Micro Focus sees themselves, their products, and their market very clearly.
Only about six percent of their total revenue comes from consulting services. In fact, Micro Focus has intentionally scaled back Professional Services group to be just high-level architects and consultants. They give the remaining business (perhaps quite lucrative) to services partners, even the prime contracts to lead an entire initiative.
Micro Focus's partners range from giants (think Microsoft, Accenture, Dell, HP, and Infosys) to small boutique firms (think Partner Intelligence).
In 2004, MIT Professor Michael Cusumano wrote on the topic of software vendor business models in his book, "The Business of Software," saying that running a software firm and services firm differs greatly.
Software vendors concentrate on making and selling product, with an important financial metric being a high ratio of revenue per headcount (make as much money as possible with as few people).
For example, Micro Focus is a highly profitable software vendor with 1200 employees and annual revenue of about $450 million. Doing the math, that would come up to about $375K per person--an amazing ratio for any software vendor.
"...if it costs you roughly the same to make one copy or one million copies of a product, you would be a fool not to want to make and sell a million copies of every product you create."
On the other hand, services vendors perform labor-intensive work. Instead of focusing on selling lots of software product, services companies need lots of people and must maximize billing and utilization rates. These companies can only make as much money as they have people and hours in the day. To match the Micro Focus revenue per headcount, a services vendor would have to keep every employee fully utilized at an hourly bill rate of about $210.
Cusamano admits it is not impossible to be a "hybrid" vendor offering both products and services:
"One reason why software companies, even those with products to sell, may have high services revenues is that their technologies are often too complex to package as 'off-the-shelve' products. As a result, they sell 'solutions' that require customizations (say, 20 to 50 percent of the total amount of code) or special integration and installation work."
Micro Focus will concentrate on the software product while specialized services partners provide the rest of the "ecosystem" of the total solution. Micro Focus acknowledges that the market is too large and complex for one vendor to attempt by itself.
Of course, Micro Focus's partners do not specialize in just consulting services. One executive said that Micro Focus has about 350 relationships within their three solution areas of Mainframe technology, Distributed COBOL products, and Borland products. Many of these partners are ISVs who embed Micro Focus products into third-party software applications.
Clear Product Positioning
In addition to understanding their nature as a pure software vendor, Micro Focus also sees their product lines clearly. At one point in the Q&A session, the Micro Focus facilitator stopped the person in the audience asking a question and said, "Let me clarify, we don't do COBOL anymore. We do Visual COBOL."
This is an important point. Micro Focus understands that the market for legacy mainframe COBOL in business systems is, for all intensive purposes, gone. COBOL, of course, is the "crown jewels" for Micro Focus. That means that they are concentrating on the large "contemporary, distributed" market for Windows-based visual IDEs such as Eclipse and Microsoft's Visual Studio utilizing managed frameworks such as .NET and Java.
One such managed language that works with either .NET or Java frameworks within GUI development tools is COBOL. Micro Focus must now work hard to change the perception of COBOL as being an old language so that it gains more acceptance in the distributed application development market.
They are also working hard to provide alternatives to the mainframe platform. Micro Focus offers an entire "stack" of products:
- Enterprise Analyzer (for visually analyzing the applications)
- Enterprise Developer (Personal and Team Editions)
- Enterprise Test Server (for moving app dev workload off of the tradition mainframe platform)
- Enterprise Server (the flagship mainframe-alternative engine)
However, Micro Focus is not taking an extreme position of "just eliminate the mainframe." Rather than be a complete adversary to IBM, they can offer complementary solutions. For example, their Enterprise Test Server platform allows a mainframe customer to keep production applications and data running on the mainframe and just move application development and testing CPU cycles to a cheaper platform that mimics the mainframe.
I would not have gained this insight into Micro Focus had they not been so transparent with their partners about their business. Executives openly discussed past issues, changes in positioning, and future plans during the conference. They demonstrated tools for the partners and facilitated interactive discussions on how to best enable this partner channel through which they would provide the best services possible to their customers. They offered to provide their Sales Kickoff documentation to partners at the same time it is rolled out internally.
Frankly, I think this level of partnering with software vendors is atypical in the marketplace.
Real collaborative relationships would be impossible if Micro Focus did not see themselves first and foremost as a pure software vendor. They understand they are in the business to make and sell software products. If Micro Focus muddied the business-model waters and also tried to gain revenue from consulting services, then third-party services firms would become evil competitors instead of close allies.
Other Software Vendors, Take Notice
Micro Focus is a shining example to other vendors on how to build a partner ecosystem where the software firm works together with external companies to sell and deliver a complete technical solution in order to thrill customers.
Note: as an example of how competing with your partners is a bad idea, see this article on Oracle's poor performance trying to sell its Sun hardware.