Tom Rowe submitted an extensive comment to my “Yearly Rant” post. After agreeing with my basic points, he advances a different argument that runs like this: well, software companies have to make money somehow if they are going to stay in business, so what else should they do? This classic argument raises two issues: (1) what is the role of consultants vis a vis their clients; and (2) is the “they have to make money somehow” argument really true?
What is a Consultant, Anyway?
It has always been my view that the role of a consultant is to represent the best interests of his or her client, just as lawyers are supposed to represent the best interests of their clients. Of course, a consultant’s view of “best interests” may not always coincide with the client’s view, but that is another matter.
LexisNexis in particular has always had a different view of its “independent” consultants. Every since the Time Matters/PCLaw etc. series of acquisitions, LN has tried to remake consultants as part of its sales/marketing arm. This view sees the job of a consultant as representing the interests of LexisNexis. At bottom, this transforms “independent” consultants into what are known in Las Vegas as shills – people who appear to be independent players but who is fact are using casino money.
A consultant does of course sometimes have to walk a fine line between keeping his vendor happy and keeping his client happy, but for me, I view my primary job as protecting the interests of my clients. And one of the ways I can do that is by encouraging vendors to make the best product possible, not simply to maximize their profits.
Is It True?
Tom says: “None of the companies you discuss are or were (prior to acquisition) sitting around living the high life, rolling in the money.” As a former VP of Time Matters, he is obviously in a much better position to assess this than I am.
However, it should be noted that the accepted profit margins in various industries differ widely. Thus Microsoft’s profit margin on Windows/Office hovers around 85% (I think that constitutes “rolling in the money”). On the other hand, margins for computer hardware are notoriously very slim - a couple of percent at best. Similarly, food chain margins are very slim. You also have to consider the time frame for “profit margins.” Japanese companies notoriously have a long-term time frame (years) whereas American companies are focused on short-term quarterly results.
One has to suppose that the various acquired companies were in fact minimally profitable (although there could have been other reasons for acquisition, to buy a technology or share of the legal market, for example). It is fairly well known, for example, that PCLaw was very profitable and that the Tech Support department of PCLaw was a major profit center (very unusual among software companies). Perhaps more to the point, companies that are still independent, such as Tabs/Practice Master or Worldox, seem to be doing rather well. PCLaw, Tabs and Worldox all had a model in common: annual Tech Support was about 20-25% of the purchase price and there were no “upgrade” fees – all upgrades came with maintenance. So obviously this price structure can be a profitable model. When the annual maintenance fees climb to 40% of the purchase price or more (as with LexisNexis), then the company is either very inefficient or gouging its customers or both.
So on balance, I’m not sure I buy Tom’s argument that “well, they have to make money somehow.”
What is a Consultant, Anyway?
It has always been my view that the role of a consultant is to represent the best interests of his or her client, just as lawyers are supposed to represent the best interests of their clients. Of course, a consultant’s view of “best interests” may not always coincide with the client’s view, but that is another matter.
LexisNexis in particular has always had a different view of its “independent” consultants. Every since the Time Matters/PCLaw etc. series of acquisitions, LN has tried to remake consultants as part of its sales/marketing arm. This view sees the job of a consultant as representing the interests of LexisNexis. At bottom, this transforms “independent” consultants into what are known in Las Vegas as shills – people who appear to be independent players but who is fact are using casino money.
A consultant does of course sometimes have to walk a fine line between keeping his vendor happy and keeping his client happy, but for me, I view my primary job as protecting the interests of my clients. And one of the ways I can do that is by encouraging vendors to make the best product possible, not simply to maximize their profits.
Is It True?
Tom says: “None of the companies you discuss are or were (prior to acquisition) sitting around living the high life, rolling in the money.” As a former VP of Time Matters, he is obviously in a much better position to assess this than I am.
However, it should be noted that the accepted profit margins in various industries differ widely. Thus Microsoft’s profit margin on Windows/Office hovers around 85% (I think that constitutes “rolling in the money”). On the other hand, margins for computer hardware are notoriously very slim - a couple of percent at best. Similarly, food chain margins are very slim. You also have to consider the time frame for “profit margins.” Japanese companies notoriously have a long-term time frame (years) whereas American companies are focused on short-term quarterly results.
One has to suppose that the various acquired companies were in fact minimally profitable (although there could have been other reasons for acquisition, to buy a technology or share of the legal market, for example). It is fairly well known, for example, that PCLaw was very profitable and that the Tech Support department of PCLaw was a major profit center (very unusual among software companies). Perhaps more to the point, companies that are still independent, such as Tabs/Practice Master or Worldox, seem to be doing rather well. PCLaw, Tabs and Worldox all had a model in common: annual Tech Support was about 20-25% of the purchase price and there were no “upgrade” fees – all upgrades came with maintenance. So obviously this price structure can be a profitable model. When the annual maintenance fees climb to 40% of the purchase price or more (as with LexisNexis), then the company is either very inefficient or gouging its customers or both.
So on balance, I’m not sure I buy Tom’s argument that “well, they have to make money somehow.”
I don't understand you statement that you don't buy my argument that "well, they have to make money somehow?" That's an inarguable statement. Any business has to make money in order to stay in business. If they don't, they go out of business. As I stated in my comment, that's not good for the business or its customers. That is why "free" often is anything but free. It is why most lawyers understand that a deal that is too good for their client, might well turn out to be quite bad in the end. I certainly don't defend LN's performance over the past 4 years - it has been insufficient on any number of fronts. But, I can't argue with their decision to move to a subscription model. For a mature software product it makes the most sense for them and their end users - and, as you point out, has been the model for many of the other popular legal specific products in the market.
As to your:
"PCLaw, Tabs and Worldox all had a model in common: annual Tech Support was about 20-25% of the purchase price and there were no “upgrade” fees – all upgrades came with maintenance. So obviously this price structure can be a profitable model. When the annual maintenance fees climb to 40% of the purchase price or more (as with LexisNexis), then the company is either very inefficient or gouging its customers or both."
You seem to agree the AMP model that LexisNexis has announced is a viable model, and I agree. Your objection seems to be the cost. Your numbers are high -- under the newly announced Time Matters AMP the cost will be somewhere between around 29%-37% of the purchase price, depending on license count. But I do agree with you that those numbers are still high compared to other industry standards where the 20-25% yuo mention is more the norm. With the switch to all SQL, development issues that we saw in TM8 and some in TM9 being resolved, and tech support getting more under control, perhaps those numbers will come down in future years.
Posted by: Tom Rowe | February 05, 2010 at 03:41 PM