Over the past year, we’ve been discussing how performance-based outsourcing (aka Vested Outsourcing) has the potential to transform 3PL-customer relationships. But can the principles that underpin PBO also transform the way companies procure supply chain and logistics software and the way they work with software vendors?

I believe the answer is yes, but only if software vendors are willing to augment their product offerings with managed services—and if customers are willing to “think differently” about the way they deploy and pay for the value of software.

Back in June 2007, I wrote a report called “Supply Chain ‘Geek Squad’” (available to ARC clients only) that highlighted a trend I saw in the industry, namely how the business models of software vendors, consulting firms, IT services companies, and third party logistics (3PLs) companies were converging together. I compared this trend to what was happening in the retail industry, where retailers were going beyond selling products and providing services like home theatre installation (e.g., Best Buy via its acquisition of Geek Squad) and kitchen design and carpet installation (e.g., Home Depot, “You can do it. We can help”). And just this week it was reported that Walmart is buying Vudu, an online on-demand movie service provider similar to Netflix.

Here is an excerpt of what I wrote back in 2007:

Although there are still many “Do-It-Yourself” people out there, retailers are well aware that it’s the “Do-It-For-You” side of their business that will drive revenue growth and margins. Supply Chain Management software vendors (among others) are waking up to a similar opportunity. Many manufacturers and retailers are looking at their fragmented supply chains and becoming overwhelmed by the ever-growing complexity. Buying and implementing supply chain software is now the easy part (even though it’s still a time-consuming and costly process); the real challenge is finding experienced supply chain experts who can connect all the pieces together (software, process changes, metrics, best practices, continuous improvement, etc.) to deliver business value.

Many companies don’t have these experts on staff, or they don’t have enough resources to tackle every initiative. Hiring consultants or waiting for resources to free up (which never seems to happen) has been the traditional response. But like retailers, supply chain software vendors are realizing that companies can buy applications with similar functionality, from a variety of vendors, for about the same price, and so their primary competitive weapon moving forward is their people (“human IP”) and the value-added services they can provide.

It’s now almost three years later, and contrary to my prediction, relatively few solution providers have “woken up” to this opportunity—the exceptions include CTSI, enVista, i2 Technologies (now part of JDA), LeanLogistics, Transplace, and a few others.

I would argue, however, that the case for software vendors to transform their business models is even greater today, in the aftermath of “The Great Recession,” in this so-called “New Normal” that all businesses are operating in.

What do customers want? Not software, I say, but outcomes—cost reductions, productivity improvements, revenue growth, increased market share, improved working capital, and so on. As Harvard marketing professor Theodore Levitt famously said, “People don’t want to buy a quarter-inch drill; they want a quarter-inch hole!”

I’m not saying that supply chain and logistics software vendors should stop selling products (“drills”), but they can certainly do more to help clients achieve their desired outcomes on an ongoing basis. And perhaps there’s no better place to start than by reimagining and transforming the one element of their business model that is most criticized by customers: maintenance fees.

Simply put, the link between maintenance fees and customer desired outcomes is at best hidden and at worst nonexistent (for related commentary, see “Software Maintenance Fees: An Outdated Cash Cow?”). If a software vendor could define a service that links a yearly fee with achieving a desired customer outcome, it would not only solidify its relationship with the customer (which could lead to additional software investments), but also differentiate itself from the competition.

In a meeting this week with a leading supply chain software vendor, I mentioned the idea of applying PBO principles in the software industry. While the executives were intrigued by the idea, one of them also said, “Software vendors have tried gain-sharing in the past and it really hasn’t worked very well.”

This is true, but PBO/Vested Outsourcing is not gain-sharing! I’ll address this topic in a future posting, but it’s clear that much more education is required.

As with logistics outsourcing, the time is right for a mind shift in the software industry, for both vendors and customers. The journey won’t be quick, it won’t be easy, and it won’t be for everyone. But the opportunity to deliver and receive greater business value is there, and if you don’t seize it, somebody else will.

(Note: i2 Technologies, LeanLogistics, and Transplace are ARC clients).