Yonyous Business Operations in the Software Industry - Case Study Example

Yonyou’s Business Operations in the Software Industry Executive Summary This paper is about Yonyou’s business operations in the software industry. The company developed management software modules and eventually diverted to providing customized software services. The adoption rate of management software increased as most of the companies wanted to have an efficient management system in their companies. The management software industry has changed gradually over the years, particularly after the 2012 recession. The recession has caused severe downfall in the revenue of the entire industry. The profit margin of the companies took a severe downturn. The recession led all the software companies to change their business strategies. Likewise, Yonyou also developed its own strategies to sustain in the changing market environment. The investment in the R&D to promote product development eventually worked in company’s favor towards its expansion. Yonyou collaborated with companies like IBM and Atos to develop the cloud computing, which proved to be a step towards the future of IT. Introduction Yonyou Software Co. Ltd., headquartered in Beijing, China, is an accounting and ERP software company. It operates in mainland China, Japan, Honk Kong and Thailand. Founded in 1988, Yonyou has been ranked as no. 1 management software provider in China. The company excelled in Chinese markets as it could understand the Chinese management culture closely. In order to streamline its business, the company also outsourced its consulting and implementing services. The information technology industry went through several changes in last five years and all the companies had faced severe downturn or even ceased to exist. However, Yonyou has managed to adapt to the changing environment and sustained in the competitive industry. Management Software Industry The growth of management software had slowed down after the great recession and economic crisis in 2008. The management software market in Asia had a much higher growth rate in 2011, although being a small portion of the global market. The manpower and materials cost had increased within the last decade in China, as a result the companies were bound to adopt the management software system in order to avoid inefficient operations and management. Although, as compared to other developed countries, China still stands behind when it comes to investment in management software. China mentioned in the 18th national congress, that it will follow its own way to implementation of information technology on a national strategic level. The adoption of IT into the management system came with a tradeoff between higher efficiency of management and high cost of implementing IT, this issue slowed the development of IT industry. Moreover, there was severe internal competition within the industry over enhancement of software standards in order to keep up with the technological revolution. The adoption of management software would increase with the growth of internet usage. It was expected that the investment in IT would eventually increase its demand in the industry. The Chinese domestic firms were caught in the interest of cloud computing, which was massively developed by SAP and Oracle. The CEO of Yonyou mentioned that, for a software firm it is not only about developing on the cloud computing services, but also to contribute to third party application developers by opening the application platforms, as a result it will allow the companies to meet the diversified needs of the customers. Yonyou’s Market Position Till 1995, Yonyou developed accounting software, after 1996 it started working on Enterprise Resource Planning (ERP) software, which diversified its product portfolio. Starting from high end to low end, Yonyou catered to the entire segment in the industry. The NC product line, which is the high end product line, was for big corporate houses and industries. It provided customizable one-stop solution for them. The U8 product line was for ERP and mid level businesses and lastly the low end T series, comprising of T1, T3 and T6 was targeted at single module applications. However, in 2009, Yonyou excelled more in the mid-to-low high end market, but in the high end market, SAP and Oracle was more dominant. The low end market was still dominated by the local companies. Yonyou being a Chinese company, it understood the country’s business management and process better than SAP and Oracle. The high end NC series was targeted at the diversified business of the Chinese business groups and catered to their centralized management needs; it also helped Yonyou to penetrate in to the high end market which was once dominated by international players. Moreover, Yonyou offered more competitive offerings through its eight industry specific subsidiaries. Studies have shown that Yonyou held the leading position with 23.5% market share in 2011-2012 and owned a 30.7% market share in ERP software domain. In 2011, The Company’s market share was more than the sum total of the second and third ranked company’s market share. Yonyou always wanted to operate in the international market, but competing with SAP and Oracle overnight, was not easy. The company followed its Chinese customers, who localized their business overseas to meet the local regulations. Yonyou helped them with a centralized oversight of their subsidiaries. The revenue generated from the international business increased from 0.76% in 2010 to 1.15% in 2012. In 2012, the company also started developing on the prospect of the cloud computing (Tsinghua SEM. 2014). Strategic Decisions in the Past During 1990s, the software companies only sold software licenses. Yonyou used the distributor approach in order to facilitate the widespread promotion and sales. Eventually, when the company diverted to developing management software from selling software licenses, the revenue from software sales was not enough. Financial software was developed in a standardized manner, which followed the host client country’s accounting standards. The management software also catered to a range of customer’s needs, which varied broadly across companies and their industries. Providing customized software services to clients is critical. However, the partner distributors who used to sale software did not have necessary experience and knowledge to provide services for management software to clients. Yonyou was not the only company to face this problem, SAP and Oracle was also in the line. In order to solve this problem, The Company established more than a hundred direct sales subsidiaries in order to provide services according to client’s needs. Management software was to fulfill customized needs of the firms, where implementation and consultation was very important. Different companies needed different types of software implementation. The local Chinese companies needed software, based on Chinese management systems. This localized implementation incurred extra costs to companies like SAP and Oracle. Yonyou, courtesy of its scale of operation, was able to provide localized solutions at a lower price, by building its own team for consultation and implementation services. Thus, the customers were able to enjoy lower IT costs and at the same time received services from the manufacturer, rather than an outsourcer. Yonyou understood the local cultures and practices well; as a result, it allowed the company to provide better consultation and implementation services. Every product line was backed up by its own research and development team as well as a consulting and implementation team (Tsinghua SEM. 2014). From 2010 onwards the manpower cost in china increased heavily, thus, the profit of labor intensive companies reduces severely. Yonyou also faced the same problem, as its work force was staffed with implementation and consultation professionals. The unbearable labor costs stopped all plans for expansion in 2012. The profit declined by -29.3%. Clearly, the operation strategy followed by Yonyou and several other software companies needed change, in order to adapt to the changing environment in 2013 and onwards. The company decided that, it would be more profitable to develop upstream products rather than downstream ones. The company started to invest on extensive R&D and product development, though, software consultation did not disappear at all. The competition in the business management industry was intense. Any company which could penetrate into a particular industry could beat other. But, concentrating on fewer industries would lead to missing opportunities in other industries. Eventually, Yonyou focused on Research and Development of Platforms, and simultaneously, it also provided client’s customized needs. Internal and External Conditions in 2012 The 2012 recession caused severe rise of the labor costs. All the companies, whose operations were dependent on the manpower, had suddenly hit a downturn in their profit margin. The entire software industry was going down. The unstable economy and increasing labor costs had reduced the profitability of the company by -29.3%. Fellow companies like Kingdee International, also faced severe loss. The stock price of the company had hit its daily limit twice. The company’s decline in the operational revenue and profit making, continued till the second quarter of 2013. This was the result of unfavorable global economic condition as well as the change in the company’s product portfolio. Several other factors like, cash outflow was faster than cash inflow and lack of cost control also lead to the financial downfall of the company. This recession has caused Yonyou to go through a business structure transition in order to curb the massive economic downturn (Tsinghua SEM. 2014). Although, the operational revenue in the Q3 of 2011 remained stable, but the expenses of 2012 increased by 17.7% in the first three quarters. Being a technology service company, it still had a labor intensive model of service, so Yonyou rapidly needed to build service partner capacity. In 2012, the company invested 10 million RMB and found Yonyou Yunda Information Technology Services Company Limited. Almost, 80% of the software consultation services were outsourced to this company. It was planned that all of its mid level services, i.e., the U8 product line would use this service outsourcing. By 2013 Q4, Yonyou and Yunda, each would account for one half of the total business revenue. This transition affected the U8 product line the most. Nanchang based Yunda, had a work force of over a thousand staff, of consulting and implementing personnel as well as new recruits. Yunda’s core business included Information Technology Outsourcing and Business Process Outsourcing. Yunda became a professional service proving company under Yonyou, in 2013. Apart from Yunda, Yonyou also developed other outsourcing relationships (Tsinghua SEM. 2014). Service outsourcing and distribution were designed according to client’s preferences. Based on the financial standard of the projects, the clients were ranked as gold, silver and bronze. The partners had to go through rigorous assessment before they could officially start working for Yonyou. They had to pass a two-month probation in order to qualify, which was followed by an annual assessment of quality check and partners relationship. Comprehensive assessments on a regular basis were done by Project managers in order to maintain the service quality. Thus, the 2012 recession’s impact on the economy and the internal culture of the organization, led to Yonyou’s transformation. Change in Business Model The recession in 2012 led several companies to terminate their employees and downsize their business. But, Yonyou on the other hand, did not terminate many employees; rather it invested heavily on research and development and marketing. Although, the company had worked on cost cutting in the third quarter of 2012, it was still moving aggressively towards expansion than any other fellow companies in the industry. The R&D had two areas of operation, the Software R&D and the Platform R&D. The platforms were used only for the internal development of the company, later it was opened to service vendors and clients. The readily available platforms helped to save on R&D expenses for the researchers and developers in the profession specific markets. The advent of cloud computing changed the company’s business operations drastically. The hardware and operational expenses were reduced by combining the platforms and cloud computing. Yonyou made collaboration with IBM, to develop a cloud computing lab. The company also made a joint venture with Atos Origin to expand its cloud service market in Europe, Africa and Middle East. Two major cloud computing applications on CSP were “Accountant’s Home” and “Book Keeping Pro”. Accountant’s Home was released in 2012 served as a portal as well as a social networking service. Accountants all over the world could share their ideas of tax policies and book keeping issues. This network of accountants eventually increased the consumer base of the company. The market was becoming increasingly customized and one single product was not able to cater all needs, on the other hand, a platform would work on all markets. Yonyou developed a “one strategy, two platforms” plan of execution. The Private Cloud Platforms (UAP) and the public cloud (CSP) were the two cloud platforms. UAP was designed for the high end clients whereas CSP was for small and medium enterprises (SME). Yonyou always wanted to have industry chain integration; which would remove all barriers among the enterprises and would reorganize internal resources to create product and service alliance in a value added approach (Tsinghua SEM. 2014). The platform strategy in 2013 was focused to serve developers on a diverse scale. It was named “platform development” and “industrial chain symbiosis” The company wanted to lead the industrial cluster to promote collaborative development within its partners in the industry. The competencies of its partners were enhanced by Yonyou by sending specialized teams across the country to certify them. Yonyou gradually moved towards Internet based products, like CSP. CSP was open to SME customers as well as partner developers. The development of internet products is quite different from those of software packages. The CSP was released without any market research, because neither the company nor the users could afford market research. Yonyou was gradually transforming to an internet company as cloud computing and internet is deeply connected. The business based on cloud computing heavily relied on the financial support of the existing traditional product lines. Yonyou tried to become one of the world’s leading technology companies. The primary focus was on development of the internet services and cloud computing and continued to invest in these fields. Pure software distribution was eliminated, as the consulting and implementation service was mostly outsourced. As a result, Yonyou had to heavily depend on its partner’s certification system for service quality. Yonyou’s withdrawal from direct services changed customer’s expectation for the company. The company wanted to work in collaboration with the service partners long enough to provide the quality services independently (Tsinghua SEM. 2014). Recommendation Yonyou should maintain the service quality of its consultation and implementation services, as it is outsourced to a separate subsidiary. The outsourcer must comply with all the standardization of Yonyou; as a result, the customers will be able to trust the brand of the company, even if the services are not provided by them. Yonyou can also expand its business overseas by acquiring other firms, just like Google did. This will not only lead to its growth, but also pose as a threat to its competitors. Lastly, the company can integrate all its products with the cloud computing technology, as a result it will give it a competitive edge over its rivals and also it will reduce the maintenance and operational costs. The internet has spread its reach to all the corners of the world, so Yonyou should evolve itself as a fully internet based company; this will boost its market penetration. Conclusion Yonyou has successfully developed itself as a cloud computing based company. Even though the recession had put negative impact in its business, the company still sustained without having to terminate many of its employees. The company understood the local Chinese management culture which helped Yonyou to cater to all the client’s needs better than its competitors. Thus, it can be stated that understanding the culture of the customers in vital in building long term relationships with them. Yonyou gained high brand loyalty from the local customers, where international companies like SAP and Oracle failed to penetrate. A company must keep on evolving itself to match with the growing market trend. As internet was becoming a worldwide phenomenon, Yonyou identified the opportunity and started developing on cloud computing services. However, the founding members of the traditional product line faced financial cutoffs, because most of the capital was channeled on development of cloud computing and internet based products. The contrast between the two groups of staff started internal rivalry and the company wanted to maintain its internal entrepreneurial culture and trust among its employees simultaneously making itself an “all around business partner”. Reference list Tsinghua SEM. 2014. Yonyou 2013. China Business Case Center. Tsinghua University School of Economics and Management 1-29 Read More