Product Lifecycle Management: Expediting Product Innovation

Increasing the Visibility of Requirements

For a design team, a loosely stated requirement is often misleading. That's why it is important to capture requirements in a structured manner, in a requirements database maintained by requirements managers, before they are passed along to the product development teams. The role of requirements manager may not exist in the current scenario, or it may have been fulfilled by the marketing team. But it is essential to analyze requirements properly before taking them up for development. Companies can use best practice methodologies like Affinity Diagram, PUGH Matrix, or QFD for analyzing, prioritizing, and mapping requirements to existing features or to new features that they can deliver. These methodologies also require companies to benchmark what competitors can deliver to satisfy a given requirement. The true product lifecycle management (PLM) system emphasizes the fact that product requirements should be communicated clearly to all stakeholders of product development, including the design, testing, materials, supplier, manufacturing, production engineering, and service teams. Increasing the visibility of product requirements is the first step in implementing any PLM system.

Increasing Productivity

The design starts from a concept generated by a given market need. The design team must be given a highly efficient environment in order to be able to work with maximum productivity. The use of computer-aided design (CAD) and computer-aided engineering (CAE) tools has been common in the industry for the last decade, but the real challenge is to store the generated CAD data in a centralized, secure, and easily accessible place. It's also important for design engineers to be able to check in or check out these files on a daily basis during the design cycle. This will give designers more control over the product design, since the centralized storage of product data makes for an information-rich product development process.

Furthermore, incorporating a strict approval mechanism will enable designers to do things right the first time. Precise CAD data is an important element of analysis for the CAE or computer-aided process planning (CAPP) teams, since erroneous or improper CAD data makes CAE and CAPP efforts useless. Also, ensuring that CAD data is precise will result in precise engineering bills of materials (EBOMs) for the manufacturing resource planning (MRP) or enterprise resource planning (ERP) systems.

CAD data cleanliness and control is not only important for the design team, but also for the subsequent product development teams down the line. For this reason, CAD data management is considered as the heart of PLM.

Healthy Collaboration

Bringing people together is the main objective of any PLM system. When product development people are closer (virtually speaking), they can collaborate more efficiently. Due to current globalization trends, as well as the trend towards leveraging competencies and resources that are geographically separated, it has become mandatory to collaborate in a virtual environment. The health of the collaboration can be parameterized with three basic questions:

• How secure is your collaboration environment?
• How efficiently can you collaborate?
• How many resources is your collaboration environment consuming in terms of the network, and hardware and software?

Collaboration plays a vital role when your design teams are separated geographically. It also makes lot of sense for organizations that outsource the whole product design to third party organizations or suppliers. Collaboration enables the host companies to give product design feedback to the design partner companies or suppliers in the early stages of the design, rather than after completion. This is critical, as early detection of issues in product design is less expensive to fix than issues which are detected later.

Reducing Time-to-market

Manufacturing organizations are striving to answer the question, "How to reduce time-to-market?" Companies can obtain more market share and profit if they introduce the product to market sooner than their competitors. Thus, they tend to minimize cycle time whenever possible. Product cycle time as a whole can be broken down into cycle times for design, engineering analysis, validation, buying, process planning, and piloting.

Product development involves cross-functional teamwork, as the following functions are generally involved: marketing, design, engineering, purchase, testing, production engineering, manufacturing, and quality. In a conventional product development cycle, these cross-functional teams work serially, one after the other (also termed serial engineering). This conventional method actually ties product cycle time to a certain period, as only one team can work at a time (while the other teams wait for the results). For example, the analysis, testing, and purchase teams will wait for the design to be completed before themselves proceeding.

The idle time of other teams can be used to shrink the overall cycle time of the product. This leads to the concept of concurrent engineering, where cross-functional teams can start their work at a predefined point of the previous step of the product life cycle. For example, the engineering or purchase departments might start the analysis and buying processes when the design is 60 percent complete. And the manufacturing planning might start once analysis and testing is 50 percent complete. Concurrent engineering can shrink product cycle time phenomenally, by leveraging the maximum time resources possible from all stakeholders of the product.

However, the impact of rework in concurrent engineering is heavy compared to serial engineering. For example, when there is a design change after 60 percent completion of the design, it will impact the work of the analysis and testing teams, since they have already started their work. But this impact can be easily managed in a digital workplace. If analysis and testing is being conducted in a digital environment that is seamlessly integrated with the CAD environment, then the impact of design change is minimal: this is the power of digitization. It is strongly suggested that the product development environment be digitized as much as possible in order to attain successful concurrent engineering. Nowadays, there are CAD tools which are tightly integrated with native CAE and CAPP tools. Concurrency can be easily achieved with the kind of digital environment that allows for designing, analyzing, simulation testing, and product planning, since activities do not necessarily have to be conducted physically. This also reduces the cost of building physical prototypes.

Engineering Data Control

Engineering data is the output of the design team, which releases the design to other teams in order to get their feedback. The design team then incorporates the collected feedback on the engineering parts. There should be a revision control mechanism in this process. Even after the design is completed, there can be a design change due to failure in product development steps down the line. And even after design, analysis, and testing, there may be difficulties in the assembling process only during the piloting stage. In this scenario, the part has to be revised, and the design change will be incorporated in the new revision. The product will once more undergo reviews, analysis, testing, and validation before it comes back to piloting.

Engineering data control is more cumbersome when design is outsourced to a third party organization or to a supplier. In this case, the host company should notify the design partner or supplier that a design change is necessary. When companies do not have a healthy collaborative environment, this design change process increases cycle time drastically. This is why collaboration and integration between the host company and its design partners and suppliers play an important role in reducing time-to-market.

Preserving Product Knowledge

Introducing more new products every year is becoming a trend in the manufacturing industry. Research shows that the companies introducing more products per year will be more profitable. Within this trend, it has become vital for companies to preserve product knowledge in a well-defined information technology (IT) system, instead of keeping it only inside the brains of various employees. In other words, product knowledge is an asset to companies—if they have a proper system of storing product data, they do not need to worry about human resource attrition. Product knowledge can consist of any one of the following elements:

• engineering data
• product requirements or specification sheets
• lists of suppliers that can supply the product
• lists of technical specifications such as CAD drawings, CAD models, process specs, etc.
• engineering analysis reports on parts
• the number of configurations that can be generated from product aggregates, and their compatibility rules

Modular Product Development—Design One, Configure Many

Organizations striving to introduce more new products per year should concentrate on modularizing their product structures, and on generating more variants from the structures. The concept of modularization helps phenomenally in saving time-to-market. All they need to do is break down the product structure into meaningful sets of aggregates, and create compatibility rules between the aggregates under each product line. Basically, they need to make a product portfolio rationalization. If they make sure their aggregates can work with each other across different models under a single product line, they can easily generate new product configurations on the fly (based on product need), and launch the new product in just weeks. This eliminates the time barrier for conventional product development, which involves starting from scratch. It takes time for organizations to come to the level of reusing and leveraging product aggregates to generate many configurations, and only a few organizations around the world have achieved this.

PLM: Manage Your Innovation Process

In general, PLM helps manage the product innovation process in many ways, as discussed in this paper. It enables companies to directly map product requirements to features, and to obtain control over product data. It also helps them to preserve their product knowledge assets, and allows companies to enter into the new paradigm of modular product development.

Unlikely Acquisition Has Insiders Scratching Their Heads

The announcement in September 2006 that Illinois Tool Works Inc. (ITW) (NYSE: ITW) had made a cash tender offer to acquire all of the common stock of Click Commerce. (NASDAQ: CKCM) made many market insiders scratch their heads. ITW is a diversified manufacturer of highly engineered components and industrial systems and consumables, consisting of approximately 700 business units in 48 countries, with some 50,000 employees, and $12.8 billion (USD) in revenues. Click Commerce, for its part, has been a thriving provider of on-demand supply chain management (SCM) solutions for a variety of worldwide industries.

Part Five of the series Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?

For background information, see Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?, A Supply Chain Applications Vendor Expands Beyond Its Roots, Method to the (Expansion) Madness: Some Common Threads, and Challenges for an Expanding Supply Chain Solutions Vendor.

The Good, the Bad, and the Ugly of Similar Acquisitions

The deal calls to mind other software vendors that were acquired by large diversified manufacturing groups, with both good and bad outcomes. A positive example is the early-2004 3M acquisition of HighJump Software (see 3M Wraps Up HighJump, While Retalix Shops OMI International). ITW might want to follow 3M's way of handling HighJump—HighJump was organized as a separate limited liability company (LLC); 3M has maintained HighJump Software as a brand name (HighJump Software, a 3M company), and at a separate location; and 3M placed only two resources into the company (a controller and a person who was supposed to keep the rest of 3M at bay).

Moreover, after the merger was consummated, 3M did not skimp, but rather wisely infused a needed sales and marketing (S&M) spend, and encouraged acquisitions by HighJump to fill the gaps in its supply chain execution (SCE) product portfolio. This was exemplified by the recent acquisitions of Pinnacle Distribution Concepts, a transportation management system (TMS) provider specializing in the delivery of web-based, on-demand solutions, and of Global Beverage Group Inc. (GBG), a provider of delivery management solutions for the direct-store-delivery of consumer packaged goods. Also, the 3M giant has since shared some best practices from manufacturing operations that are applicable to HighJump, so as to help drive further software innovation, including the recent in-house delivery of a labor management system (LMS).

Like HighJump, Click Commerce is seemingly not one of the so-called "roll-up" acquisitions typically characterized by subsequent large cuts in product investment in order to rapidly increase profitability. In fact, ITW claims the exact opposite intention in its purchase. Instead of reducing investment in Click Commerce products, for example, ITW views Click as a natural platform and springboard for envisioned ITW services and software forays. Indeed, the acquisition does not have the appearance of an opportunistic bargain buy of technologies. Neither has Click Commerce demonstrated any desperation, as indicated by its decent price tag, which was a multiple of its revenue levels. ITW's complete lack of experience in software development should not prove to be too serious, provided that ITW lets Click operate largely as an independent business unit making smart moves as it did prior to this acquisition.

Thus, customers of both ITW and Click Commerce should be pleased, because this acquisition should center their IT investments inside a larger suite of complementary offerings, and increase their vendor's financial viability and market visibility. Furthermore, Click Commerce's management team is (for now) reportedly going to remain in place, as will most of its employees, which should preserve the autonomy, focus, and culture of the vendor. The new subsidiary should retain its own profit and loss (P&L) responsibility, maintain control over its product development roadmap, and continue to manage a separate sales force and partners.

ITW claims it wants to run Click Commerce as a business unit with the sole objective of continuing to sell collaborative commerce software; in the long run, ITW may thus become one of the significant SCM software vendors globally. While the cross-selling opportunities exist and are tempting (� la General Electric's approach of selling software to industrial clients during Jack Welch's tenure), ITW has to quickly set and clarify requirements for Click Commerce to cross-sell with other business units and their trading partners. At least the master data management (MDM), radio frequency identification (RFID), and demand channel management (DCM) products seem to be low-hanging fruits, in addition to the warehousing products that have reportedly already been used by many ITW divisions.

Challenges To Beware of

These potential synergies will have to be handled carefully though, given that the imposition of over-demanding requirements has traditionally disrupted many acquisitions of enterprise applications vendors by large industrial organizations (the look-alikes of 3M and ITW). Namely, there are unfortunate examples of many other non-technology companies that have tried to diversify into the enterprise software business, and that have subsequently struggled with cultural differences (due to the different nature of a software business as compared to an industrial manufacturing business). In other words, they have not been able to create the right atmosphere to replicate the success that 3M is achieving with HighJump. In many cases, the acquired software vendors have experienced slower growth, thwarted sales and marketing efforts, and falling corporate support for the risk-taking and innovation required to maintain a full-fledged enterprise application suite. The software industry requires a more innately adventuresome approach with regards to delivering new products, from concept and ideas, to commercial implementation. Outside desktop office productivity applications, at least, the notion of a "cash cow" product has not pervaded the enterprise application space.

A good example of such a poorly handled acquisition (and subsequent divestiture) is provided by Viastore Systems, a large supplier of automated material handling and storage retrieval systems, which acquired former SCE vendor Provia Software (now part of Infor, after being previously sold to SSA Global). This was relatively surprising, given the seemingly synergistic nature of Viastore and Provia (see Provia Tackles RFID in a Twofold Manner; Part Three: Provia and Viastore Systems Alignment. Possibly the ugliest example involves former Marcam Corporation and Baan, which were both acquired by the automation, controls, and process solutions giant Invensys, in 1999 and 2000 respectively. Invensys abandoned the mission a few years later and sold both companies (along with most of its other software acquisitions), again to SSA Global, and for a fraction of the original price. See Invensys Production Solutions—Can Historic Strengths And The "Protean Boost" Overcome Its Liabilities?.

Coming back to ITW and Click Commerce: while product overlap and redundancies are no issue here, there is still the challenge of integrating the companies. At this stage, ITW maintains that its key strategy is to integrate only those elements that are absolutely necessary, and to instead try to preserve the culture and autonomy that has made Click Commerce special. Still, the two companies' differing cultures and work styles may come into play, and experience teaches us that following a seemingly promising acquisition, a major difference in philosophy often emerges between the acquired and acquiring management teams. This may have to do with questions of how to execute strategies for growing the company while "increasing operational efficiency," which inevitably results in the exodus of the acquired management team. It is important for ITW to avoid any major difficulties in assimilating Click Commerce personnel, operations, technology, and software, and to retain the key personnel.

ITW, a large and established industrial company, has never sold complex SCM software, which has particular sales cycles and product life cycles (with higher investments and risks of innovation). It might expect Click Commerce to even more quickly grow to match new (possibly too optimistic) growth and profitability targets set by ITW, which could deteriorate customer service levels if ITW pushes the vendor to expand uncontrollably. It is questionable whether ITW's well-known "80/20 rule" (meaning that 80 percent of a company's sales are generated from the most important 20 percent of its products and customers, with appropriate options to support the lower volume and lower profitability product lines and customers) can be applied to Click Commerce's industry "Who's Who" customer list.

Given the market opportunity for cross- and up-sell, and possibly differing end user markets for the two merging companies, ITW will also have to resist the temptation to expand Click's software suite to new, unsupported verticals, while possibly neglecting some existing verticals. For instance, it is not clear how many ITW businesses would care for the spare parts planning and optimization software, which might prompt the likes of Servigistics or MCA Solutions (which has lately become quite cozy with SAP) to prey on possibly disconcerted existing Click Commerce (Xelus) customers. The esoteric health care research and financial institutions areas might be even more suspect in that regard. ITW will have to be careful not to lose the deep collaborative commerce domain knowledge present in Click Commerce today. Vertical industry depth and expertise is critical to ongoing success, and should be encouraged and nurtured. However, some sectors may easily be neglected amid a slew of acquisitions of complementary but diverse technologies (and subsequent attempts to intertwining them).

Furthermore, in the long term, if ITW finds the SCM market too difficult to compete within, or if Click Commerce falls short of expectations for whatever reasons, the eventual ensuing divestiture would likely disrupt customer support and implementations in progress. Thus, Click Commerce might be pressed to maintain profitability and revenue growth levels on its own until sales, service, and consulting groups from both companies align their different products and services. Click Commerce's growth expectations under ITW should be manageable, and possibly even slower than for the past several years. While ITW does very few divestures in general, the "devil" will still be in the details of execution going forward.

Challenges for an Expanding Supply Chain Solutions Vendor

Although Click Commerce is a thriving provider of on-demand supply chain management (SCM) solutions for a variety of worldwide industries, it does have to face up to a variety of challenges, some of which are of its own making.

Part Four of the series Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?

For background information, see Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?, A Supply Chain Applications Vendor Expands Beyond Its Roots, and Method to the (Expansion) Madness: Some Common Threads.

In 2005, Lucent Technologies Inc. accounted for 13 percent of Click Commerce's total revenue, whereas during 2004 and 2003, Microsoft accounted for approximately 11 percent and 19 percent, respectively, of the total revenue. This means that the vendor's quarterly product license revenues remain substantially dependent on product sales to new customers. Thus, the vendor's ongoing growth path has been based on the ability to attract and win new customers with expanded solution sets, and to cross-sell extended solutions into the acquired installed base. Click Commerce's objective is to offer comprehensive business-to-business (B2B) automation solutions that optimize the internal and external business processes of large, global companies, including their channel partners and their supplier community. There are several key elements of the strategy to achieve this objective:

* delivering industry-specific solutions (in addition to addressing the existing market needs of high technology, industrial and consumer product manufacturing, retail, higher education and health care, and financial services);
* targeting large, global enterprises—especially divisions of these large companies, where there are often opportunities to sell other products to the same division or similar products to other divisions within the organization;
* providing value-added services to existing and prospective customers, since via numerous client implementations, Click Commerce has developed expertise and best practices in managing partner relationships, launching solutions, driving adoption, hosting, and administering and optimizing its software and the network environment; and
* acquiring more complementary businesses, as the vendor continues to evaluate strategic opportunities to acquire complementary businesses that can enlarge its customer base, provide additional revenue streams, and leverage the existing corporate and technical infrastructure. The vendor is looking for markets that are underserved by the traditional enterprise resource planning (ERP) vendors, and that leverage its expertise in enabling business relationships, by (for example) increasing the breadth and depth of its compliance automation and radio frequency identification (RFID)-enabling product offerings.

Although Click Commerce has a good vision; an intriguing product roadmap; responsible growth; financial discipline; a recurring revenue model; a proven management execution; a successful merger and acquisition (M&A) track record; a loyal, blue-chip customer base; strong governance; and whatnot, one can nonetheless imagine how colossal the job has been for the company (with no prior expertise in some acquired realms) to cohesively enhance the product portfolio, and how challenging it will be in the future. Also, the footprint has now become indisputably large and unclear, and will involve significant integration work.

To be fair, the vendor aims at delivering its applications through integrated, high-performance technologies designed for maximum compatibility with its customers' existing systems and computing environments. Its underlying platform is based on the latest open standards (to facilitate integration with customer relationship management (CRM) tools, ERP systems, portals, and legacy enterprise systems), and provides some tools necessary to derive better return on investment (ROI) for its customers:

* real-time configuration and distributed administration for greater business flexibility;
* easy-to-use web interfaces allowing business users to modify workflows;
* detailed feature configuration to align the system with business needs;
* implementation tools covering customization, deployment, management, and upgrades (these tools are part of an integrated environment providing access across the system);
* configurable security, which operates throughout the levels of a system, from encryption of network traffic to business-oriented authorization policies; and
* multilingual capabilities for international deployment, with fairly high-performance, cost-effective, reliable, and scalable operations.

Yet dynamic multi-enterprise supply chains require even more sophisticated solutions to connect enterprises with their suppliers, partners, distributors, dealers, and customers. This is necessary to coordinate and optimize business processes, accelerate revenue, lower costs, and improve customer service. To that end, in July 2006, Click Commerce unveiled a new solution architecture blueprint. The Click Commerce Composite Application Framework (CAF) is based on service-oriented architecture (SOA) principles, so as to enable the delivery of tailored solutions without the typical cost, development, and time required for customization (see Architecture Evolution: From Web-based to Service-oriented Architecture).

With the framework, customers will eventually be able to combine application services in Click Commerce and third party products to create new solutions that more precisely address particular business problems. These new solutions can then be installed on customer premises or delivered via a software as a service (SaaS) model. The framework uses the Click Commerce Enterprise Service Bus (ESB), which coordinates and orchestrates the composite applications and the Click Commerce Master Data Management (MDM) solution, which in turn ensures the accuracy and consistency of data. The framework is envisioned as the foundation of Click Commerce software development moving forward. As a proof of concept of sorts, at the same time Click Commerce announced the availability of two composite applications:

* Click Commerce Service Supply Chain, to provide end-to-end support of service and repair planning and execution
* Click Commerce Extended Order Management, to orchestrate the management of orders from businesses and consumers across an extended network of user company-owned and third party facilities

However, more concrete details and products are needed to see how well-rationalized this framework will be for all Click Commerce products. Given how much thought and excruciating effort is has taken for even the likes of SAP to deliver on its (ongoing) SAP NetWeaver promise (see Multipurpose SAP NetWeaver), one can only imagine the magnitude of the still outstanding work for Click Commerce. The size of the vendor also begins to matter in this market, as prospects have increasingly been paying attention to the perceived stability and viability of the vendor, in addition to the typical price, quality of service, and customer reference decision-making factors in the industry segment. The principal competitive factors affecting the market include speed of implementation; price; knowledge of the industry and its related distribution channels; core technology; an ability to integrate and interoperate with existing technology; and the financial capacity of the respective vendors.

Competition is Notable—And Diverse

The market for such products is intensely competitive, subject to rapid technological change, and significantly affected by the new product introductions and other market activities of industry participants. There are relatively few barriers to entry in the Internet-based software market, and one should expect competition to persist and intensify in the future. Click Commerce currently has four primary sources of competition:

1. the in-house development teams of its potential clients;
2. large SCM and ERP vendors;
3. infrastructure and platform providers; and
4. various niche independent software vendors (ISVs). Given its recent expansion into several related markets, the vendor's competition has intensified, and now comes from many directions, as indicated in the table below:

Solution Focus	Competitors
Demand channel management/partner relationship management	Comergent, IBM, SAP, Oracle, Salesforce.com
Supply chain management	Manhattan Associates, RedPrairie, HighJump, Infor, One Network, i2 Technologies, JDA Software (including former Manugistics), Logility
Service Parts Planning and Optimization	Servigistics, MCA Solutions, Baxter Planning Systems
Master data management (including global data synchronization and secure communications)	GXS, Sterling Commerce, Lansa, ISS, Cyclone Commerce, Inovis, Seeburger, IBM, SAP
E-research and health care	InfoEd, iMedRIS, API Software
Contract and service management	IQ Navigator, Fieldglass, ICG Commerce

Solution Focus Competitors Demand channel management/partner relationship management Comergent, IBM, SAP, Oracle, Salesforce.com Supply chain management Manhattan Associates, RedPrairie, HighJump, Infor, One Network, i2 Technologies, JDA Software (including former Manugistics), Logility Service Parts Planning and Optimization Servigistics, MCA Solutions, Baxter Planning Systems Master data management (including global data synchronization and secure communications) GXS, Sterling Commerce, Lansa, ISS, Cyclone Commerce, Inovis, Seeburger, IBM, SAP E-research and health care InfoEd, iMedRIS, API Software Contract and service management IQ Navigator, Fieldglass, ICG Commerce

On its own, Click Commerce might not be able to maintain its competitive position in the long term against current and potential competitors, especially against those with significantly broader product lines or greater financial, marketing, service, support, technical, and other resources. Many of the above competitors indeed have longer operating histories in related markets; greater financial, technical, marketing, and other resources; greater name recognition; and a larger installed base of customers in related markets. Moreover, a number of competitors, particularly major business software companies (including those known for their ERP, database, CRM, and other pertinent software) have well-established relationships with Click Commerce's current and potential customers, as well as with independent system consultants and other vendors and service providers likely to influence certain customer's product selection processes. In addition, such competitors will likely be able to respond more quickly to new or emerging technologies and changes in customer requirements (or to devote greater resources to the development, promotion, and sale of their products) than Click could, as a relatively small publicly held company.

In fact, Click Commerce has had to make investments in research and development (R&D) through internal development, licensed technology, and acquisitions. In fiscal years 2005, 2004, and 2003, it spent approximately $7 million (USD), $2.9 million (USD), and $2.4 million (USD), respectively, on R&D. Its R&D staff is responsible for enhancing existing products and services, and expanding the product line and services offerings. The recent product development activities naturally focus on product enhancements to increase the functionality and ease of integration of its configurable applications, and on the integration of external services and partner technology.

With a slew of recent acquisitions, and a number of acquisitions seemingly necessary in the future, it looks as though Click Commerce has overreached itself and bitten off more than it could chew. Therefore, although at first it might have seemed odd for a manufacturing company like Illinois Tool Works (ITW) (which hardly anyone in the enterprise applications market has ever heard of) to acquire a software company, there might be method to this madness after all. There are immediate apparent benefits for Click Commerce, which estimated that up to $5 million (USD) of its costs (about 10 percent of total costs, and almost equal to product development costs), were associated with complying with federal regulations and burdens associated with being publicly traded. These overhead costs can now be mostly offloaded to ITW, and given that ITW has thus far acquired over 700 companies which are run in a decentralized fashion, Click Commerce might get the best of both worlds: "business as usual," while having extra money to invest in organic product development and growth, as well as growth from future acquisitions. Certainly, ITW's track record of astutely identifying targets for profitable acquisitions is promising.

Despite its impressively broad product portfolio, Click Commerce will either have to plug some functional holes, or simply bolster the footprint. For instance, it could improve its focus on the retail sector by supporting a number of the US Environmental Protection Agency (EPA) and Food and Drug Administration (FDA) regulatory compliances, such as FDA 21 CFR Part 11 (on electronic records and signatures), which would be a springboard for other vertical initiatives. Also, one can imagine the vendor encroaching into the realms of inventory optimization (other than spare parts), service parts price optimization, field service workforce routing and scheduling, distributed order management (DOM), partner incentives and compensation management, etc.

Thus, Click Commerce will have to continue to make investments in or acquire complementary businesses, technologies, services, and products (or enter into relationships with parties who can provide access to those assets, if appropriate opportunities arise). However, in almost any acquisition, there can be difficulty in integrating the acquired products, services, or technologies into its operations, and these difficulties can disrupt the ongoing business, distract management and employees, and increase expenses. Furthermore, integration of such acquisitions may result in a significant use of capital, which can certainly be better absorbed by a larger parent company.

Method to the (Expansion) Madness: Some Common Threads

Click Commerce, a thriving provider of on-demand supply chain management (SCM) solutions for a variety of worldwide industries, has been impressively active in its expansion efforts. Its product offerings now include quite a few solutions outside its traditional demand channel management (DCM) and extranet realm. While each of these solutions has a unique focus and its own traditional customer base, the company's target market of large multinational businesses often requires solutions from several of these categories. Each of the vendor's disparate solutions is designed to assist customers with various key business processes:

* coordination and optimization of business processes by providing visibility into partner activities and the tools for improved management of tasks and processes;
* standardization of sales and order management processes, and facilitation of collaborative commerce among trading partners to shorten revenue cycles;
* lowering of costs through reduction of manual touch points and processing times;
* provision of assistance to partners to provide better service (to increase brand loyalty);
* compliance with regulatory requirements by speeding application preparation, eliminating routine errors, and notifying research teams of approaching deadlines; and
* enhancement of collaboration with customers and prospective customers.

Part Three of the series Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?

For background information, see Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony? and A Supply Chain Applications Vendor Expands Beyond Its Roots.

Click Commerce believes that the quality, depth, and scope of its diverse product offerings should create opportunities for integrating and cross-selling its solutions from one product offering to existing and future customers of other product offerings. The products also have a few common, underlying themes. For instance, regulatory and compliance issues have lately been mushrooming, such as those highlighted by the US National Institutes of Health (NIH), as well as the US Automotive Right to Repair Bill, the Robinson-Patman Act (anti-price discrimination act), the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (also known as The Bioterrorism Act of 2002), and the Sarbanes-Oxley Act (SOX) (see Using Business Intelligence Infrastructure to Ensure Compliancy with the Sarbanes-Oxley Act). There are a growing number of regulatory and compliance opportunities in the market, and these are just a few. Accordingly, Click Commerce has lately been structuring its business as it continues to look for acquisition targets to take advantage of these compelling possibilities. For instance, former Webridge had solutions to take advantage of the market created by the NIH, and had already captured five of the top ten research institutions, whereas erstwhile ChannelWave had solutions to take advantage of the automotive right-to-repair mandate.

Furthermore, as application service provider (ASP) hosting technology matured (meaning that ASP is not a "dirty word" any more—see Trends in Delivery and Pricing Models for Enterprise Applications: Pricing Options for more information), Click Commerce saw this trend and recognized the benefit of the former Allegis business model when it acquired the company in 2003. Historically, the vendor had realized most of its revenues from licensing its software on-premise, and related implementation and maintenance services. The software was usually installed on customer-owned hardware at the customer's facility, and was operated and maintained by the customer's personnel. This software license model generally resulted in lengthy sales cycles, significant integration and implementation challenges and expenses, and relatively large (but one-time) revenue recognition events for the vendor.

Today, while still selling some products under the license model, Click Commerce offers all of its products either on a software as a service (SaaS) basis, or on a hosted ASP basis. Under the SaaS model, the software is installed, operated, and maintained on the vendor-owned servers, which are monitored and maintained by vendor personnel. While the software is still configured and integrated to the customers' needs, implementation and integration challenges are substantially reduced (see Software as a Service beyond Customer Relationship Management and Sales). Under this approach, a customer's monthly subscription and hosting fee is substantially less than the typical one-time license fee, but over the life of the subscription equivalent or greater revenue is generally produced for Click Commerce. The lower up-front costs and integration hurdles tend to reduce customer approval requirements and shorten sales cycles. All revenues associated with subscriptions are recognized ratably over the life of the arrangement, including software licenses, set-up services, and implementation services. This results in more stable and predictable (albeit deferred) revenue for Click Commerce.

Also, through several of its acquisitions, the vendor has assembled a suite of products and services that enterprises can use to implement radio frequency identification (RFID)-enabled SCM solutions. The emergence of RFID has created market momentum for Click Commerce's global data synchronization (GDS) solutions, and was one of the reasons why the vendor looked at SCM companies during its most recent acquisition binge. The vendor views the RFID market as important because major, industry-leading retail chains (channel masters), including The Home Depot, SUPERVALU, Tesco, and Wal-Mart, in addition to the US Department of Defense (DoD) have announced initiatives that will require their suppliers to become RFID-enabled. The idea is to thereby reduce product shrinkage, reduce stock-outs, and reduce inventory costs within the supply chain, while concurrently improving product time-to-market.

According to UCCNet, there are more than one million suppliers worldwide, and more than a quarter million suppliers in North America that will eventually have to implement collaborative commerce solutions. A key trend that cuts across all Click Commerce verticals is RFID, with a huge projected $10 billion (USD) software and services market by 2010. This will revolutionize how trading partners interact with each other, and how they manage their own internal processes to serve those external partners (see As Hype Becomes Reality, a Radio Frequency Identification Ecosystem Emerges).

While the company does not supply RFID transmitting or receiving devices, its RFID-enabling software can process data from such devices, and integrate and communicate that data to and among trading partners. The key enablement software, the GDS and secure communications product, is part of the Click Commerce Master Data Management (MDM) solutions product offering. The value opportunity from RFID investments in GDS and in tags and readers comes respectively from errors reduction and labor reduction. However, even bigger value opportunities come from RFID investments in SCM, planning, and optimization. These are, respectively, cycle time reduction, improved visibility, and demand-driven execution, where Click Commerce hopes to delight its customers.

To that end, in early 2006 at the company headquarters in Chicago, Illinois (US), Click Commerce announced the opening of the RFID Competency Center to showcase how RFID enhances its solutions. The Center features the Intelligent Supply Chain, a RFID solution created by Click Commerce and Vue Technology. This demonstration tracked the movement of inventory through a multi-tier supply chain, from manufacturing through distribution to the retail store shelf, where item-, case-, and pallet-level RFID tagging was used to provide inventory visibility and management across the supply chain. This visibility and control logically increase supply chain agility and accuracy, allowing inventory to be pulled through the network based on real-time demand conditions to avoid stock-outs. Within the distribution center, RFID drives labor productivity and accuracy by automatically sensing inventory throughout the warehouse, and eliminating labor associated with check-in, bar code scans, and cycle counts. The resulting benefits of the Intelligent Supply Chain reportedly include fewer lost sales, increased customer service levels, and lower supply chain costs.

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Currently, Click Commerce has about 1,500 customers with over a million individual users in 70 countries and 15 languages. Its Global 2000 clients typically have complex products and multilevel, hierarchical relationships with a broad range of channel partners. Click Commerce solutions have also been devised to support the unique business processes of a wide variety of industries, including manufacturing and distribution (Delphi, Hyundai, Jabil Global Services, Abbott Labs, Kawasaki, Lincoln Electric, Goodrich, Honeywell, BP, Solectron, Subary, Tyco, etc.) and consumer products and retail (Wal-Mart, Home Shopping Network, Ann Taylor, Procter & Gamble, Bausch & Lomb, Pier1 Imports, Sara Lee, Black & Decker, etc.). Also included are commercial aviation and A&D (American Airlines, Delta Airlines, Lockheed Martin, Alaska Airlines, GE Aircraft Engines, Air France Industries, the Canadian Department of Defence, etc.), high-tech and electronics (Motorola, Microsoft, Dell, SAP, Oracle, Intel, Nortel, Lucent, Hitachi, etc.), and financial institutions (Bank of America, JP Morgan Chase, ABN Amro, American Express, Citibank, Union Bank of California, Charles Schwab, Countrywide Financial, etc.). One should also not forget its health care and higher education clients.

The company says that its products and services enable such corporations to coordinate and optimize business processes, accelerate revenue, lower costs, and improve customer service. For instance, Microsoft, the world's largest software company, relies on the Click Commerce Demand Channel Management (DCM) solution, which is deployed in 17 countries and 8 languages to support 350,000 partners, nearly a million users, and 400,000 customer accounts. The system's primary functions are to manage leads, control the allocated marketing funds, and manage all partner communications. As another example, Nissan Motor Corporation, a leading manufacturer of commercial cars and trucks with North American sales of about $1.3 billion (USD), relies on Click Commerce SPP&O solutions. In North America, Nissan products are sold through a network of over 1,200 Nissan and Infinity dealers, and the challenge has been to reduce high inventory value while at the same time improving overall fill rate and service levels. Reportedly, Nissan reduced overall spare parts inventory by 33 percent in year one, and by 50 percent in year two, while simultaneously increasing fill rates by 10 percent.

An unnamed leading supplier of telecommunications equipment relies on the Click Commerce SCM solution suite. Since it was a make-to-stock (MTS) manufacturing environment prior to deploying the suite, management had the challenge of customarily high levels of inventory and facilities costs, and lack of visibility and control of order fulfillment process, while poor on-time delivery was negatively impacting revenue recognition. After the company was re-engineered to become make-to-order (MTO), there were reported results of reduced inventory (from $7 billion [USD] in 2001 to $632 million [USD] in 2003) and reduced numbers of company owned-warehouses (from 200 to 15 virtual outsourced warehouses), with its gross margin improving from 12 percent in early 2002 to 43 percent by the end of 2003.

A Supply Chain Applications Vendor Expands Beyond Its Roots

Click Commerce is a thriving provider of on-demand supply chain management (SCM) solutions for a variety of worldwide industries. The vendor has evolved beyond its roots, into a provider of much more comprehensive on-demand supply and demand chain management software, consulting, hosting, and related services that should enable users throughout the world to collaborate (that is, to work jointly with others), in near real time, and conduct commerce (exchange ideas, opinions, sentiments, products, etc.) with business partners across an extended enterprise.

Part Two of the series Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?

For example, Click Commerce Supply Chain Management (SCM) solutions were acquired in February 2005 via Optum, a former warehouse management systems (WMS) vendor (which in 2004 had acquired V3 Systems and WorldChain, providers of software for supplier management and vendor managed inventory [VMI], respectively). These solutions provide supply chain execution (SCE) and WMS solutions for multi-tiered supply chains, and include a radio frequency identification (RFID)-ready demand fulfillment solution. These solutions also enable supply network communications, coordinate business processes and services, and optimize supply chain functions (see Who Needs Warehousing Management and How Much Thereof?).

With this technology, Click Commerce clients can receive orders and other information from customers who have implemented RFID initiatives, and can run their warehouse and fulfillment operations using the same RFID information that their customers use in their retail operations. The solutions are designed to function independently of one another, or in tandem for tailored enterprise network environments, although each solution includes Click Commerce's integration platform, best business practice methods, and a supply chain intelligence dashboard. Supported supply chain business processes include supplier enablement; fulfillment coordination; service logistics; shipment execution; and warehouse management.

In May 2006, Click Commerce released MOVE version 8.1 of its WMS software, which aims at enabling user companies to offer more value-added services, and provides support for RFID- and voice-enabled operations in the warehouse. MOVE 8.1's value-added services allow companies to offer such services as customer personalization, complex final assembly and light manufacturing operations, and support for reverse logistics requirements in the service supply chain. The release also provides RFID capabilities integrated with basic warehouse operations, such as receiving, put-away, picking, and shipping. In partnership with Vue Technology, the leading provider of item-level RFID, the RFID-integrated solution should increase productivity and inventory accuracy in the warehouse. It should also provide the ability to pull inventory through the supply chain network based on real-time demand to avoid stock-outs, and thus likely deliver increased customer service levels and lower supply chain costs (see RFID—A New Technology Set to Explode?).

In addition, the release further enhances MOVE's voice functionality, which creates a dialogue between warehouse employees and the WMS. MOVE 8.1 uses a voice-directed interface that allows warehouse employees to use a headset to communicate vital warehouse information about inventory operations, rather than inputting the information into a cumbersome handheld device. The solution, which includes technology from Vocollect, should result in increased labor productivity, improved inventory accuracy, and better safety for the company's warehouse workers.

The new release integrates with the Click Commerce Enterprise Service Bus (ESB), which enables extensible markup language (XML), electronic data interchange (EDI), or flat file communications between the WMS and external systems, as opposed to requiring a costly middleware provider. With the Click Commerce ESB, companies can integrate MOVE 8.1 with other applications, since the solution is based on open standards and uses service-oriented architecture (SOA), enabling composite applications to be tailored to users' business processes, instead of having to work in a predefined framework. The ESB integrates Click Commerce applications to work as a suite of products by leveraging Web services and business process execution language (BPEL) to orchestrate the flow of information between disparate applications (see Understanding SOA, Web Services, BPM, and BPEL).

More Acquisition-based Expansions

and their investments in spare parts inventories. These solutions are particularly important for companies in the aerospace and defense (A&D), automotive, and high-technology industries, where maintaining and repairing complex equipment is critical (see Lucrative but 'Risky' Aftermarket Business—Service and Replacement Parts SCM). These products are designed to help optimize the procurement and distribution of spare parts inventories, the deployment of parts to optimal stocking locations, and the flow and disposition of inventory through the repair loop (and back into usable stock).

The SPP&O applications have a broad view of the service network, and provide strong planning capabilities coupled with an integrated tool for bridging the information gaps between partners. Embedded algorithms identify and address issues related to a user company's service parts supply chain, and help companies determine disposition and routing at each step: return, receipt, repair, and restock. Owing to Xelus' forays in leveraging RFID in tracking and analyzing service parts, Click Commerce has broadened its footprint with the service parts planning and reverse logistics expertise of Xelus. This should help them to eventually manage the entire gamut from ordering, moving, and fulfillment of parts (in other words, from raw materials), to subassemblies and finished goods, to aftermarket spare parts. Supported service supply chain business processes include parts planning optimization; product acquisition; reverse logistics; inspection and testing; reconditioning and repair; and distribution and sales.

To further expand its portfolio, in November 2005, Click Commerce acquired Requisite Technology, Inc., which enhanced Click Commerce's catalog offering by adding a master data management (MDM) capability that enables collaborative commerce and RFID programs (see Customer Data Integration: A Primer and SAP Bolsters NetWeaver's MDM Capabilities). Requisite's MDM software, which transforms disorganized plant, material, and finished product data into consistent information repositories, is currently embedded in some of the world's largest enterprise resource planning (ERP) provider's solutions, with approximately 400 of these customers actively using elements of the Requisite solution. The solution had already been in use on a software as a service (SaaS) basis (see What Is Software as a Service?), with various leading business process outsourcing (BPO) providers using the applications to support their procurement operations. Also, Requisite had delivered infrastructure and services (directly and through its global service partners, including Atos Origin) that made manufacturers' MDM and related cost reduction projects successful.

In addition to providing MDM capabilities, the acquisition added patented technology and increased Click Commerce's presence in Europe with additional sales and support staff in key markets. This provided the vendor with additional opportunities to deliver its demand, supply, and service chain collaborative commerce solutions (see Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony? for more information). The acquisition also broadened Click Commerce's solutions portfolio to include Requisite's Bugseye patented search engine, Content Workstation content cleansing, alignment and validation tools, and eMerge content aggregation and workflow management tools. It also provided a framework for using data across many different levels (industries, regions, companies, and departments). Requisite provided software to many different industries and end users, including the A&D, commercial aviation, consumer goods, contract repair, high-tech, telecommunications, petrochemical, and transportation industries. Some of Requisite's leading customers include BASF, Eastman Kodak, Graybar, Marathon Ashland Petroleum, and Union Bank of California.

Mastering Data Management and Synchronization

These Click Commerce solutions enable companies to manage information about any type of item, including finished goods for resale; direct materials used in manufacturing; and indirect materials used in maintenance, repair, and overhaul (MRO) operations. These solutions also enable companies to create, collect, align, and enhance data to provide a uniform version of information, regardless of catalog needs. The search capabilities allow users to search aggregated information to find relevant results, and to have access to item details and images. Consequently, the solution suite, re-branded as Click Commerce Master Data Management (MDM), now consolidates and manages widely distributed master product data within an enterprise. Its solutions provide a single, consolidated version of this information, which should improve the accuracy of dependent systems, and reduce errors arising from data duplication and inaccuracy.

The product suite is intended to address problems caused when a user company maintains its master data in raw or "native" form in multiple, disconnected ERP and other enterprise systems, while lacking the detailed descriptions, product attributes, and classification structures which permit corporate-wide analysis and visibility into cost and performance. Customers thus use MDM solutions to deliver core services and infrastructure to turn raw master data into more readily available product information that can be acted upon to cut costs, deliver products faster, and boost competitiveness. Supported MDM business processes include cleansing and normalizing existing data; organizing and mapping data to internal structures; integrating to MDM or ERP legacy systems; and conducting master data maintenance. The Click Commerce MDM solution does not replace enterprise applications or the data contained therein, but rather enhances the existing ERP system, thereby helping to reduce customer costs by integrating its solution with tools and processes already deployed throughout an organization.

The strategic intent behind these numerous acquisitions might be best shown by the fact that Click Commerce's global data synchronization (GDS) and secure communications solutions (acquired in 2004 via bTrade) complement its MDM capabilities by allowing companies to communicate normalized master data with their trading partner community via the Internet. Data synchronization is an industry-wide retail initiative that requires manufacturers and suppliers to "sync" product information with their retailer customers, and Click Commerce has identified GDS as one of the building blocks for an RFID-enabled supply chain. Conveniently, bTrade was one of the top five solution providers in data synchronization (along with UCCNet and other major standard-setting bodies). UCCNet had previously selected bTrade software to handle communications with the trading partners, and retail supplier on-boarding in North America. Today, this software handles communications for the global registry for the worldwide retailer industry. Furthermore, bTrade had early relationships with leading retailers like Wal-Mart, SUPERVALU, and Home Depot, and was well on its way to establishing itself as one of only ten data pools in the world.

Service Contract Management

Additionally, in February 2006 Click Commerce acquired substantially all of the operating assets of Elance, Inc., based in Mountain View, California (US). This provided on-demand e-commerce solutions for contractor management services business, with capabilities enabling companies to find, evaluate, purchase, manage, and pay contractors and third party service providers. After the sale of the services and contractor management business, Elance concentrated on its Internet business and the growth of its online service for small business outsourcing.

As manufacturing companies outsource more and more of their operations, buying and managing third party services and service providers becomes a real challenge. Click Commerce believes the addition of services and contractor management capabilities creates significant cross-selling opportunities in the A&D and contract manufacturing verticals, as well as in its core markets of high-tech, financial services, and institutional research. Click Commerce has continued to offer Elance outsourcing management software as a service to many other industries, including the energy, manufacturing, transportation, and utilities industries. Elance reportedly estimated that in 2005 its customers used its solutions to manage over $7 billion (USD) of their services and contractor spending on information technology (IT), contingent labor, operations, management consulting, marketing, print, and other service projects. The customers of this Elance business include a number of existing Click Commerce customers, such as FedEx and Motorola, as well as other well-known companies, like American Express and British Petroleum (BP). The acquisition also included two foreign Elance subsidiaries, which expanded Click Commerce internationally by increasing its European presence with additional sales and support staff in the UK, and by adding a small software development facility in India.

In 2006, Click Commerce expects the acquired Elance business to recognize approximately $7.5 million (USD) in recurring revenues from its customers' purchasing maintenance, hosting, and services. The majority of employees from this Elance business unit have become Click Commerce employees since the transaction. Consequently, the on-demand e-commerce solutions for service businesses (re-branded into Click Commerce Contract and Service Management products) should enable customers to manage their services and contractor management life cycles. To that end, customers can use these solutions to find, evaluate, purchase, manage, and pay for a wide variety of outsourcing and professional services, and other services. The solutions handle multiple types of services contracts and payment structures, such as time and materials, retained relationships, milestones, blanket orders, service level-based payments, and volume-based contracts. With these solutions, the customers might also realize the benefits of compliance with key policies, laws, and controls for corporate reporting, including the US Sarbanes-Oxley Act (SOX). The solution can also help them manage labor and staffing, and provide visibility into spend volumes, supplier performance, and efficiency.

Helping Health Care Research

Last but not least (although this is somewhat unrelated to the other offerings), Click Commerce eResearch and Healthcare solutions help health care and higher education institutions improve response time and accuracy of approval processes by connecting research departments through administrative extranets. The software automates labor-intensive review and approval processes into flexible, more easily navigated sequences of workflows. Supported research and health care business processes include grant and contract management; institutional animal care and use committee (IACUC) review; clinical trials discovery; incident reporting; conflict of interest reporting; and institutional review board (IRB) review. An IRB is a committee of physicians, statisticians, researchers, community advocates, and others who ensure that research studies involving human subjects are ethical and that the rights of study participants are protected. All studies involving human subjects in the US must be approved by an IRB before they begin. Click Commerce IRB extranet provides institutions with an Internet submission system for IRB applications that simplifies application creation, eliminates routine errors, and alerts research teams of approaching deadlines. An IACUC, for its part, is a committee charged with reviewing animal welfare issues and approving all research involving use of animal subjects per US federal guidelines. Click Commerce IACUC extranet provides institutions with an Internet submission system for IACUC applications that simplifies application creation, eliminates routine errors, and alerts research teams of approaching deadlines.

In late 2005, Click Commerce released Research Extranet version 5.5, designed for use in the health care and higher education industry. This solution provides new applications and tools that can lead to improved efficiency in complicated human and animal subject research procedures. Leading universities and research institutions such as Mayo Clinic, Johns Hopkins University, Northwestern University, the University of Michigan, and the University of Washington currently use Click Commerce's extranet solutions. It is expected that with the new Research Extranet 5.5, these institutions will be able to develop and deploy customized research procedures more efficiently, and improve their ability to share important research data across the organization.

Research Extranet 5.5 includes Process Studio, which should allow institutions to more easily manage the creation of research processes. It should also enable them to launch these applications more quickly, since with its addition, institutions can take more effective advantage of the Research Extranet and potentially increase productivity immediately. Additionally, the release provides support for Web services, which facilitates easy integration with external applications. The release also added important functionality for users of the Click Commerce IRB Extranet and the IACUC solution. Namely, IRB and IACUC administrators can leverage a new comprehensive reviewer notes feature, which allows review committees to make comments directly in the system, potentially streamlining the research approval process. This new feature also provides the ability to more quickly identify changes in modifications submitted by researchers. The Click IACUC Extranet is currently in use by five institutions to manage animal research compliance requirements, and provides access to pre-award grants, bio-safety committees, and conflict of interest reporting applications.

Will a Tool Manufacturer and a Supply Chain Software Vendor 'Click' in Matrimony?

Mergers and acquisitions (M&As) in the enterprise applications arena are certainly not uncommon. In fact, when a single day goes by without an intra-market acquisition announcement, a market observer might even start feeling out of sorts. Neither it is uncommon to hear about manufacturers of, say, automotive parts, construction supplies, or food service equipment acquiring an enterprise system's software license and then engaging in lengthy implementations.

Part One of the series Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?

However, the early September 2006 announcement that Illinois Tool Works Inc. (ITW) (NYSE: ITW) had made a cash tender offer to acquire all of the common stock of Click Commerce, Inc. (NASDAQ: CKCM) made many market insiders scratch their heads. ITW is a diversified manufacturer of highly engineered components and industrial systems and consumables, consisting of approximately 700 business units in 48 countries, with some 50,000 employees, and $12.8 billion (USD) in revenues. Click Commerce, for its part, has been a thriving provider of on-demand supply chain management (SCM) solutions for a variety of worldwide industries.

As part of the agreement, ITW purchased all of Click Commerce's outstanding shares for $22.75 (USD) per share (an approximately 27 percent premium over the share price at the time), and the total value of the transaction, including payment for outstanding stock options, was approximately $292 million (USD). The boards of directors for both companies have approved the transaction. Morgan Stanley acted as exclusive financial advisor, and McDermott Will & Emery LLP acted as legal counsel to Click Commerce in connection with the transaction. The closing of the transaction, which was subject to certain conditions, including the tender of at least a majority of Click Commerce's shares, and regulatory approval, took place on October 27, 2006.

In addition to the differing approaches and "walks of life" for the parties, the acquisition was surprising and unexpected for many other reasons. ITW's successful track record of acquisitions has been characterized by frugality (in paying only slightly more than the acquired company's annualized revenues), whereas for Click Commerce, the price tag is over four times its revenues. It appears that as part of ITW, Click Commerce is seen as a platform for growth, and as a new (software-based) avenue to expand the manufacturer's horizons. In other words, ITW plans to harness Click Commerce's technology and savvy to expand its value-added software solutions, to deliver a range of solutions to the increasingly complex problems of today's supply chains, including ITW's numerous diverse business units and their respective trading partners.

The acquisition was also surprising given that Click Commerce had not been perceived as a company in distress in any need of a "white knight" savior (let alone badly in need of one). Quite to the contrary: lately, the vendor has had an enviable string of both profitability and growth (in most part, it should be said, via wise acquisitions of niche specialist vendors and solutions). Most recently, Click Commerce posted 2006 second quarter revenues of $19.7 million (USD), which was a 48 percent increase over the year before—this was reportedly the company's twelfth profitable quarter. In 2005, Click Commerce had $59 million (USD) in revenues and an operating income of $14 million (USD), respectively representing a whopping 128 percent and 210 percent growth. The vendor has lately instilled a corporate-wide culture of profitability, whereby people are paid on earnings, and where on-commission-based employees get merit-based bonuses annually, while everything is budgeted to the bottom line (profits) and managed in relation to the profit margins. To be fair, given the plethora of acquisitions that Click Commerce has conducted recently, it is difficult to discern pure organic growth in these impressive total growth figures

Click Commerce's Roots

To better judge the rationale behind the acquisition, it might be helpful to explore Click Commerce a bit deeper. Founded in 1996 and based in Chicago, Illinois (US), the company started with the idea of developing software to help enterprises handle complex distribution and dealer networks. Click Commerce's philosophy and strategy stem from the premise that collaborative commerce turns traditional linear value chains into trading partner networks (TPNs). In other words, collaboration should provide visibility and transparency, optimize shared assets, and orchestrate common processes in the demand, supply, and service chains (consisting of sales force, key accounts, consumers, retailers, distributors, suppliers, manufacturers, field service, etc.).

It is a hackneyed fact that traditional phone, fax, and paper-based communications systems are labor-intensive, inefficient, and prone to error. Companies have historically dedicated significant resources and time to the manual entry (re-keying) of information from faxed or phoned-in purchase orders, as well as to the manual processing of paper checks, invoices, and shipping notices. While spreadsheets and e-mail are also used to manage their partner relationships, even these electronic systems can be inefficient and difficult to integrate. The large volume of paper generated by these systems, and the mass of information to be sorted and processed frequently produce hidden costs such as errors and delays in information delivery, as timely changes can be difficult to implement in manually intensive processes. The cost related to such changes can also be significant. For example, a paper-based catalog cannot be quickly or inexpensively updated to inform customers of changes in product offerings, availability, or pricing (see Differences in Complexity between B2C and B2B E-commerce)

Software as a Service: Not without Caveats

The software-as-a-service (SaaS) model has so far been broadly adopted in the worlds of sales force automation (SFA) and customer relationship management (CRM), where lately the success of NetSuite, Salesforce.com, and RightNow has influenced traditional software makers to get busy and tweak their product portfolios. However, those same vendors, while working feverishly to SaaS-enable some of their offerings, are hoping to buy some time by pointing out that up to now, SaaS deployment has mainly been a proven solution for specific, well-defined business needs only, and this primarily within individual departments.

For a discussion of the trend toward SaaS, see SaaS-ing the Manufacturing Opportunity.

Part Two of the series SaaS-ing the Manufacturing Opportunity.

Despite the success of the companies mentioned above, many people are still skeptical about the long-term success of SaaS. Data sensitivity, privacy and security (outside the user's firewall), the system's flexibility, and concerns about recent, highly publicized outages (which translate into general system performance concerns) represent only some of the issues that will give on-premise applications a longer lease on life. In addition to such concerns, the question of whether on demand hosted offerings can be properly integrated with existing on-premise applications as well as skepticism over the usefulness of adapting SaaS or on demand solutions to unique business processes and practices top the list of doubts.

Salesforce.com and other SaaS-evangelist companies typically offer workable solutions for such standard business operations as capturing sales opportunities and leads. However, by using true multi-tenant architecture, which allows volumes of numerous customers' data to be stored on a single instance of the database on the vendor's premises (a heck of a lot of metadata to be maintained by the vendor), such applications often cannot offer companies (especially large and demanding ones) the kinds of differentiators they need to increase sales and profits or gain market share. Indeed, SFA processes are quite cut-and-dried (routine) and are not exactly revenue generators as long as their functionality is merely about capturing sales personnel's opinions on opportunities and making sure that they abide by the sales process rules.

Sales forces are quite successful at leveraging this "one-size-fits-all" delivery model, as they are still to this day the least regulated of all business process functions. This delivery model enables each sales person to quickly deploy a solution because, in their opinion (and consequent attitude), the tools they use do not impact the other parts of the organization. That is to say that in such environments, there is no point in extensively customizing the SFA system since it is not the details of the sales process that matter much. For instance, since planning implies some ability to proactively influence the outcome, those user organizations that have attempted to integrate the disconnected SFA function with the forecasting, fulfillment, and accounting aspects have uncovered additional challenges when these are attempted in a SaaS manner.

In other words, resembling the well-known "80-20 rule" somewhat, that final 20 or so percent that sets any company apart from its competitors often cannot be provided by SaaS solutions. The need for differentiation will require the enterprise to still seek out more traditional vendors who have industry-specific expertise and broader functional footprints to accommodate evolving, interdepartmental business processes. At the very least, coexistence of SaaS and on-premise applications will be the reality for many enterprises (Microsoft cites the existence of dual models, where a PC-installed application can be enhanced by online functionality, as seen with media players like Windows Media Player), so SaaS will be able to move beyond providing operational efficiency toward helping businesses become more effective. Giving users the ability to customize screen field names, as one is able to do in a Salesforce.com service, is not going to cater to true differentiation. Neither will enabling users to write JavaScript (or similar) and put the universal resource locator (URL) for the script in a custom field, nor will the use of tab access and the style sheets, which is what Salesforce.com refers to as "customization".

This resembles the "a-ha" notion of the "iPod user experience" that lets users listen and arrange music to their (distinguished) hearts' content in a new, simple, clear, and appealing way. Companies need to conduct their business processes differently from what they have done in the past if they want to set themselves apart, and this includes creating new features and interdepartmental/inter-enterprise flows. Thus, it remains to be seen how much Salesforce.com's Apex, the vendor's most recently unveiled multi-tenant interpretative language, will help in that regard. Apex, a runtime engine with Java-like syntax and the functionality of procedural language structured query language PLSQL (since the underlying database at Salesforce.com is Oracle), was designed to work with the Salesforce.com application programming interface (API). Apex has limited functionality that can only do what it was designed to do (special database triggers and stored procedures, for example), and it is not really the general-purpose programming language needed to accommodate significant custom programming. Again, the benefit of a controlled environment comes with the downside of limited tailoring. Enterprises also want more control of their applications, as they need to constantly change configurations in order to add new products, develop closer integration between their systems, and introduce best-in-class business processes.

For the above reasons, even Salesforce.com is trying to break out of the narrowly defined box that it started in as a CRM/SFA company. Its most aggressive efforts center on its AppExchange partnering platform and ecosystem of third-party applications so as to expand their functional scope and create more differentiating, opportunity-to-order business processes. Time will only tell how this strategy will work with the vendor's business intelligence (BI) and analytics and data integration partners (some of which are high-profile companies like Business Objects, Informatica, or Pervasive Software); enterprise incentive management (EIM) partners like Centive, Xactly Corporation, Cellarstone, or Perks,com (whose functional capabilities and what-if planning processes should be able to influence sales forces' behavior toward increasing revenue); product configuration and partner relationship management (PRM)/demand chain management (DCM) partners (like Selectica, Comergent, Webcom Inc., Big Machines, Firepond, etc.); marketing automation and analytics partners, and so on. Furthermore, the emphasis of some AppXchange partners of late has been on developing the financial services vertical and to subsequently build out a strategy to its closest areas such as insurance, media, banks, and so on.

As for Apex, it is also built on a multi-tenant architecture, which means that each customer's code is segregated from the codes of every other customer, even though all customers are running on the same instance of Salesforce.com. While this segregation of code instances should increase the ability of individual customers to customize their systems, some AppXchange partners have expressed concerns about it potentially cannibalizing their businesses and the need for their solutions.

Most recently, in mid-December 2006, Salesforce.com announced its AppStore vision and monetization strategy for the AppExchange (Apex) marketplace. Customers will be able to use AppStore as a single source for trying, buying, and deploying on demand applications on the AppExchange. AppStore will eventually provide a complete package of commercial services and revenue-sharing programs for developers and partners (a zero-touch sales model, managed entirely by Salesforce.com). Developers and partners will then be able to use AppStore as a global distribution network to market, sell, invoice, and deliver the applications they have built using the Apex programming language and platform made available on the AppExchange. AppStore is hoped to be the catalyst that unlocks the value of Apex and the AppExchange, accelerating the vision for the creation, delivery, and success of basically any application on demand. The idea here is that AppStore should make the purchasing of on demand applications for customers as easy as buying music on iTunes, whereas for partners, it is hoped that AppStore will remove the burden and expense of building out a sales and distribution channel. Additionally, the global AppExchange incubators will help companies develop new products on the Apex platform, and will also help to accelerate the success of existing AppExchange partners. Ten companies have already signed up for the AppExchange incubator program including Appirio, Avankia, Centive, Convenos, DomoDomain, InsideView, InvisibleCRM, Right90, VerticalResponse, and Xactly.

Salesforce.com pledges to provide AppStore services to partners for a revenue share percentage of closed deals that will vary depending on the level of services provided. AppStore services are currently scheduled to be offered in a phased approach throughout 2007: Standard Referral in the first quarter of 2007, Premium Referral in the third quarter, and AppStore Checkout in the fourth. Customers who purchase Salesforce.com applications should make their purchase decisions based upon features that are currently available on the existing Apex platform, and they will not be charged additional fees for using AppStore services. As previously announced, the next release of the Apex platform is currently scheduled to be available in conjunction with the release of Salesforce Winter 07, and the Apex programming language is currently scheduled to be available during the first half of 2007.

Coming back to the list of actual or perceived limitations of SaaS, two other major concerns are how integration between off-premise (SaaS) and on-premise data and content will be securely routed and managed, and what happens to the wealth of sensitive data and accumulated information when the customer cancels the SaaS arrangement with the vendor. Also, many territorial information technology (IT) managers will not be pleased with the idea of relinquishing parts of their "IT fiefdoms" and having to rely on an outside host's ability to impeccably run their data centers, even if the host is a viable business. At the end of the day, the major question remains whether SaaS deployments are really ready to support complex, global organizations around the clock and on stringent service level agreements (SLAs) or not.

These issues, combined with a new and growing market awareness, may explain the findings of some recent studies indicating that over 60 percent of enterprises currently still prefer the perpetual licensing model on-premise over subscription-based options. In fact, most of Salesforce.com's AppXchange partners still have sound on-premise businesses, and typically claim that only 10 to 30 percent (at most) of revenue comes from the Salesforce.com alliance. Also, most SaaS vendors are positioning themselves as software plays even though they are really blending software and consulting services, whereby the understanding of these services and their economics (both those of the master vendor and of its partner ecosystem) is still being devised. For now, this positioning is largely in the form of fixed set-up and consulting fees before the customer can embark on the pure subscription service. Accenture's relationship with Salesforce.com is both a blessing and a curse in that this partner represents a serious endorsement of the SaaS delivery model, but one should still expect some notable consulting price tags for certain implications even in the SaaS environment.

As for software licensing, the most common way today remains for the customer to pay a fixed fee according to the processing power of the machine (or machines) being used, or another widely used alternative whereby the user enterprise (licensee) pays a fixed fee according to the number of users (or seats) accessing the software (see New Approaches to Software Pricing).

To be fair, both approaches are relatively stable; the customer can budget using a formula while the vendor receives a big chunk of license revenue up front and a steady flow of annual maintenance revenue (usually 15 to 20 percent) thereafter. It is a steady, profitable model that customers and investors both understand, and habits are difficult to break.

Another downside of a hosted model is the long-term cost of "leasing" the service for the customer. One of the primary benefits of hosting is the initial negation of up-front costs associated with (since one still has to cleanse data, test and integrate systems, train users, etc.) more rapid implementation of a production system. SaaS does indeed cancel out the need for separate server hardware or hosting, and it reduces upgrade costs, as it does the cost of bug fix and patch application, tuning, and other maintenance and support traditionally done by the user enterprise's internal IT staff. However, after a certain period of time, the subscribed-to system will begin to cost more than an in-house production system would, and the customer has no ownership of anything at the end of the day. The appeal of SaaS is immediate gratification coupled with reduced initial financial pains, as would be the case with renting an apartment, furniture, or appliance as opposed to buying one.

Know Thy Market Segment's Price Response

Our analysis from early 2006 (please see The Case for Pricing Management and The Rise of Price Management) brings us to the conclusion that almost all companies need to approach the management and optimization of their offerings' (products or services) selling prices, discounting, and potential price increases with the same firmness they use to manage all manufacturing and procurement related costs.

Indeed, most companies have thus far done almost everything in their power to cut costs—from outsourcing information technology (IT) departments, indirect material cutbacks, streamlining, restructuring, and layoffs, to limiting employee travel and whatnot. But there has long been another side to the profitability equation that often goes unexplored: pricing the last citadel of hunch, instinct, or guesswork in businesses. For the record, price is the collection of monetary and business terms (including applied discounts and rebates) that are assigned to the acquisition of a good or service. In its broadest definition, price includes much more than the "list price" of an offering. Price is the monetary measure of the value assigned by a customer to a good or service.

Advanced analytics and sophisticated systems have long been used to manage inventory, control the cost of goods sold, and manage the supply chain in terms of costs and delivery. But the irony is that none of these factors is as powerful a lever for profitability as pricing. Indeed, recent research and surveys show that when companies make pricing a priority and implement solutions from a specialized pricing formula, these vendors can see a profit improvement, sometimes as high as 20 percent.

Further, many companies make substantial investments in three of the four classic "marketing Ps"—product, place (direct sales and fulfillment channels), and promotion. As for the fourth "P"—price—most companies have not yet moved beyond pesky spreadsheets or a few hours of a consultants time to ensure that their pricing strategies give them the best chances for success. This is again despite the indications that many organizations that have automated their pricing strategies and operations as an antidote to the automated procurement and strategic sourcing (that have in turn helped many businesses cut costs on the buying side) have, as a result, reportedly experienced significant gains in both margins and profitability. Margin is a generic term most typically associated with profits. Common financial measures include gross margin, contribution margin, and net margin. Each reflects profits after certain costs are subtracted. Profit, on the other hand, refers to financial gain or revenues minus expenses.

Moreover, the potential benefits of improved pricing can flow through an entire organization, since more predictable and effective pricing policies can help manage sales force compensation, promotional expenditures, incentive programs, cost allocations, and operational planning. This is because smart pricing can do much more for a company than simply allow it to increase margins and grow revenue. Smart pricing processes and approaches can help companies gain market share, apply pressure to competitors, improve the use of production capacity, or reduce the risk associated with new product launches.

Quantitative, systematic, optimized pricing can then mean survival or not, as depicted in the well-known (by now almost classic) McKinsey & Co. report from 2003 titled The Power of Pricing. A price rise of 1 percent, at constant volumes of sale and costs, should generate an 8 percent increase in operating profits, which is 50 percent greater than the impact of a decrease of 1 percent in variable costs (that is, materials and direct labor), and more than 3 times greater than the impact of a 1 percent increase in sales volume (even if one forgets that increased production typically increases costs)

Thus, while there are many determinants of a companys success, no variable can influence margins as much as pricing. In other words, poorly constructed pricing policies can be just as detrimental to a company as optimized pricing can be beneficial.

The "Easier Acknowledged than Done" Situation Remains

In spite of the above findings and increasing market awareness, one can still sense a chasm between the markets realization of the potential pricing benefits and its corresponding (expected) moves. Specifically, many companies realize that having non-profitable products or customers results in margins quietly and unnoticeably leaking (and money being left on the table). Related to this is the notion of the pocket price waterfall, which displays how much actual revenue enterprises really keep in their "pockets" from each of their transactions with customers. These pocket prices help companies diagnose and capture missed pricing opportunities.

To be clear, a pocket price is a financial description of the price paid after direct selling costs have been subtracted, which is the money the company "puts in its pocket". Further, a pocket margin is a financial description of the margin that gets "put into the company's pocket" after all costs are allocated (indirect overhead and indirect costs). Price waterfalls are analytic reports that measure the erosion of list prices and compare them to the actual pocketed price. Price waterfalls do so by taking into account several factors. Such factors include negotiated (if not irresponsibly generous) discounting (a component of a price that represents a deduction from a baseline or "list"); rebates and promotions; consignment costs; cooperative advertising; chargebacks; payment terms and cash discounts; online order discounts; performance penalties; receivables carrying costs; slotting allowances; stocking allowances; freight charges; volume incentives; and so forth.

Each of the above factors places a unique "fingerprint" on each and every order and deal, and yet, these factors and fingerprints remain largely invisible throughout the enterprise. This is to say that managers who watch over pricing often focus on invoice prices that are readily available. Unfortunately however, revenue leaks are not detailed on invoices, and are therefore not easily spotted. Revenue leaks (or price waterfalls) can include cash discounts for prompt payments; late payment and extended terms costs; cooperative advertising allowances; volume-based rebates; promotional programs (a form of discounting that has clear guidelines and time scales to encourage very specific buying behavior); freight expenses; special handling; and so on.

Since commoditization, price transparency, price wars, and price erosion are all seemingly here to stay, there is thus an increasing urge to transform the crude, self-destructive, reactive, and other "dark art" pricing strategies of yesteryears that are still largely practiced today. Such archaic methods have companies relying on anecdotes from the field, applying a "cost plus" pricing approach, watching and matching competitors prices, etc. to form their pricing strategies.

Companies see the need to turn their pricing strategies into a more exact science by using complex algorithms to analyze available historical transaction and market data. This raw data can be harvested mostly from existing corporate databases, such as enterprise resource planning (ERP), supply chain management (SCM), or customer relationship management (CRM) systems to synthesize a detailed analysis of the profitability of every level of business, all the way down to each individual transaction. Managers or pricing analysts can then study the results and figure out how to adjust their price operations accordingly in a more educated, data-driven manner. The idea here is not to customarily "guestimate" (make a somewhat informed decision) what is going to happen. Rather, it is to change prices in a more controlled (even if experimental) way, watch what happens, and then set prices for real after that (with the next set of tests and observations taking place soon after).

For instance, astute software captures real-time and historic purchase data, and organizes it into analytical models to determine optimal price and deal structure. This is made possible by taking into consideration such variables as the customer's buying power and geographic region; the relative value and cost of the supplier's goods and services; the competitive dynamics; and how frequently the customer makes a buy. This marriage of statistical science and analysis empirically answers the proverbial question of what the market will bear for "this much, at this time, for this thing." This determination is made at a very precise level, benchmarking pricing decisions against the subset of transactions that are similar in terms of price response, and sets the stage for price optimization and negotiation guidance.

The "one-size-fits-all" list price, coupled with the "let the sales guy negotiate the best deal he can get" pricing method, and further helped by a mega Microsoft Excel spreadsheet full of unexplainable exceptions and variations, is slowly being replaced by this data-driven approach. Also, given the growing awareness that a single item can have different prices for different customers and segments, a solid price management solution must take each individual customer into account and sense, set, and enforce the price according to that segment. For some enterprises, pricing science, a combination of statistical and algorithmic methods that synthesize price recommendations from historical pricing and marketing data, could be one (if not the only) way to find coveted profit margins.

Enabling a Winning, Unified Team

Enterprises are increasingly realizing the need for holistic, data-driven pricing management, which in many instances starts with the application of pricing science to determine how price response varies across customers, products, and orders. Price response refers to the net prices achieved in the market correlated to customer, product, and order variables that influence the price outcomes.

In general, demand elasticity (or consumers' price sensitivity) is responsiveness of the quantity purchased of an item to changes in the item's price. If the quantity purchased changes proportionately more than the price, the demand is elastic. Conversely, if the quantity purchased changes proportionately less than the price, the demand is inelastic. Price sensitivity is the specific elasticity measurement as it relates to a customer's response to price or discount movements. For example, high price sensitivity would reflect substantial changes in behavior from a small pricing movement.

One must also remember that a truly strong price optimization system is not merely a "price-raising" system. There may be as many opportunities to reduce the price on a given item, or increase item turnover, ultimately producing more profit dollars than if a price were to be increased beyond the consumer sensitivity level.

However, the terms customer price sensitivity and elasticity often carry with them the negative connotations associated with "exploiting willingness to pay." While this may be an accurate description of business-to-consumer (B2C) pricing dynamics, willingness to pay and sensitivity are not major factors in business-to-business (B2B) pricing. Conversely, B2B market prices reflect a range of qualitative and quantitative factors: product-service differentiation and associated value, competition, relationship, service, supply and demand, and variable costs, to name the most significant.

The terminology thus used in B2B environments to describe the aggregated effect is market price response. Once the enterprise has determined price response, it can employ price segmentation to quantify how response varies across the market based on the customer, product, and deal circumstances associated with each transaction. Once the enterprise has determined which circumstance, or deal attributes, affect price outcomes in a customer's market, the company can use price optimization to help it align prices within each segment, and to differentiate prices across the segments, which improves consistency and profits.

Once a company has determined how price response varies across its markets, it can then discover, analyze, and remove margin leakages. Once this is done, companies are then able to enforce and manage pricing policies (including discretionary negotiation guidance) to become more proficient with quoting, contracts, and negotiations. Comprehensive insight into pricing performance should be a powerful tool for improving profitability, starting with sales representatives who, when armed with scorecards showing market pricing conditions and recent peer group quotes, can negotiate deal terms with greater confidence.

The idea here is to counteract the all-too-common faulty selling practice of lowering prices in order to maximize the odds of winning. Fear of losing the sale on price inevitably biases a majority of uneducated pricing outcomes lower than the circumstances actually warrant. Whether negotiating a deal discount or setting product line prices, the impulse to "do whatever it takes to get the business" often results in suboptimal pricing and margins. Many benchmarks have supplied empirical evidence of the pricing that is really necessary to win under a given set of circumstances, which in most cases is higher than assumed.

Even if a salesperson is willing to compete aggressively, it is difficult to do so without a sound analytical support. A well-known anecdote illustrates that every salesperson remembers the details of the last deal only, which is usually completely inappropriate for a new sales opportunity. The distribution of price outcomes for each price segment should therefore reveal where prices were set lower than was likely needed to win the deal. This analysis, based on looking backward, should not only highlight grossly unprofitable outliers that are well below the price segment median, but it should also identify the much more common case in which prices and margins could have been slightly higher.

It is typical to find that in total, these underpriced transactions have reduced realizable margins by 10 to 20 percent, or more. Information is likely the most powerful negotiating tool available, since giving salespeople contextual price recommendations (with reasonable space to maneuver) based on quantitative information about what similar customers paid under similar circumstances should immediately improve results. Further, pricing analysts can spotlight outlier transactions and reap immediate benefits by enhancing the margin characteristics of these "low-hanging fruit" (most obvious pricing opportunities), whereas executives can more quickly review the profitability of their business units and take action where needed.

Last but not least, when management deems that an order deserves an exception to standard discounting policy, the ability to evaluate different value-added scenarios (those activities or steps that add to or change a product or service as it goes through a process; the ones customers view as important and necessary) based on their relative profitability ensures "must win" deals and helps limit the overall financial impact. The main point of price segmentation is to recapture those previously wasted profits going forward, and this is where benchmarking each new price decision against its respective price segment peer group should truly pay off. A pricing segment is a group of transactions that display similar circumstances and behavior related to pricing, discounting, and promotions. This capability allows companies to segment and optimize their prices and promotion offers at a more granular level, thereby improving alignment with each segments respective price sensitivity.

With a clearer picture of what pricing is achievable across the market, decision makers should have the prescriptive information they need to set prices as high as possible without putting business at risk. This understanding can then be used to eliminate unprofitable pricing variation within price segments by increasing and tightening the distribution of price outcomes.

In addition to better market information and price recommendations, well-devised incentives also have powerful effects on a sales representative's discipline and confidence. Incentive compensation plans are designed to motivate sales and service professionals to achieve goals and strive for excellence. But, an alarming fact is that these same compensation plans are often at odds with the corporate strategy of customer satisfaction. This is because sales employees, in their zeal for earning more, often lose sight of what is important—their customers' needs and their companies' strategies.

If, for example, a company wants to increase sales of a new product line, but the direct sales and indirect channel still receive hefty incentives that favor existing product lines, the sales folks will logically not care to pursue sales for the new (but unrewarding) product line. Also, what if a manufacturing company's salespeople are paid on the volume of purchase orders, and continue to sell under heavy discounts or by overpromising nonexistent features to customers? The company's profits will likely dwindle quickly as a result. There have been many examples of companies paying immense sales commissions to their sales forces (who, to be fair, have all reached their quotas, albeit inadvertently set wrong by their superiors), even as the companies suffer terrible losses, possibly at the risk of going out of business.

Therefore, some companies have been using monitoring capabilities to discover and address issues with sales force performance. Using information gathered via the monitoring processes, a company can then use analytics to study order win rates and discounting across sales representatives and field offices. Many companies reward sales forces on the basis of revenue booked, but some pricing solutions also provide insight into win rates and the "cost" (discounts offered) to achieve that win rate. For more on these pertinent issues, see Are Sales Incentives Even in Tune with the Corporate Strategy?.

This is the part one of the series Know Thy Market Segments Price Response, which discusses the importance of price management, and explains the processes involved in pricing that all enterprises should execute in order to achieve their margins. In the next part of this series, a new approach to pricing—one that uses science and algorithms to analyze massive amounts of company data—will be discussed.