ul><ul><li>Implementing enforcement </li></ul><ul><li>Additional areas of potential impact </li></ul>
    4. 4. A Reminder… <ul><li>Consider reading each slide with the following preamble: </li></ul><ul><li>My architecture might fail </li></ul><ul><li>{ to achieve its objectives | in the long run } </li></ul><ul><li>if I fail to { choose | specify | create } { the | a } </li></ul><ul><li>issue that we’re talking about… </li></ul>
    5. 5. Some Key Business Issues <ul><li>Business Models </li></ul><ul><li>Licensing </li></ul><ul><li>Portability </li></ul><ul><li>Deployment architecture </li></ul><ul><li>Integration </li></ul><ul><li>Installation </li></ul><ul><li>Upgrade </li></ul><ul><li>Performance </li></ul><ul><li>Configuration parameters </li></ul><ul><li>Log files </li></ul>Not exhaustive…
    6. 6. Business Model Framework <ul><li>A framework of interrelated choices that help you create offerings that provide maximum value. </li></ul>Customer ROI Model Quantifies Return Enforcement Protection of Rights Licensing Terms and Conditions of Use Type of Value Exchange The way you make money Profit Engine Causes More Money Making Events Customer Value Analysis Identifies Value Pricing How much money you make
    7. 7. Value Exchange Models <ul><li>The way money is exchanged </li></ul><ul><li>Multiple types of value exchange can co-exist in the same product e.g., txn fees and “optional modules” </li></ul><ul><li>OEM / In-licenses may create potential incompatibilities </li></ul>
    8. 8. Core Value Exchange Models <ul><li>Time-based access </li></ul><ul><li>Transaction </li></ul><ul><li>Meter </li></ul><ul><li>Percentage of revenue gained / costs saved </li></ul><ul><li>Hardware </li></ul><ul><li>Service </li></ul><ul><li>Data / Content </li></ul>Charity?
    9. 9. Time-Based Access <ul><li>Grant “right to use” for a defined period of time (even if you don’t actually use) </li></ul><ul><ul><li>Perpetual (like Microsoft Windows) </li></ul></ul><ul><ul><li>Annual (like many ERP) </li></ul></ul><ul><ul><li>Rental </li></ul></ul><ul><ul><li>Subscription </li></ul></ul><ul><li>Pay After Use... </li></ul>
    10. 10. Transaction <ul><li>Transactions: Measurable units of work </li></ul><ul><li>Exchange of money is always tied to the transaction but value (and price) is often associated with an attribute </li></ul><ul><ul><li>Duration of a phone call </li></ul></ul><ul><ul><li>Time of day call is made </li></ul></ul><ul><ul><li>To whom the call is made </li></ul></ul>
    11. 11. Meter <ul><li>Constraining a well-defined resource </li></ul><ul><li>Consuming a well-defined resource </li></ul><ul><ul><li>Concurrent (e.g., concurrent user) </li></ul></ul><ul><ul><li>Identifiable resource (e.g., named user) </li></ul></ul><ul><ul><li>Consumptive (e.g., you have 100 hours) </li></ul></ul>
    12. 12. Hardware <ul><li>Associate the amount charged for the software with some element of hardware </li></ul><ul><ul><li>Software anti-piracy dongles – you pay for both the dongle and the license SDK/run-time </li></ul></ul><ul><li>Huge challenge: software becomes “free”, especially in embedded software </li></ul><ul><ul><li>Home appliances: microwave ovens </li></ul></ul><ul><ul><li>Information appliances: router/VPN server </li></ul></ul><ul><ul><li>Consumer electronics </li></ul></ul>
    13. 13. Service <ul><li>The exchange of money is tied to a service; software is required to provide the service or is intimately related to the service </li></ul><ul><ul><li>Symantec: anti-virus updates </li></ul></ul><ul><ul><li>AOL: email </li></ul></ul><ul><ul><li>Red Hat: Linux-related services such as support or upgrades </li></ul></ul><ul><li>Often associated with subscription pricing </li></ul>
    14. 14. Revenue Obtained / Cost Saved <ul><li>Charge based on revenue obtained or costs saved, often in terms of percentages </li></ul><ul><ul><li>Retail yield management </li></ul></ul>ServiceSource, with annual revenue between $25M - $50M, says it receives compensation based on the revenue it generates for its clients and charges no consulting, training or implementation fees, or ongoing management costs. - June 29, 2005, San Jose Mercury News
    15. 15. Data / Content <ul><li>The software creates unique data/content </li></ul><ul><li>The exchange of value provides access to these data </li></ul><ul><ul><li>FICO scores </li></ul></ul><ul><ul><li>re-processed government data (patents, TIGER/Line® files) </li></ul></ul><ul><li>Often associated with subscription pricing </li></ul>
    16. 16. A Smattering of Examples... Transaction Fee: Flat or % of some defined txn Visa, BEA (when used in an ASP) Perpetual License: Upfront fee + 15-22% annual maintenance ERP Annual License: Yearly License, must be renewed ERP, MSFT Per-user, Concurrent, & Named User ERP Per-CPU (Hardware) MSFT, Oracle, BEA Service (subscriptions) Anti-Virus, AOL Consumables (Meter) Printers (ink, paper)
    17. 17. Architectural Impact <ul><li>Value exchange model choices inter-twine themselves with technical choices </li></ul><ul><ul><li>Does your architecture fully support your model? </li></ul></ul><ul><ul><li>Are you (perhaps unexpectedly) constrained by business model choices? </li></ul></ul><ul><li>Let’s review two examples </li></ul>
    18. 18. Effects of Time-Based Access on Tarchitecture <ul><li>Today? Generally, minimal (honor system) </li></ul><ul><li>Future? Disallow use </li></ul><ul><ul><li>Microsoft and others pioneering model </li></ul></ul><ul><ul><li>Rentals / other models require both protection and backend systems to support </li></ul></ul>
    19. 19. Effects of Transactions on Tarchitecture <ul><li>Do legal and technical definitions match? </li></ul><ul><li>Uniquely identify & understand entire life </li></ul><ul><li>Capturing the necessary data (schema) </li></ul><ul><ul><li>Direct: System captures and manages all data necessary to support the business model </li></ul></ul><ul><ul><li>Indirect: System must be integrated with other systems to capture/manage necessary data </li></ul></ul><ul><li>Reporting/Remittance requirements </li></ul><ul><ul><li>Format? Security? Auditability? </li></ul></ul>
    20. 20. Licensing Terms and Conditions of Use
    21. 21. License Choices <ul><li>Rights/restrictions you associate with your IP </li></ul><ul><ul><li>Right to use, copy, resell, embed, modify, etc. </li></ul></ul><ul><li>Rights you request from your licensees </li></ul><ul><ul><li>Right to co-market, access system, analyze data, etc. </li></ul></ul><ul><li>Customers will often pay for specific kinds of rights (if you let them...) </li></ul><ul><li>Not all are enforceable </li></ul><ul><li>Disclaimer: Enthiosys cannot provide legal advice – we’re not lawyers. Instead, we’ll focus on many common business terms associated of software licensing agreements. </li></ul>
    22. 22. Flip-Chart Exercise <ul><li>What are the rights / restrictions that you (typically) grant with… </li></ul><ul><ul><li>your hardware? </li></ul></ul><ul><ul><li>your software? </li></ul></ul><ul><li>Which of these do you think you can enforce via technology? </li></ul><ul><li>What are the rights you (typically) request from your customers? </li></ul>
    23. 23. SoftCo Software License License Term Meaning Grant of License: non-exclusive non-assignable, non-transferable USE SoftCo grants the purchaser (licensee) the right to use the software, and licensee cannot give or sell it to anyone else. SoftCo can continue to license the same software to anyone they want to Ownership of Software SoftCo owns the actual software that is licensed to the purchaser. Copy Restrictions The only copy of the software that the licensee can make is for backup purposes. Use Restrictions Licensee cannot distribute the software. Licensee cannot crack software or derive new IP from it. Assignment and Transfer Restrictions Licensee cannot sell or give the Grant of License to anyone else without SoftCo’s permission. If SoftCo does grant permission, the new licensee is bound by the original license
    24. 24. SoftCo Software License License Term Meaning Termination License is in force until terminated by SoftCo. When terminated, licensee shall destroy or return the software and media. Update Policy Reinforces SoftCo’s ownership of the software. SoftCo can change the software anytime without having to notify the licensee or granting use of the new software to the licensee. Export Law Licensee must abide by applicable export laws. Confidentiality Complex expression that tries to protect SoftCo’s IP contained within the software. Disclaimers of warranty and Liability Litigation attorney’s requirements. Releases SoftCo from ANY AND ALL CONCEIVEABLE FORMS OF HARM TO THE LICENSEE IN ALL WAYS AND FOREVER. 
    25. 25. Common Rights <ul><li>Do they have the right to: </li></ul><ul><ul><li>Upgrade to latest version? </li></ul></ul><ul><ul><li>Receive bug fixes for current version? </li></ul></ul><ul><ul><li>Refuse bug fixes for current version? </li></ul></ul><ul><ul><li>Return the software? </li></ul></ul><ul><ul><li>Move it to a different machine? </li></ul></ul><ul><ul><li>Embed your software as a component in their software and resell it? </li></ul></ul>
    26. 26. Rights, Restrictions, and Architectures <ul><li>Which of the rights presented above could require support from your architecture? </li></ul>
    27. 27. Case Study: Promising the Future <ul><li>Context </li></ul><ul><ul><li>Small supplier of key software infrastructure technology </li></ul></ul><ul><ul><li>Out-license promised to “support Mac OS 8.6 and later” </li></ul></ul><ul><li>Consequences </li></ul><ul><ul><li>Licensees demanded Mac OSX support </li></ul></ul><ul><ul><li>Company forced to spend more than $4M </li></ul></ul><ul><ul><li>Company constrained in operating freedoms </li></ul></ul><ul><li>Lesson </li></ul><ul><ul><li>License agreements must be structured in the near and long term interests of both software vendor and licensee </li></ul></ul>
    28. 28. Try This Now AND At Work… <ul><li>Refer to the License Model Summary </li></ul>
    29. 29. Enforcement Protection of Rights
    30. 30. Enforce? What Do You Mean? <ul><li>Typically one of </li></ul><ul><ul><li>Disabling some or all of the application when one or more terms of the license agreement have been violated </li></ul></ul><ul><ul><li>Capturing usage data for post-processing (e.g., to enforce pay-after-use business models) </li></ul></ul><ul><li>Key challenges include </li></ul><ul><ul><li>Detecting violation </li></ul></ul><ul><ul><li>Choosing a suitable response </li></ul></ul>
    31. 31. Motivations for License Enforcement <ul><li>Improve profitability by </li></ul><ul><ul><li>Motivating / requiring purchase of additional licenses (depending on business models) </li></ul></ul><ul><ul><li>Prevent losses due to inappropriate use or theft </li></ul></ul><ul><ul><li>Improving cross-sell / up-sell opportunities </li></ul></ul><ul><li>Improve customer satisfaction by </li></ul><ul><ul><li>Only licensing what customers use </li></ul></ul><ul><ul><li>Better matching use model with business & pricing models and/or payment mechanics </li></ul></ul>
    32. 32. Enforcement <ul><li>Honor system (contract, audits) </li></ul><ul><li>License managers </li></ul><ul><ul><li>Home-grown </li></ul></ul><ul><ul><li>Professional </li></ul></ul><ul><ul><li>Persistently protected software </li></ul></ul><ul><ul><ul><li>Injection </li></ul></ul></ul><ul><ul><ul><li>API </li></ul></ul></ul>
    33. 33. SW License Manager Basics Protect “ Server” License Manager License Generator Embedded License Manager License
    34. 34. HW License Manager Basics Protect “ Server” License Manager License Generator Embedded License Manager Strong protection: a) Software and license on key b) Must have physical token to run! License
    35. 35. SW License Manager Attacks Protect “ Server” License Manager License Generator Embedded License Manager License
    36. 36. HW License Manager Attacks Protect License Generator Embedded License Manager “ Server” License Manager License
    37. 37. Tangible Costs <ul><li>Development costs </li></ul><ul><li>Lost opportunity costs </li></ul><ul><li>Skill-set acquisition costs </li></ul><ul><li>Ongoing maintenance - TCO </li></ul>
    38. 38. Projected Total Cost over Solution Lifetime Development cost based on US Bureau of Labor Statistics mean salary for computer software engineers. Lost opportunity cost based on Software Magazine , &quot;Software 500“: Average Revenue/Employee (2007). Total cost of ownership based on Gartner Research estimate of $3.40 lifetime costs for every dollar invested in initial development.
    39. 39. Challenges with eLicensing <ul><li>Business Challenges </li></ul><ul><ul><li>Rethink the channels / partners </li></ul></ul><ul><ul><li>Revenue recognition / refunds / manufacturing (HW) </li></ul></ul><ul><li>Back office challenges </li></ul><ul><ul><li>Configuration engine for terms and conditions of license based on sale </li></ul></ul><ul><ul><li>Integration with customer service, fulfillment, ??? </li></ul></ul><ul><li>Technical challenges </li></ul><ul><ul><li>Must certify protected software </li></ul></ul><ul><ul><li>Degree of enforceability </li></ul></ul><ul><ul><li>Patch management </li></ul></ul>
    40. 40. Underlying Technology Matters <ul><li>Native object code is easiest to protect </li></ul><ul><li>Very hard to protect Java </li></ul><ul><ul><li>Replacing VM with “spoofed” VM </li></ul></ul><ul><ul><li>Replacing class loader </li></ul></ul><ul><ul><li>Replacing JAR files </li></ul></ul><ul><li>Patchwork quilt of </li></ul><ul><ul><li>vendors, platforms, protection mechanisms, integration approaches, business models, etc. </li></ul></ul>
    41. 41. Developing The License Model <ul><li>Which rights do you want to protect? Why? </li></ul><ul><li>Which terms </li></ul><ul><ul><li>support your business and pricing model? </li></ul></ul><ul><ul><li>do you want to enforce? </li></ul></ul><ul><li>What are the risks associated with breach? </li></ul>
    42. 42. Contact and Content <ul><li>Reach me at [email_address] </li></ul><ul><li>More about agile and business models </li></ul><ul><ul><li>agilePM blog and Product Bytes newsletter at http://www.Enthiosys.com/insights-tools/ </li></ul></ul><ul><li>Join us at </li></ul><ul><li>pcamp, Mountain View, Mar 15, 2008 </li></ul><ul><li>Meet us at Agile 2008, Toronto, Aug 4-8, 2008 </li></ul>

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