The EDA business model: look back to IBM and forward to self-preservation
The growing gloom of recession has only intensified the discussion as to whether there is a viable business model for EDA firms, and if there is one, what it might be. But a financial announcement yesterday from outside the industry stands like a fingerpost at a crossroads. And a recent discussion with Magma chairman and CEO Rajeev Madhavan suggests that industry executives are paying attention to the signs.
The announcement was from IBM, that monolith built on the mainframe. (Well, actually, it’s build on cash registers, but that’s another story.) IBM rather startled the market by announcing a 12 percent gain in net income for its fourth quarter, despite a nearly 20 percent drop in hardware revenues. Far from reefing sail for hard times, IBM’s CEO Samuel Palmisano reportedly told employees "Many companies today are curtailing or drastically cutting spending and investment, even in areas that are important to their future. We are taking a different approach, not only because we have the financial strength to do so, but because we choose to manage I.B.M. for long-term success."
Analysts attribute IBM’s counter-recessionary results to the company’s successful shift from a hardware-driven, and highly cyclic, business model dependent on customers capital expansion plans to a software-and-services model that is mainly dependent on customers’ level of continuing operations. And your humble non-analyst would like to add that executing this strategy has been possible because of Mr. Palmisano’s attitude toward funding strategically important programs. If he were the type to run for the employee lists and red pencil every time revenues turned down, there would be no strong software-and-services business to carry the company through.
All fine for giant IBM. But what does that have to do with EDA? We have speculated here previously that the future for the EDA industry does not lie in the direction of some simple fix to the existing seat-license business model, but toward a recognition that EDA is not a part of the personal-computer software industry, with shrink-wrapped software and free support. It is, like Oracle, SAP, or IBM, actually a service industry in which the software is a delivery vehicle, and it needs to act that way.
So far, signs that the industry agrees with this opinion have been rather scarce. But a recent discussion with Madhavan suggested that times are changing. The CEO described a deep cultural changes at Magma over the last nine months, focusing design teams outward toward customers and the way they work, and focusing the company’s operations on baseline revenues, not on the promise of exceptional revenue growth.
The first part of this transition, Madhavan said, involved getting design managers out into the field, handling applications-engineering issues and talking with users on a regular basis. That is, Madhavan shifted the focus from creating elegant products in isolation and then sending them out to see how they worked. Instead, the focus should be more the way it was when Magma was a start-up, Madhavan said: figure out how to solve the customers problem, and use product development as a tool to that end, not an end in itself. Sounds very service-oriented in structure.
The second part of the transition was putting the company’s finances on a basis consistent with the service orientation. That has meant pain—reducing fixed expenses until the company can make a profit on its baseline revenue. And it has meant combing through product lines, making each individual product responsible for positive contribution, rather than letting a few stars carry the rest. The focus is not on creating the greatest edifice, it is on making money by making customers incrementally more profitable.
It seems to me that there is a fundamental shift here, away from EDA as a research-centric enterprise that undertakes grand challenges and then induces customers to fund the R/D expense, often by acquiring start-ups who are actually meeting the customers’ needs. The shift is toward making the customers more efficient, and thereby creating a cash flow that the EDA company can share. This view sees research, development, and applications engineering not as levels in a hierarchy or phases in a product history, but as full-time partners, each of which brings a specific skill set to that bottom line of releasing a free cash flow in the customer’s operations. I think this is a model IBM managers would recognize quickly.