How To Monetize PLM?

How To Monetize PLM?

Almost a year ago, I raised the question asking if free is going to be the future of PLM? You can take a look on this discussion here. Additional discussions related to the “free” topic also happened. However, most of them were related to the notion of Open Source PLM. Nevertheless, today, I’d like to get back to this topic in the strict FREE context.

Before talking about PLM, I’d like to take you back into 19th century when two French economists – Cournot and Bertrand built models of the competitive world. They basically came to the opposite conclusions. According to Cournet, companies need to keep production lower in order to keep price high and not going to drop prices to the marginal level. According to Bertrand, model was opposite and in short assumed that manufacturers need raise production to get additional market share by taking down the product price. The second theory got back to us in today’s digital economic.

Let’s get back to PDM/PLM world. My hunch is that high prices and low profit are very typical for this space. Companies are competing with products having similar functionality (just compare portfolios of leading PLM vendors) and “successfully” driving prices and margins down more and more. At the same time, “user’s adoption” becomes a very critical topic in PDM/PLM space. In the situation when PLM products introduce more and more issues, customers are looking more and more on the alternatives (i.e. non-PLM software like Excel or emerging vendors providing open source or on-demand products).

So, what can be a solution to resolve this dead-lock? In my view, the ultimate solution can be taking price down to the ZERO level. By making basic PLM/PDM functionality free, we can expect improved user adoption and growing market share. Associated with this, quality of the software will be improved due to massive implementations for the huge amount of new customers. Now, you will ask me when PDM/PLM vendors will take money to do such action? I have few potential answers and will be interested to discuss what do you think about such options:

1. Selling support contracts and services

2. Selling online storage, traffic

3. Selling premium functionality

4. Selling information about organization work for the future improvement

Actually, I see, some of these processes already started to happen. The massive introduction of PDM functionality bundled with CAD is sort of trying to “sell for free”. There is a significant interest to model of Free Licenses etc.

Just my thoughts… What do you think about that?

Best, Oleg

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  • Isn’t that the industrial open source business model which RedHat and similar type of companies tryining to grow? Recenlty I read an article saying only RedHat makes some profit out of this busisness by enhancing, deploying and maintaining open source software. This is in general a service / software business where the profit will always be difficult.

  • Tomas, Yes, What RedHat is doing is one of the options. Aras is trying to replicate it with some changes and improvements that specific for PLM space. However, I think, in order to be more successful reach need to be much bigger than today… Best, Oleg

  • Oleg,

    I don’t think it is realistic to expect current established vendors to follow this model but it is certainly possible for newcomers to attempt a strategy like this for differentiation. But if you look at software products across the board most vendors balk at free offerings and there aren’t any successful examples I can think of in this area. Web browsers, email and a few others come to mind but none of those compares in scope with PLM. The key for PLM are the services needed to implement it. Most PLM products require a significant service component of which partners reap a large benefit. The vendor themselves really wants the software revenue. I am sure you are aware of all this but I think this dynamic would preclude free PLM software of any reasonable quality for the time being since any service company could step in and siphon the service revenue away. This would be a signifcant disincentive for a vendor to develop free software with the vision of recouping the monies via service and implementation work. I also don’t think maintenance and support revenue would be sufficient either. The closest model I can think of to what you suggest would be something like Sugar CRM where they offer a free version but the real capabilities are saved for a “professional” version that has a cost associated with it. This might work for start ups and smaller companies but I can’t ever imagine a Raytheon or John Deere using a free PLM software.

  • Andy

    Oleg,

    As you know, that model already exists in the PLM world with Aras. I work at a Fortune 500 company where we use Aras Innovator as the basis for our internal PLM activities. We do not see any reason to pay for PLM licenses anymore as the Aras tool set does everything we need.

    I understand that many CIOs are afraid of moving to this model but that doesn’t mean that it doesn’t work. If they want to keep wasting their money on “big box” solutions that don’t work any better than the Aras solution then they’re free to do so. Someday they’ll wake up and smell the future.

  • Stephen, You are right at the current status-quo. However, looking on current trends in the enterprise and internet business, my prediction that current status won’t be able to survive. As much as marginal cost of information systems across the board will go down, PLM won’t be able to survive in the way it is today. Lots of “collaboration” capabilities become a commodity and their cost will be going down. You can see, for the moment, lots of trial to have cheaper and easier to implement ERP systems. It is not coming to PLM yet, but with today’s combination of high price and very low market share, I bet the right answer will be to put price down and raise market share. I don’t think price is the only issue here. There are many others – technologies, need to “implement-for-customer”, high %% of services. In my view, market will go to 1/more specialized cases (may be founded on top of FOSS) and relatively cheap (or even free) collaborative-product-data management foundation. Still have time to think about that, but not as much as many people see it… Best, Oleg

  • Andy, Model of Aras may work for big companies (may be Fortune 500), that have capabilities to keep all services and implementation ‘in-the-house’. However, this is not a model that can raise market-share. Aras need somehow to get $$$ and companies, like you, probably is not the best option if you are not planning to pay services and maintenance money to Aras. When I see obvious advantages of Aras, I still cannot see how this model becomes sustainable for long run. Thanks for you comments, as usual great! Best, Oleg

  • The last couple of months I read more and more about Aras. I think they have a good marketing manager.

    I keep thinking about where this Business Model is based on. They work with a lot of partners who also wants there share. This means at the end more and more people wants a piece of the cake.

    If I look at a PLM Implementation, licenses is not the only thing. I think it is a small part of the total investment.

    If Companies like Aras do not survive, what are these Big Companies going to do with there PLM System.

    The independent PLM Companies like Matrix-One and Agile couldn’t survive and there business Model was based on Licenses, Maintenance and Services.

    I think that the Business Model of a Company like Aras is more based on getting Market Share and at the end Big Companies like Microsoft will buy them.

    I, as an independent consultant, asked some of my Customers if they would like to put Aras on there short list. All of them are afraid to do this.

    Perhaps it will take some time before Companies are used to this kind of Business Model.

    Regards,

    Menk Slot

  • Menk, Yes, in my view, Aras business model is focused on market share first. However, they need to survive. Companies like Microsoft can acquire them to gain more market share, but I don’t think there is something they will be able to do after acquisition that they cannot do now. Interesting, what customers you talked to mention as a reason why they won’t put Aras on the short list? I’d expect these are customers that loved to be in IBM business before (full coverage insurance :)). Best, Oleg.

  • Bhushan

    Oleg,
    Nice discussion; few points from my side.

    For current vendors one of the option i see is opting ‘0n Demand PLM’ or few organization will start hosting the services for these – which i think has already started with PTC working with IBM.

    On Open Source PLM – It will take time for sure before Industries start thing it seriously.

    I see One threat from ERP Vendors becoming serious about PLM [example – SAP PLM]? whats your thought on this…

    Regards,
    Bhushan

  • Bhushan,
    Thanks for your comment! On-demand is a good pain relief if your primary concern is up-front cost. I think, implementation wise, on-demand is complex, since it requires re-thinking of services/customization/implementation strategies. And this is not simple.
    Agree with you on Open Source. I will take your ERP questions separately. Watch next posts :)…
    Best, Oleg

  • Brian

    If just making the functionality free was “the” answer then Star Office would have made huge inroads into Microsoft Office market share.
    Having said that I agree with you that making the base solution free and selling the services is a key to improved PLM adoption throughout more organisations.
    As you point out Aras follows this model. They allow completely free download and setup of the system. You can do it all yourself without a single dollar of external costs.
    What they do sell are two of the points you note above.
    Support contract and Services.
    Premium functionality.
    For free you can get a really good PLM system and with effort you can get some really good integration via Federated data to ERP systems etc.
    If you want a truly world class Integrated Enterprise PLM system which deeply integrates with your CAD solutions then you need to buy a support contract.
    This is not an unreasonable business model. You can start small, test the waters if you will and then commit fully when you realise the advantages you are otherwise missing out on.
    Market share is a huge driver in any business. The more you have the greater your revenue stream and the better your ability to support and develop your product.
    Open source products will gain share over the next few years as more people see the suppliers thriving and producing quality products.

    Brian

  • Brian, Thank you for your comment! I agree, to make functionality “free” is only part of the answer. However, if you compare MS Office with Google App (which is free and online), you can get different numbers and perception. “Free” has an opposite side and, this is, obviously, lower commitment. And this is the case of Star Office. In my view, Aras will struggle to find “middle class” users. Today smaller customers are using it for free and big OEMs (those that bring big money to PLM vendors) are still more interested to pay for well-developed, complex, customized and known PLM solutions. The situation may be changed over next few years and current crisis work well for Aras Open Source model. Best, Oleg

  • Dave

    Hi Oleg,

    I’ ve been implementing PLM systems for xxx years.

    From my point of view, big PLM vendors will need to change their business model: Maybe not in the short time, but they will need to do it.

    Companies (bigger ones will be the first ones) will not pay anymore to have the “property?”, “right-to-use?” on a software.

    Companies needs a SOLUTION for their needs: In order to get a solution they will pay for services, premium functionality, online storage or traffic, and so on…

    The name of the future busines model can be SaaS (Software as a Service) or Open Source or others… but I don’ t bet for the current big PLM vendors business model.

    Let’s talk about Aras:

    * I’ m not sure Aras is an OpenSource solution: Is Microsoft based !!! Maybe is a OpenDistributed solution.

    * Take a look at Aras references: Big and important companies.

    I’ m not sure big companies will be pay in the short time for “well-developed, complex, customized and known PLM solutions”.

    Well devoloped???

    I know your experience, so I’ m sure is not needed to do a list of project implementation disasters related to “well developed” solutions (M1, SmarTeam, TeamCenter, WindChill, and ALL the rest…).

  • Dave, Thanks for sharing your thoughts! I think, main interest to Aras these days is behind what you just called “need to change”. World is going towards changes generated by great demand for “free software”. It doesn’t mean companies will lose money (just think about Google and Red Hat). However, for the domains like PLM, there is no “ready to go model yet”. So, I see Aras is experimenting. Arena, PTC/IBM and some others were experimenting with SaaS. I don’t see any mainstream solution today in the PLM market different from what proposed by mind share PLM vendors. But, in my view, change will come. You can find some of my thoughts about Open Source vs. SaaS here — http://plmtwine.com/2009/06/17/future-plm-face-to-face-open-source-vs-cloud/. Best, Oleg

  • Andy

    I’m not too sure who Dave is but I like the way he thinks!

    We use Aras software because it works better than any of the “big name” PLM software that we’ve tried. Not only does it work better but it installs faster, is more flexible, and is about 10% of the total installed cost of a “big name” PLM package. Licenses are free but you do need developer and admin resources applied. It isn’t free in total but I’m comfortable with the 10% number based on a few years of data that we’ve gathered.

    I can tell by the comments in this thread as well as other threads that some people don’t consider Aras to be a serious PLM option. I will say that my team does a lot of Aras demos for people from other Fortune 500 companies. People are constantly blown away in these demos by the functionality of the Aras software and the speed of the installation. Lots of people who have paid millions for their “big name” PLM system feel a little akward when they figure out how much money and time they wasted.

  • Andy, Thanks for your comment, as usual. Do you really measure TCO for Aras as 10% of licensed cost PLM? This is kind of huge, in my view. Best, Oleg.

  • Andy

    Yes, we’ve seen the 10% verified on several projects at several different companies. Most people who we talk to do not believe the difference is that big but then again, none of them have actually peformed an Aras install either. I would not have believed the 90% reduction in TCO either before we actually did it.

    Zero license costs drops the bill a bunch. Very fast deployment time reduces the consulting bill a ton. Windows look and feel drops the deployment time a bunch. (the last deployment that we did the engineering team didn’t even need to be trained on the Aras tool because they were comfortable with the look and feel right from the start)

    You add it all up and we’ve seen ECO projects that cost over $1M and took a year in TeamCenter drop to a few months and $100K in Aras.

  • Andy, What you explained is very impressive. I think vendors need to learn this experience. I think, part of open source growth will be sharing of this in the open communities we have. Best, Oleg

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