Sandon Associates-Order Processing System for Software Companies

Sandon Associates

Order Processing System for Managing Information on

Sales of Software Products

Overview of Business Requirements

The market and demand for software products has been increasing as quickly as the price/performance of hardware has been decreasing. The number of companies whose sole product is software has been expanding at a rapid pace to meet this need. Unfortunately, systems to manage the information about orders and sales of software products have not kept pace. Existing order entry systems designed for the distribution and manufacturing industries do not begin to address the unique requirements of the software industry. Millions of dollars in revenue are generated from relatively few sales transactions, each of which is exceedingly complex, with a great deal of information, affecting many areas of the business. Information regarding site location, CPU serial number, release level, and maintenance contract must be maintained. Quotes, evaluation copies, support contracts, and export licenses also must be monitored. A software company frequently grows from zero to millions in sales in just a few years. Management, focused on marketing and development, might ignore administrative systems which are seen as peripheral to profits. The sheer magnitude of data required for each sale rapidly overwhelms manual tracking systems that initially appeared capable. When the ten million dollar sales plateau is approached, hundreds of licenses have been sold and the data of who has what license, which release level, payment records, commission amount, etc., is buried in papers or stand alone systems which are difficult to access. In response to these problems, each functional area may fix its unique piece of the problem by developing a stand alone system. Many hours are spent trying to reconcile these unconnected systems. In the integration process, companies run the risk of losing or mis-transferring data and valuable company records. Perhaps the initial public offering requires an audit of licenses.

The solution to these problems is an integrated Order Processing System, or OPS, which maintains and reconciles all the necessary sales, maintenance and licensing data. The author has advised a number of companies on the design, development and implementation of an information systems to address the unique needs of the software business. After briefly outlining the segments of the software industry, the author will present an overview of the functional areas of an integrated OPS explaining how it will meet a High Dollar Segment software company's business needs.

Industry Segments

The software industry can be segmented by license price into three main segments: 1) the Low Dollar Segment, under several hundred dollar range; 2) the High Dollar Segment, the over several thousand dollar range; 3) the Mid Dollar Segment, between these two. These three pricing segments determine the information systems requirements for order entry and management of information on installed systems.

Low Dollar Segment

The low dollar segment consists of products such as spread sheets and video games. The company is essentially a publisher, focusing on a large quantity of unit sales, controlling cost of manufacturing and selling in bulk through multiple distribution channels. The product is simple, with no maintenance or system updates required. There is not a concern with tracking which end user is using which specific serial numbered product. End user registration of the license is voluntary and is primarily done for marketing purposes. A standard, off the shelf, order entry/inventory system such as Great Plains, ASK, or Oracle Financials which follows the traditional distribution flow of receiving a customer order, printing a shipping ticket, shipping the goods, and invoicing the customer, serves this segment reasonably well. Historical sales information is recorded for future analysis; however, these functions fall short of the requirements for other segments.

Mid and High Dollar Segment

The high dollar segment consists of software for complex applications such as integrated circuit design, software development and network management, and requires different business processing databases than simple systems. The products are usually sold directly to customers or via specialized channels such as ISV and VAR's, and field technical support is provided by the developer/manufacturer. Unlike Low Dollar Segment products, R & D costs far outweigh manufacturing costs. It is essential to track every licensed user, which CPU serial number each product runs on, what release level is installed, and when the maintenance contract expires for each sold system. Because of the complexity of data required for each system sale, the traditional inventory and distribution databases are no longer sufficient. The Mid Dollar Segment shares the some of the requirements of the High and Low Segments.

Integrated Order Processing System

The unique order processing requirements for a High Dollar software company cannot be met by the many accounting systems currently available for main frame, mini-computers and PCs. The solution is an integrated Order Processing System (OPS) as a "Front End" to a standard accounting system. The OPS consists of an integrated relational database of all information relating to sale and installation of the system licenses. The system will manage an order as it flows from entry through shipping, installation and payment. When an order is completed, the information is maintained in the Installed System part of the data base where it can be easily accessed for reporting purposes. The invoice amount will be transferred to a standard accounting system which will track accounts receivable, cash receipts, general ledger, and accounts payable. Each department will have responsibility for updating and maintaining its portion of the shared OPS database. All information in the shared database would be available to those that need it, and are authorized to have it, enabling decisions about services, licenses and updates based on current, accurate information. The system should provide the data and processing tools to allow each department to perform its respective function as follows.

Sales Reps:

Sales reps will be able to generate quotes based on the company pricing methodology. Once accepted, the quote will be converted to an order. The OPS maintains a backlog of all outstanding orders and provides summary and status reports of all the steps necessary to fulfill the order including but not limited to: customer purchase order receipt, credit approval, contract approval, CPU platform designation, operating system specification, network environment determination, and export document creation. The OPS prompts the contracts department about requests from sales reps to vary from standard contract offerings. The OPS also manages orders for training, documentation and consulting. Outstanding quotes, order backlog and commission earnings can be accessed when required.

Sales Order Administration

The OPS sales order database tracks sales orders, logs customer purchase orders, creates export documents, manages license agreements, and monitors negotiated prices. The OPS reconciles information from accounting history, prior sales and previously installed software for each client. Site location, CPU id, platform, customer names/addresses, contact names, and other information is housed in this administrative part of the database for quick access and easy updates. The OPS also files the business relationship of customers such as VAR, system integrator, or consulting partner.

Accounting Department:

The accounting function of the OPS generates invoices and posts cash receipts when orders are completed. The Accounting Department can also review the purchase order, product shipping information, and confirm credit limits. The department can independently set dates for revenue recognition, invoicing, commissions, and shipping on the shared OPS database. The OPS will electronically transfer invoice and cash receipt transactions to a standard accounting system.

Deferred Support Revenue

This function of the OPS amortizes the support revenue over the term of the maintenance contract for the Accounting Department. The OPS database allows and prompts for canceling the remaining part of an old contract when upgrading or adding a new product or feature to a customer's account.

Shipping

The OPS generates shipping and packing slips as well as product documentation and security key codes for the Shipping Department based on payment status and credit hold status. The department then records product release level and serial number actually shipped to insure accuracy.

Commission Accounting

This function of the OPS calculates commission based on product, sales history, cash receipts, invoices shipping, and other factors. The OPS arranges commission payment based on invoice date, ship date, or date of cash receipt and calculates on flat rate or stair step, by territories, and including key account or key product bonuses. Because of all the factors which go into any individual's commission check, the OPS allows for changes in commission plans according to a company's unique needs.

Support/Support Renewal

The OPS maintains the status of the support contract and generates notification of contract expiration to a client 90 days preceding the expiration of the contract. If the client chooses to extend the service contract or upgrade to new modules/release levels, this function updates the shared OPS database for technical support and billing.

Maintenance Releases

Based on release level and installed configuration, the OPS determines when to send upgrades and fixes to paid maintenance customers or customers with trouble calls.

Legal/License/Contracts

The OPS database houses information about contracts and legal restrictions of software usage on a per customer and per system basis. The database also houses standard contractual agreements with various exceptions built in for easy access by the sales rep responsible for generating documentation. The Legal Department can easily track signed licenses with customers and monitor compliance with license agreements.

Marketing

The Installed System portion of the shared OPS database enables the Marketing Department to complete comprehensive sales analysis of installed systems, configuration and platforms factoring in a client's location, industry and size. Based on this information, Marketing can suggest new products or upgrades to current customers and package effective configurations of systems to potential clients.

Technical Support

The maintenance of outstanding "bugs," maintenance fixes and the ability to query them is appropriately a separate data base. However, OPS can be queried to determine the type of maintenance plan and its current payment status when fielding support calls.

Summary

It should be apparent from the above discussion that an Order Processing System is essential to the long range success of a software company. However, because each companies business processes tend to be unique, and because there is no off the shelf package available, it becomes necessary to design and develop a custom system. Some of the above described functions may be of more importance to different companies, and it requires business planning to determine the key issues. An ancillary benefit of the design process, is the documentation of the business rules such as commissions, warranty, pricing and contracts. The system can be developed incrementally as requirements and funds are available. Although the ideal time to establish an OPS is early in a business's life, data can be transferred and merged from stand alone systems into one integrated OPS after the fact. For software companies data is a precious resource as well as a necessary functioning tool and must be recognized and treated as such. Integrating sales and systems information in a customized OPS facilitates timely sales and contracts approval, on-time shipping of systems, efficient technical support, accurate commission statements, up-to-date licensing information, and expanded market analysis. The author is available for consultation about an OPS and customization of the Order Processing System outlined in this article.

Go To Top of Page