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11/16/2005
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The Myth of the Service Economy

Customers come last when software companies play the M&A game.

Joshua Greenbaum

One of the great benefits of having a spouse who's not in the IT field is that she can provide me with that outside perspective that we analysts pridefully think is ours alone. So when I tried to explain to my wife why a hostile takeover of a software company was so paradigm-busting — software is a service industry, which means it's about customers and people, not hard assets that can benefit from the dispassionate calculus of economic rationalization — she scoffed politely and asked why software should be different from any other service industry.

Indeed. Take health insurance companies, or airlines, or phone companies, cable companies or banks, she suggested. Certainly every one of them wants you to believe that "your call is important to us" and that "customers are our greatest asset." But the reality of consumer service industries is that disservice is all too often the norm, and customer disdain is the coin of the realm. And, if my dear wife is right, that is what's happening behind the scenes in the software industry as well.

What's interesting is how much we've mythologized service industries to be more about service than industry, and more about customers than what all publicly traded companies know to be their real raison d'etre: shareholder value. No more so than in the software industry. While many companies pay lip service to customer service, they engage in behavior that practically begs the customer to hightail it off to another vendor. We've all seen this in hyperaggressive sales tactics, extremely unfavorable contract terms and conditions, and downright poor technical support, to put it mildly.

The secret to getting away with this nonsense is lock-in: Usually you have only one choice of health-care provider — if you have any at all — and your choices of airline, cable and phone companies can generally be counted on one or two fingers at best.

In software, historically, the lock-in either came from monopoly or switching costs. Even if you had the choice of firing your vendor and taking on a competitor, you usually were forced to pay dearly for the luxury of conversion. Now the lock-in looks even more insidious: With the larger vendors peddling both infrastructure and applications, you're even more tightly locked in, and, due to industry consolidation, your alternatives, which once numbered in the dozens, have most likely dwindled to one or two.

I don't know many airline, phone company, cable company or health-care provider executives personally, but I do know a lot of software executives. And it's notable how few of them are really out to screw their customers. Make a profit, yes. Get the best prices they can, usually. Do almost anything to win a deal, pretty often. But do wrong by their customers? I don't know anyone who thinks the road to success is paved with the invoices of unhappy customers.

Of course, no one in banking, insurance, the airlines, phone or cable companies would confess to such lapses in compassion, either.

The problem is that actions speak louder than words. It's pretty obvious, judging from the fallout from Oracle's PeopleSoft acquisition, and the intense reader response to my October column on how customers hate their vendors, that customer dissatisfaction is a real problem in the software world. In fact, I would argue that the real paradigm-busting aspect of the Oracle-PeopleSoft deal was that it exposed to broad daylight how little customers' best interests are part of the merger and acquisition game.

Okay, so Oracle has taken great pains to make nice to its new charges, but the economics of the deal were as coolly calculated as any M&A in a nonservice industry: pool the assets, squeeze out costs and find the product synergies. To say this merger, or many of the other mergers that seem to take place daily in the software industry, was done with customers in mind — other than to squeeze more revenue from them — is to be ignorant to the point of folly.

So maybe we should tip our hats to Larry Ellison yet again, for demythologizing the software industry and bringing the cold, hard light of truth to bear on our reasoning. The software industry as a whole has a long way to go to truly distinguish itself from the rest of the disservice industries. At least it's good to know that the bar is set so low.

Joshua Greenbaum is a principal at Enterprise Applications Consulting and has been covering the software industry for more than 20 years. Write to him at josh@eaconsult.com.

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