Handicapping the enterprise software vendor CEOs
- Changes in leadership at enterprise software companies are not rare events but they can trigger issues in your relationship with the vendor. Here's our guide on what to look for.
If typical, your firm is using application software from dozens of firms. Some are recent additions to your software portfolio and some, like family, have been around many years. Yet, when the leader of the software company changes, it can trigger a number of changes that alter your business/technology relationship. How will a new CEO at your favorite vendor affect things?
Why the CEO choice matters to software buyers
Most companies hold onto application software 8-10 years with many applications in use up to 20 years or so. Your firm has a vested interest in seeing a software product line:
- Receiving a continuous and uninterrupted flow of upgrades and enhancements
- Remain market relevant during the entirety of its useful life
If your firm just signed up with a vendor and now that vendor’s leadership is changing, that could upend the relationship you thought you were going to have with the company. However, if your firm’s use of the software has been long-lived and is nearing its end-of-life, then a change in leadership is rarely an issue.
What follows is my assessment built up over more than 30 years observing enterprise software copmanies as implementer, consultant and advisor to buyers and, on occasion, software vendors. Your experience may be different.
The different kinds of software CEOs
New enterprise software CEOs pop up all the time. They’re like the dandelions in a lawn. They keep showing up no matter how often you weed. But one thing they’re not: they’re all not the same.
This year has seen a new crop of software CEOs emerge. Some will be successful depending on your criteria for success and some less so. Here are my shorthand descriptions of software CEOs you might meet. But be careful, some CEOs are better choices for shareholders, some are better for customers and some are just out for themselves.
Founder – Charismatic - This is the CEO that everyone loves. They’re often a visionary and no one misses their conference keynotes. This executive is most like the late Steve Jobs.
Key vulnerability/kryptonite: While these leaders can be inspiring, Wall Street, unfortunately, loves financial results. A great story sometimes won’t stop the activist shareholders, hedge funds, etc. from attacking.
Founder – Technical – This is the CEO that gearheads love. This CEO records his/her expense report in hexadecimal. Everybody wants this person’s ideas on their next-gen platform.
Key vulnerability/kryptonite: These folks are so technically brilliant and exacting in their thinking that they often can’t wrap their heads around the sales process or relate to sales professionals. While they can develop great products, they might not stay long enough to see the market embrace them.
Serial entrepreneur – Venture capitalists love this executive as he/she has already launched and taken public or successfully exited from 2-3 other firms. This executive knows exactly who to bring on board their team for the next big idea and when to do so. Unfortunately, VCs won’t get much love from this executive as the serial entrepreneur can self-fund their new company. This executive wants no dilution prior to IPO.
Key vulnerability/kryptonite: Inertia – After you’ve made your first $100 million or billion, would you want to do all that work again? Or, would you rather buy an island and retire? Just because an entrepreneur struck gold once doesn’t guarantee they can do it repeatedly. There comes a time when all serial entrepreneurs will take their profits off the table.
Big chair coveter – This is an executive that has worked for 3-4 technology companies but has yet to get beyond the Executive Vice President level. They really want the CEO chair because anything else means their career is over.
The problem with the coveter is that there may be a legitimate reason why no other employer would give them that job. Often I’ve seen coveters being CFOs, VP Sales or Chief Operating Officers.
Key vulnerability/kryptonite: While their desire for this position is not disputed, these executives may not be the well-rounded, strategic thinking people they need to be. Some of them can also be as inspiring or visionary as last week's cooked turnip.
Sales driven CEO – There are some executives that think that any problem can be solved by goosing this month’s sales and cutting costs. All you need is to whack a lot of headcount in back-office functions and R&D while using those savings to offer an even better collection of sales incentives, spiffs, etc.
The Salesy CEO thinks short-term means close of business today and long-term is month-end. Their myopia prevents them from seeing or getting anything long-term. Worse, they’ll say anything to a prospect to close a deal and leave it to their replacement to make things right.
Key vulnerability/kryptonite: This executive quickly becomes vulnerable as technology, trends and strategic vision are NOT their long suit. Every day that they are in the job is another day competitors are out-innovating them. The big ‘tell’ from these CEOs is how often and how vigorously they defend their lack of competitive differentiation and innovation with phrases like:
- “We’re giving customers the choice (to fall further behind technically)”
- “When I speak with our (most laggardly) customers, they tell me that they don’t want any (new) disruptive innovation”
Transactional CEO – This CEO is brought in for one reason only: to trigger a liquidity event. This CEO will pursue one of the following courses:
- Take the company public
- Raise a major capital round
- Seek an acquirer for the firm
- Roll this firm and one or more other firms together
- Sell off ‘non-core’ parts of the business
The transactional CEO isn’t really there to develop a long-term vision for the products or to recruit new talent into the firm. And, they really don’t care about interacting with existing customers as none of those will help them get the deal done. This short-termer is here for the deal and then they’re gone. That’s why their compensation package is so deal results focused.
Key vulnerability/kryptonite: Sometimes these executives take the assignment before they realize how impossible the gig really is. It turns out that some broken companies can’t be tarted up and flipped fast. These broken firms are like the house that costs a flipper a fortune to repair and then is no longer profitable.
PE Executive – Private equity firms often have a bench full of executives they can drop into a portfolio company. But make no mistake, these people work for and at the pleasure of their private equity taskmasters. Depending on the PE firm, they may push the executive to do one or more of the following:
- Asset strip, identifying and then sell off non-core parts of the software company to help repay some of the monies the PE firm paid for the company. At the extreme, the worst assets are sold off to third parties while the PE firm keeps the cash cows.
- Load up the company with debt. PE firms hate to use their own money to do a deal. As soon as the deal is done, the PE firm saddles the acquired entity with a mountain of debt. Servicing the debt - not customers or prospects - becomes the new CEO’s job.
- Acquire similar firms to create a roll-up firm. Then, after a period of rationalizing the deals, package it all up and take it public.
- Grow the company organically. This only works when a PE firm acquires a software company whose products have runway in front of them.
- Milk the customer base for every penny in maintenance revenues and license shortfalls discovered during aggressive customer audits.
Key vulnerability/kryptonite: The PE executive is not a technology visionary. They’re a finance person. They won’t inspire the users at the next user conference. They see dollars and cents not long-term technology trends.
Turnaround Artiste – These are as rare as a cheap apartment in Silicon Valley or Manhattan. It is extremely rare to find a tech company that was launched, grew up, had its day in the sun and then went into its geriatric stage only to do it all over again. Phoenix stories are as scarce as hen’s teeth and few executives could ever claim credit for one of these turnarounds.
Key vulnerability/kryptonite: While some well-meaning executives sign-up for these adventures, the odds are often stacked against them. Hubris may guide some of them into these deals in that they genuinely believe they can do the turnaround. However, the turnaround will often require capital and time that neither Wall Street nor other investors will give this executive. Before the turnaround CEO can even get started, a major investor will just want to sell the carcass off and shut it down.
Inorganic Grower – Some CEOs love to do M&A deals. They’ve never met an investment banker that they didn’t want to talk to. The CEOs who love this stuff may have had a stint in an investment banking, venture capital or private equity firm somewhere on their resume. Dealmaking is in their blood. It’s what they do.
Key vulnerability/kryptonite: Buying companies is often the easy part. It’s the integrating them into the software and/or the company that’s often tough. Some products have to be completely re-written to fit in. Sometimes the best talent within the acquired firm bolts just as a deal is announced, thus rendering the acquisition an expensive but useless event.
Consumer Systems CEO – This is a CEO who comes from outside the enterprise software space. The thought in this executive placement is that the company will benefit from new perspectives that the CEO will bring. Instead of “When Harry met Sally”, it’s “When Enterprise met Consumer.” Software pricing, user interfaces, etc. get altered in this scenario.
Key vulnerability/kryptonite: The enterprise software space is not simple. It’s full of nuance and it’s different from consumer electronics, consumer software and B-2-C businesses. It also takes time to learn – more time than some CEOs get the opportunity to learn.
Self-Serving CEO - This is the CEO who takes stock options that should go to employees and keeps them for him/herself. This is the same executive that cuts him/herself in for a huge golden parachute for simply selling the company they just got installed into. Nothing about this executive is done for shareholders or customers, it’s all about how this helps the bank account of the executive.
Key vulnerability/kryptonite: At some point, this executive usually over-reaches at the cookie jar. However, their attention to their employment agreement means that even when they get fired, they’ll still make out just fine.
The Change CEO – Sometimes a company needs to make a major shift. Show me a company that’s still peddling a lot of on-premises software and I’ll show you a firm that’s going to boot the CEO and bring in a cloud-purist. The Change CEO gets the job because they convince the board that not only is a major shift needed but that they have the vision, team and more to make it happen.
Key vulnerability/kryptonite: The career of the Change CEO is on the line in these deals. Everything is on his/her shoulders. If they don’t bring in the right team and make sure they can make the money last during the transition, then their career could be over. But, if they get it right, they’ll stand to make a fortune as will the company.
The self-interested and short-term focused CEOs are often the most problematic for software users. These executives often focus on the immediate financial results of the company while putting off or neglecting the company’s need to innovate.
Aligning a CEO’s compensation to the achievement of financial results is easy but it’s a different story when you want a software CEO to:
- Develop material innovations in a timeframe that beats, not lags, similar moves by competitors
- Create new innovations/process designs/etc. that are novel in the market
- Provide product strategies that advance the company and its customers’ competitive position
- Help customers not just reduce their solution TCO but offer opportunities to deliver real, material ROI
Advice to buyers
What should you do to protect your firm?
- Never sign a software contract without material change of control language added to it. Remember, change of control can mean more than ownership changes. It can also mean the appearance of new executives.
- Establish a legal remedy should something happen within a year or two of your implementation.
- Never let your firm get so locked in with a vendor that you can’t seek true love elsewhere. While that’s a nuclear option, use it when it’s warranted. It’s the only thing some new CEOs understand….
- When you’re in the market for new software, make meeting the software CEO a part of your due diligence. You and your colleagues might be amazed at what you’ll notice.
- Don’t get snowed by the smooth-talking, firm handshaking CEO that’s always on-message and promising the moon. That’s a salesman in CEO’s clothing. They’ll say anything to get your business. You’re better off with a CEO that tells you the truth whether some of it isn’t what you want to hear.
I’ve met lots of software CEOs in my career including several all-new ones this spring. I worry for the customers of some of these firms when I can tell that the executive:
- Lacks vision
- Is overly focused on financial matters
- Is tethered to a major investor
- Is transaction oriented
- Is in it for him/herself
Thankfully, there are software CEOs that can balance the needs/wants of customers and investors. These leaders are in it for the long-haul and work to create value. I like these executives and customers usually do, too.