Young software firms are pragmatic but positive: PwC

Stefanos Lialias keeps a picture of Microsoft chief Steve Ballmer on his desk just to remind himself of how competitive the software business can be.

“”The inspiration is not, Hey, I’m going to try to be like Microsoft — which I am. It’s just that competitive animal is going to try to (push)

me out everywhere, so I have to work extra hard.””

Lialias is the CEO of Digital Speed Inc., a Toronto-based software company that specializes in mobile solutions for the health-care market. Digital Speed recently signed an agreement with St. Joseph’s Health Centre in Toronto and has other customers on tap.

“”If you have a particular offering, you have to be very focused. You’re not going to compete if it’s broad breadth and the messaging is too diffuse,”” he said.

A PricewaterhouseCoopers survey of emerging software companies, the results of which were published Wednesday, corroborates much of Lialias’s experience in the market.

Like Lialias, Canadian software companies are pragmatic about the market but overall quite positive about their prospects. “”They were very optimistic about revenue growth, even though they felt that revenue was their greatest challenge to meet. I think the reason we did the survey was because we see some optimism out there,”” said Susan Allen, leader of PwC Canada‘s emerging company practice.

PwC spoke to 182 CEOs of Canadian software companies with $2 – $5 million in annual revenue.

Allen said IT spending is flat and shows indications of growth — a vast improvement over the last few years, where IT budgets were on a downward slope. Survey respondents expect a 10 per cent increase in IT spend in 2004 — which is actually more generous than the less than five per cent that many analyst firms predict.

One of the biggest issues facing smaller Canadian companies, she said, is finding a niche so that they can compete with the established software companies that pour millions into R&D and marketing.

According to Allen, there is room to play. She said executives from Scotiabank and Canadian Tire, who recently attended a PwC conference, said that they are willing to entertain offers from software companies of all sizes, provided they fill a need.

“”They said they don’t just look at the SAPs of the world,”” said Allen. “”The bigger (customers) are talking about consolidating their suppliers but they’re also looking for best in class suites.””

The best way to get a customer’s attention is to actually focus on that customer, said Lialias. “”We go in with a ready-made solution like mobile wireless patient monitoring, to give you an example. If you hit a particular need and you can focus on that need . . . there’s money, there’s good money.””

The PwC report also asked 307 senior IT directors to gauge how companies approach them when they’re looking to sell software. A frequent mistake is trying to sell the wrong person on the software, said Allen.

Allen said that software companies tend to overvalue the purchasing power of the CEO, when it’s really the CTOs and CIOs that hold the purse strings. According to the survey, CIOs have buying power 49 per cent of the time, CEOs are only about 30 per cent of the time.

Lialias’s answer to that is: none of the above. “”I was cognizant not to go after (C-level) executives, because that’s tier 1. Who do you think is going to go there? It’ll be IBM, it’ll be CGI, it’ll be EDS.””

He said it’s better to go after a mid-level manager like a vice-president of sales. “”To approach a CTO? If I would do that, I’d still be trying to sell. You have to pair it with your reality.””

The survey indicates that most smaller Canadian software companies are thinking about the realities of achieving business goals, one of which is to do business outside of Canada. Companies need to develop channel partners to stretch their influence into the U.S. and overseas, said Allen.

Channel partners are important, agreed Lialias, since it can be very expensive to develop a direct sales force. However, a company needs some market validation before it can attract the best resellers, he said.

A surprising finding in the survey was the number of software CEOs that said their most likely exit strategy was to be acquired by a larger company. About 90 per cent said they aim to attract an acquirer versus 35 per cent who said they plan on going public through an IPO.

Lialias doubts the validity of those numbers. “”In my experience, when you’re dealing with an entrepreneur, it’s a very personal thing. Some do go out and say, ‘I want to be acquired,’ but that’s not the first step in this for most of the guys I know,”” he said.

“”The first dream of an entrepreneur is: I want to be Microsoft.””

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