Software industry: moving from products to services

I found this very interesting article on the eBusiness page at MIT

(http://ebusiness.mit.edu/) with pretty important considerations for businesses in the area of software, considering the movement of industry from products to services. The article "The Changing Software Business: From Products to Services and Other New Business Models" is from 2008, but the subject is very current.

Some points that caught my attention.

1. Revenue from services and maintenance is greater than the sale of products. See below Oracle as an example.

2. Historically, industries start paying attention to how to develop an innovative product. Once given the innovative product the next step is how to produce it in mass. The same happened with the software industry, starting with the creation of products (operating systems and databases), through software engineering, culminating with the software factories and the maturity models.

3. Now another aspect affects the software industry, moving beyond product and process: we now have the innovation in services.

4. The sale of services is growing faster than the software, perhaps because the price of the software or customer declined and competition increased.

5.There is also the transition from designing products to a customer group and pass to build products and services personalized for each client.

6. According to the article, services contribute positively to reach 20% of total revenue. After this point the result will be positive only when it reaches 60% of total revenues, when services will again have a positive effect. The explanation for these figures is that usually companies use 20% of the price of their products for simple maintenance contracts. However, when companies sell more services such as customized product and a complex integration work, training and consulting, these activities consume more resources and reduce revenue unti the company gain scale and experience to perform these services efficiently, and then the money begins to return again.

7. From products to services can be bad news for many IT companies in the service area. For example, IBM Global Services and Accenture, are historically partner companies with SAP and Oracle. But if services represent "money on the table", the partner companies are now competing with each other for services.

8. The challenges for software companies are:

a) What is the best mix of products, services and maintenance and the percentages of each.

b) How to create a line of services from their products.

c) How to turn your services into products in order to carry out services effectively. This may mean automation of services.

Read more in the full article available on the link below:

http://ebusiness.mit.edu/research/papers/236_Cusumano_Changing_Software_Business.pdf