People who don’t spend much time analyzing the software market may have trouble understanding the differences between products in a given software category or the difference between two categories. This happens because vendors and commentators use the same words to describe different depths of functionality and degrees of comprehensiveness in one type of application. As well, there can be multiple categories of software that address the same general business issues but are designed for different specific uses. Not only is it worth the effort to sort through the labels and understand what does what best, but different categories of software that are sold and deployed separately can provide even greater value when used together.
For example, I recently had a conversation that touched on the relationship among three categories of business software: price and revenue optimization (PRO), sales and operations planning (S&OP) and performance management. The three share characteristics. All are analytical applications that have planning capabilities. Each category can – and sometimes does – stand on its own in an organization. Yet the three are complementary, and deploying them in a coordinated fashion can increase the value of each component. To envision this, imagine a pyramid-like relationship between the three: Performance management provides a foundation at the bottom, sales and operations planning fits in the middle, and price and revenue optimization is at the apex. I’ll explain this hierarchy in more detail.
Sales and operations planning is a management discipline originally developed in the 1980s to improve coordination between the parts of a business that focus on market demand (including sales and marketing) and those that create the supply that meets that demand (including manufacturing, supply chain, purchasing and operations). In theory, one could use performance management software to achieve this balance, but products in that category lack the kind of process and functional capabilities that are designed specifically for S&OP. One would have make substantial modifications to a performance management application and then continually maintain it to approximate the functionality of an S&OP application. Used together, though, the underlying capabilities of a performance management application can provide the corporate and financial planning context for the sales and operations planning function; it can be the central source of dashboards for monitoring all S&OP-related activities and the system that generates reports.
Price and revenue optimization is a business discipline used to create demand-based pricing; it applies market segmentation techniques to achieve strategic objectives such as increasing profitability or market share. PRO first came into wide use in the airline and hospitality industries in the 1980s as a way of maximizing returns from less flexible travelers (such as people on business trips) while minimizing the unsold inventory by selling incremental seats on flights or hotel room nights at discounted prices to more discretionary buyers (typically vacationers). Today, it is a well-developed part of any business strategy in the travel industry and increasingly used in others. Analytical software is available that enables companies to implement and manage a PRO strategy, which I covered in an earlier perspective.
For manufacturing and distribution companies, S&OP and PRO software combined can provide valuable capabilities. The latter can devise a mix of products at given prices that will optimize profitability given other constraints (such as market share or minimum volumes), while the former enables the company’s operations, supply chain, manufacturing, sales and marketing organizations to put the plan into practice and continually adjust the balance of supply and demand to reflect changing market conditions.
S&OP does not have universal relevance. It applies mainly to product and manufacturing businesses that move physical objects from sources through distribution to buyers. Its analogue in financial services would be a portfolio management and optimization application, which would be used to set the parameters for the composition of assets on the balance sheet – typically the types of financial instruments that the organization will hold, their riskiness and maturity.
Another type of complementary middle-layer analytical software is sales compensation management, which is an essential element in businesses that use a direct sales model. I’ve noted in the past that for these types of companies, sales compensation management software increases the effectiveness of profit optimization software because it makes it easier to adjust incentives quickly to reflect changes in market-driven requirements.
Software industry analysts often focus on the issue of choosing a suite or a group of best-in-class products. But there has been little coverage of the advantages of using complementary applications to improve performance. As I mentioned, performance management, S&OP and PRO software each can stand alone and deliver value to companies. They naturally have loosely coupled relationships with each other, which reflect the organizational reality that each is managed by different parts of the business for their own purposes. Together, though, these three types of applications, as well as sales compensation management, can enable the companies that use them to do even more in achieving their strategic goals.
Regards,
Robert Kugel – SVP Research