Hockey Sticks and the Software Business

Well, another quarter is "in the bag" and its time to take a breath and pause if only for a second...  

Now, get back to work and do it all over again. 

One of the most interesting phenomenon in the world of software is the dreaded hockey stick.  For those of you who are unfamiliar with this phenomenon, it is the seemingly unavoidable scenario that results in 98% of your sales coming in at the end of the quarter.  While this happens in many different industries, it is very prevalent in the software business.   Below is a chart that shows the hockey stick in action. 

Why does this happen?

1. The incentives of the sales team encourages it.
2. The fiscal quarter end of your company encourages it.
3. The fiscal quarter end of your customer encourages it.

The problem is that, in many cases, all of the above are aligned.  This alignment leads to the hockey stick.  Re-aligning the three items above can help to minimize the hockey stick, but it will not make it go away.  Companies have tried for years and they have paid consulting firms millions to avoid it, but it is almost impossible.

What does the alignment do? Well, for one, your sales people will do everything they can to close deals before their clock resets.  That means they want to pull in any deal they can before the end of their measurement period.  Some companies have tried capping the comp plan, but that is not a good idea because then sales get pushed out causing a whole new range of issues. 

The second and third bullets are linked together.  Most companies follow a fiscal year that matches the calendar year.  They know that you do too.  So, they know that they are likely to get the best deals if they wait until the end of your quarter to sign.  They know that you will pull out all the stops to close that deal.  Combine that with their fiscal quarter and you end up with a HUGE hockey stick at year end.  Why?  Well,they have budgets that they have been holding on to.  They need to spend that money before year-end or they risk losing that budget next year. 

The combination of two and three are catastrophic to both businesses and personal lives.  Businesses can't plan and personal lives are ruined due to the fact that everyone has to work twice as hard from Christmas to New Years (when everyone ought to be off).  Not to mention the stress and the heart attacks that it causes. 

How do you fix this?  I am not sure you can.  But, you can mitigate its impact.

1.  Change your incentives to sales people.  Don't give them all the same quarter.  Make Tom's year end in May, Leo's in August, Mary's in March, etc.  This way they are closing deals all year.  Is this a new idea???  You tell me.  I have never seen it done, but no one could give me a good reason why not.

2.  Change your fiscal year-end.  My first employer did this (QAD) to lessen the December 31 hockey stick and it worked somewhat.

The best way, in reality, to avoid this is to change your business model. Part of the problem is the way software is licensed.  The traditional software model of a huge up-front license fee and recurring 20% maintenance helps to perpetuate the model. 

If there is one thing to be learned from open source and software-as-a-service (SaaS), its that a subscription model is the preferred way to sell software. But, that is a topic for another day.