ENTERPRISE OEM SOFTWARE LICENSING — THE SELL SIDE (PART II)
This is the second article in this three part series that focuses on the advantages of licensing OEM software. Included in this series are two additional write-ups with different perspectives:
Enterprise OEM Software Licensing — A Primer (Part I)
Enterprise OEM Software Licensing — The Sell Side (Part III)
Buy vs. Build
The first analysis done by a potential licensee when deciding to integrate third-party software into its application is the buy vs. build analysis. The licensee must weigh the cost of licensing against the advantages. Here are some benefits on the buy-side of the equation:
Speed to Market: Licensing software compared with building from scratch can shave years off internal development and testing. Buying from an OEM licensee can enable the license to get to market with new functionality within a matter of months. Speed to market is essential in the fast-paced enterprise software market where opportunities will be missed if you do not move quickly enough.
Competitive Advantage: A licensee can provide new or enhanced functionality to the market to differentiate and get ahead of its competition. Or in the event where the competition is ahead, licensing third-part software allows the license to catch up quickly with the competition to minimize lost business.
Increased Revenue: The result of gaining a competitive advantage help win more deals hence generate more revenue. The company needs to predict how much revenue might be lost if the company decides to develop internally or, on the flip side, how much revenue will be gained by getting to market quickly.
Best of Breed / Quality: The OEM provider being considered is usually a specialist in their specific type of software or vertical. Years of investment and R&D can be leveraged by the licensee, thereby bringing “best of breed” functionality to their end-customers. Even if a licensee can develop something internally and get to market quickly — the licensee must consider how the quality will compare with the third-party software they are evaluating.
e.g., a company that focuses on developing databases might not have the NLP expertise internally to develop a high-quality conversational interface for their customers.
Marketing Value: If the OEM partner is known in the market for its quality and expertise in a specific area, promoting that brand within a company’s application can be very beneficial from a marketing perspective. This tactic can be incredibly valuable when a company is trying to break into a new vertical in which its OEM partner has already established credibility and brand awareness.
Cost Savings: Lower Total Cost of Ownership (TCO) is a significant variable in the decision-making process. License costs for the OEM can be considerable. They can harm profit margins, but the costs incurred for development, testing, and implementation can be significantly more than the license costs over the long term.
Core competency focus: Another factor to consider is the opportunity cost of taking resources away from other development projects. Even if the cost of building in-house is less than licensing, the licensee needs to consider the opportunity cost of having their engineering teams focus on a piece of technology that may not be foundational to their core mission. By licensing particular technologies outside their core competencies, a company can keep its engineering and R&D focused on the continued development of its highest value “secret sauce” and uniqueness in the market.
Less Risk: Since the licensee can test the software in advance, the OEM software is a known quantity, and the risk can be minimized. The yet to be developed internal solution is an unknown quantity with an estimated timeline that might not be realized.
There are many advantages to being on the buy-side of an OEM arrangement, as outlined above. However, engaging in any partnership has its associated risks, especially when relying on a third-party technology that will be embedded in your core offering. This next section will review factors to take into consideration as you go through your due diligence process.
Choosing an OEM partner
An OEM partnership is much more complex than a direct vendor-customer relationship. A successful partnership requires a deep commitment by both parties to ensure success. In addition to evaluating the technology itself, many other factors should be considered in your decision-making process. Here is a checklist to review when you are going through your due diligence process, assessing your OEM a partner, and designing the relationship’s structure.
Value of the Combined Solution: As you are negotiating your contract with your OEM partner, you need to have a clear estimation of the increased value of the combined solution, ideally in quantifiable terms, by creating estimations and projections. How much value does the additional functionality, feature, or enhancement have to your existing software offering? Is it an additional 2%, 5%, 10% of value? What impact will it have on your sales over the next year, two years, three years? Having quantified estimations will guide you in determining the correct pricing and structure of the agreement.
e.g., Depending on your customer mix, certain customer types may place more value than other customers on the enhancement to your product. As a buyer, you need to normalize this value across your entire customer base, especially if you are rolling out the OEM software as a default for all customers.
Customer Demand: If you are considering an OEM relationship, you are likely already seeing demand in the marketplace or anticipating demand in the market for the added value the OEM software provides. The best way to assess demand is to create a demo that you can share with your customers and get direct feedback. This exercise will also guide you in your implementation design and go to market strategy. The feedback program should be done in a formal and consistent way across a diverse set of customers.
OEM Success Alignment: The OEM partner should be aligned with your success, meaning the more product you sell, the better they benefit financially. Having an OEM vested in your success is critical because you will need your OEM partner to be flexible and adapt to your needs as you move forward. Although your due diligence and planning will be thorough, you will most likely encounter unanticipated requirements that will require collaborative development and support from your OEM partner once you get to market.
Deployment & Integration: An important variable estimated in your buy vs. build decision is how much effort and resources will be needed for deployment and integration. API ease of use and flexibility will be vital as you make continued adaptations through your product development and release cycles. Depending on your GTM strategy, you may have different deployment models for your customers. If this is the case, your ideal OEM partner will support various deployment models; multi-tenant, single-tenant, hosting on your servers, and potentially your customers’ servers (On-Premise).
OEM Support: The support required for an OEM licensee versus a direct customer is much more intensive and requires different skill sets. It is essential to evaluate your OEM partner from this viewpoint. The partner must have OEM support programs in place. When contracting, you will need to define who is responsible for each aspect of DevOps tightly. If you have unique support requirements regarding security, scalability, and performance, they should be outlined in your agreement.
Beyond what is in the contract, support from an OEM requires strong relationships at different levels within the OEMs organization. At times you may need direct communication and collaboration with the OEMs development and product management teams, so it is good to ask for access to these teams during your due diligence and build the needed relationships upfront.
Expertise and Knowledge Transfer: Your company will need to become experts in the licensed software from an engineering, customer experience, sales, and marketing perspective. Your partner should be open and willing to share expertise and knowledge through both structured training programs and ad-hoc training as needed. It is advisable to have an upfront plan to implement knowledge transfer between companies.
Cultural Alignment: This cannot be quantified and cannot be captured in a legal contract, but the concept is essential to a healthy and successful partnership in an ever-shifting market with evolving technology. Through the technical evaluation and business negotiation process, you will learn a lot about your potential OEM partner. Do your engineering teams work well together? How responsive are they to your questions? Do the people you are working with on the business side understand your business? What is the flexibility level with engineering and business? A strong foundation for success can be built by establishing strong working relationships within the OEMs organization at various levels, product management, engineering, sales, and marketing.
Executive Sponsorship: In creating alignment with your partner, you should require direct contact at the executive level so you can develop an executive sponsor at your OEM. This way, you know your company is getting visibility at the executive level, and you will always have someone to call if some part of the partnership needs to be addressed at a management level.
If you would like to learn more about Enterprise OEM Software Licensing, two additional articles are included in this series, one preceding and one following this one.
Enterprise OEM Software Licensing — A Primer (Part I)
Enterprise OEM Software Licensing — The Sell Side (Part III)
About the author
Thank you for reading my articles. I have a passion for creating business value by connecting the right technology, people, and companies together. Working in the software industry and living in the Bay Area over the past many years has given me the opportunity to close 200+ OEM license transactions. I have had the privilege of working with many brilliant and talented people at large enterprises such as Google, Microsoft, Apple, Amazon, and Salesforce, as well as many exciting startups. Whether you are on the buy-side or sell-side of an OEM initiative, I would be more than happy to share my experience and ideas with you. Please feel free to contact me via my open LinkedIn profile.
Andrew Paulsen / M: 415.269.7350
https://www.linkedin.com/in/andrewpaulsen/
