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Tech Industry

Inside the new "In Company"

The Web has pushed traditional companies to scrap much of their internal information technology departments and turn to "outsourcers" for their technology and development needs. But this new breed of "outsourcers" varies significantly from past IT outsourcing companies.

The Web has pushed traditional companies to scrap much of their internal information technology departments and turn to "outsourcers" for their technology and development needs (See related column.) But this new breed of "outsourcers" varies significantly from past IT outsourcing companies. These new companies, what I call "In Companies," are actually the next generation of enterprise software companies.

In Companies have a significantly different business model than traditional enterprise software providers. The traditional software business, for example, depends heavily on selling software licenses, whereas In Companies blend a significant amount of services (both professional and Web-based) into the mix of providing software. This blend not only provides Out Companies with the services they need to "Webify" significant portions of their businesses, but it could make revenues for these new In Companies less volatile and more predictable over time than those of their traditional software-selling counterparts.

Unlike enterprise software companies of old, the new In Company isn't overly dependent on a big, one-time fee. One of the most difficult components of the enterprise software business model has been the lack of visibility and predictability of the sales pipeline. The result of seeking to close a large deal in the form of a big, one-time fee (with less revenue coming from future upgrades) creates a tremendous amount of pressure and uncertainty. In fact, customer pipelines for enterprise software companies provide a false sense of security: Customer pipelines may isolate potential sales targets, but cannot account for variance based on unpredictable buying habits, creating high levels of revenue-fluctuation--commonly referred to as "seasonality" in trade vernacular. Believe it or not, it is typical for enterprise software companies to book over 70 percent of their revenues during the last two weeks of a given quarter. (In certain cases, as much as 33 percent of revenues have been booked in the last 24 hours of a quarter! )

In Companies sell software as a service, thus collecting revenue through a subscription-based business model. Out Companies, on the other hand, are more willing to subscribe to a service than to buy a product. To begin with, subscriptions are smaller increments invested over a longer period of time, rather than straight-out purchases Additionally, subscriptions provide a greater sense of mobility, of being able to move on if the service subscribed to isn't proving to be worthwhile. It's important to remember, however, that while subscriptions provide the perception of mobility, they are, in fact, not necessarily easier to cancel. The level of knowledge and customization that is invested by the customer throughout the life of the subscription serves as incentive not to cancel.

Furthermore, subscriptions provide a more constant revenue stream, as well as the ability to defer a significant amount of revenue over the life of the subscription. By providing a more significant amount of professional services and customization work, there are other, ancillary revenue streams that contribute to overall revenues. This can help protect these companies from seasonal weakness.