Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Month: January, 2006

Automated Information Tracking on the Internet

I wanted to make you aware of another cool Web-based, free resource that I’ve become aware of and have started using.

It’s called PubSub, and it allows your eyes and ears to be extended greatly on the Internet. The service works somewhat like a search engine, except a “future” or “forward-looking” one.

PubSub is a service that notifies you when new content is created that matches your subscription. The core technology of PubSub is an Engine that matches new information events against stored queries such as yours, at more than three billion matches per second. This allows the PubSub service to constantly monitor millions of information events for you.

It’s very easy to use. You enter a phrase, or a set of phrases in a list box. Simply click “Start Matching Now” and you’re ready to roll. This creates the subscription on PubSub that will continuously search for the chosen phrases across a wide variety of Internet content. PubSub claims to monitor over 2o million Internet sources, including weblogs, Newsgroups and Edgar SEC filings. You can have PubSub monitor all its sources, or narrow it down to specific categories such as “Airport Delays”, “Weblog Entries” or “SEC/Edgar filings”.

PubSub creates an RSS feed containing new matches, which you can read in a browser or have constantly available in a newsreader. I have my PubSub feed linked to my personalized Google Page, which I use as my browser homepage. That way I instantly see any new matches right when I boot up in the morning.

If you think about it, this type of service could be useful monitoring information for many different reasons. You might, for example, tell PubSub to look for “New Plasma display TVs”, if you’re in the market for a TV upgrade in the near future.

You could use it for monitoring reviews and mentions of your software product. Or track the marketing moves and financial results of your competitors.

I use it for monitoring the presence of my high technology management consulting business on the Internet. It’s very useful to know how often your company is being mentioned–and more importantly what’s being said!

This is a tool whose usage is only limited by one’s imagination. How will you use it? Post a comment, or write me an email, and let me know.

Phil Morettini
PJM Consulting
www.pjmconsult.com

1 Comment by admin on January 27, 2006
filed in Online Marketing, Social media, market research

Outsourcing Software Development Offshore

This has become a very hot topic in the last several years. I’m referring to the practice of companies in the US, and other developed countries, outsourcing software development projects to companies in lower cost, developing countries. This is a strategy that has “taken off” and is rapidly becoming mainstream in the software industry. Much has been written on the social and macroeconomic consequences of this phenomenon. My take on it will be strictly from a business perspective.

In my research in this area for a number of clients, several important questions popped to the forefront. I’ll address them one at a time.

What are the circumstances whereby outsourcing to a lower cost country makes sense?

This is a complex question with no simple answer. There are actually many reasons to consider outsourcing.

The first and most obvious is to lower your development expenses, of course. How much can you save? The answer depends upon what your costs are in your home location, as well as where you outsource too. Let’s look at example of a California Software company outsourcing to a company in India, a common example. My research indicates that the California software company can reduce its hourly costs by at least 60-70%. This doesn’t even include the “fully loaded costs” of permanent employees. On the other hand, it doesn’t take into account the inefficiencies inherent in having software development done by a third party, let alone one with a very different culture, potentially a different language, and ten time zones away. These inefficiencies are hard to quantify, and will vary from situation to situation—they are largely dependent upon how well you choose your partner, and how well you manage the relationship.

Another important consideration that would lead you to offshore outsourcing might be the availability of software developers locally. A few years ago after the dot com bubble burst, developers were suddenly available, practically everywhere. But as we enter 2006, they are very scarce in Southern California, where I’m based. And if you are looking for a narrowly-defined skill set, you can almost forget about hiring internally. Conversely, there is still a large pool of educated, skilled and experienced developers, which have not yet been fully absorbed, in a number of developing countries with a tradition in technical education. So while it may not be obvious on the surface, labor availability can sometime be an even more important driver than cost.

A third important consideration is expedient access to specific skills. An example of this is that I have several early stage software clients, who are embarking on their first large scale software project. For the first time, having a sophisticated QA function has moved from being a luxury to a necessity. For a small software company, it can take several years, with many bumps in the road and significant investment in both people and equipment, to build up an adequate in-house QA department. Another approach would be to use one of the many outsourcing firms specializing in QA. QA is all they do, every day. As an alternative to building up an in-house department, you can get immediate access to a seasoned, fully functional QA team. In other circumstances you may already have a good in-house QA team, but can use the outsourcer to provide “overflow” support, as an extension of your in-house team.

What benefits can I expect from outsourcing?

  • Lower software development expenses
  • Access to a much larger pool of talent
  • Access to skill sets that are scare in your local area
  • Less investment in infrastructure
  • Immediate or “flex” capability for fast reaction to unforeseen needs

What are the pitfalls, and potential drawbacks of outsourcing?

Well, there are many—and this is what scares the “late adopters” away. The biggest fear, I believe, is entrusting your intellectual property to any third party, let alone to someone you don’t know, in a country with different customs (RE: more IP theft) and laws. This isn’t something that I would suggest being taken lightly. However, the outsourcers are aware of this fear. They won’t be in business long, if their clients IP is being stolen from them—this is the type of thing that tends to kill a service business. So they are very sensitive to this issue, and have erected many security features to allay the client’s fears. In extreme circumstances, the client code can be isolated to computers with no Internet Access or write devices.

The second most important fear is lack of control. Software companies are typically accustomed to internal development, and want to manage the process closely. You can still manage and monitor the product development process closely using an offshore outsourcer—and you should. It does, however, take a bit more work and usually an adjustment to the normal management processes. From what I have seen in my research, it is very possible to have the process go as well, or better, than it would in-house. It’s also very possible to screw it up completely!

The third greatest fear is dealing with a different culture and time zone. Except for the most bigoted among us, I believe that this is easily overcome simply by “doing”. Once you work closely with colleagues in other countries, you realize that we’re all “people”, with many of the same aspirations and fears, regardless of where we live. Most will get very comfortable quite quickly with their foreign counterparts, if they just jump in and give it a chance.

Lastly, there is the issue of inertia—“we’ve always done it this way”. Although it seems a bit silly, this is a very common problem. This problem has deeper roots, and is much more serious, than simply fear of outsourcing. If you don’t overcome it and roll with the changes, it could kill your company.

If I do outsource, to which country should I send my projects?

There are a number of choices—below is my current preference list, in ranked order:

  1. India
  2. Russia/Eastern Europe
  3. Brazil
  4. China

I rank India first, although at this point they are probably the highest cost. The reason is that the Indian outsourcing companies are the most mature, with the longest track record. They also speak pretty good English, which is important to those of us here in the US. You can expect the hourly rates to be in the neighborhood of $18-20/hour—still an enormous savings over US development costs.

The second choice is Russia/Eastern Europe. The companies there are far less mature than in India, so you are taking a greater security and execution risk. If you really need lower costs, however, hourly rates can be as low as $4-5/hour.

Brazil is an emerging place for outsourcing. I have a handle on the exact rates, but they are very low. For US clients, Brazil has the advantage of being in the nearest time zone, so you can talk during business hours, and is the easiest place to get to—especially from the Eastern US.

China, like in nearly every other market, is the potential thousand pound gorilla lurking in the wings. It is the most immature place for outsourcing software, an industry that is just emerging. The language differences can be a difficulty, and IP laws are still troubling. But there is a huge pool of competent technical resources, and the people that I spoke with expect rates as low as $1-1.50/hour.

What are the key things I should focus on to ensure the success of my outsourcing project?

My research turned up several key things:

Choose an offshore outsourcer that has a local office in your country. Over time, this may become less important, as you get to know your ou
tsourcing partner. But at least initially, it can be the difference between a successful first project, and dismal failure.

Choose an outsourcer who has been in business for a while, is stable financially and has low labor churn—but is still hungry. If they’re “too successful”, the priority sometimes shifts from client satisfaction to maximizing profitability—not to your benefit.

Choose an outsourcing partner who is appropriate for your size. If you are a small, early stage company, you might be too small for one of the large, major brand names in the outsourcing business. The potential for getting ignored, and being low priority, looms large in this situation.

Choose a partner who is growing by referral, not by large marketing expenditures. Great Service companies thrive on long time clients and their referrals—repeat business means satisfied customers.

Have a key member of the offshore team come onsite at your company for several weeks or months, if you can afford it. This was suggested as a key reason for early success, by many of the companies who had positive experiences from the start. It was a key link in creating understanding and good communications with the offshore team.

Start small, and with a project that is not mission-critical. This will allow you to “debug and test” the process, so that you can maximize efficiencies when you do outsource a larger, more critical project.

Demand written reports on a regular and timely basis. Certainly weekly on a first project—daily might even be appropriate in some circumstances.

Demand and hold regular status meetings. No less often the weekly on a first project.

If at all possible, “pick your own team.” If you can get to know the personnel at your outsourcer, try to specify who will work on your project and for how long. The worst thing that can happen is that you start off with “stars”, and mid-project labor churn and higher priority clients lead to turnover on your team, and a more junior staff.

So that’s my run-down on outsourcing. I’m sure there are many opinions on this one. Post a comment—let’s talk about it!

Phil Morettini
PJM Consulting
www.pjmconsult.com

5 Comments by admin on January 20, 2006
filed in Business Models, Corporate Strategy, Operations, Software/Product Development

Technology Sales & Marketing-Is a direct or indirect approach best?

A question that often arises when my consulting practice engages with early stage companies is “How should we sell our product? Should we build a sales force, or sell through distributors, dealers or OEM partners?”

The answer, like most topics discussed in this forum, is rarely as simple or straightforward as the question itself. It depends—on a lot of different factors. First of all, if direct, does that mean building an expensive direct sales force, or a marketing driven model with direct sales from a website? If indirect, does it mean distribution through 11,000 mass retailers, or a select few, highly specialized, technical Systems Integrators? There are so many different options within the direct vs. indirect argument.

I will tell you upfront that I have a bias toward using multiple channels—direct and indirect—if at all possible. It’s always been my opinion that this is usually the best way of achieving the highest total return, from the high product development investments that are typical in the technology industry. But that’s a general rule, and one that won’t always hold up in individual cases.

Let’s take a look at some of the things a company should consider in formulating a direct vs. indirect sales and marketing strategy.

How Complex is the Product?

It’s always important to start with the product in considering any aspect of your sales and marketing strategy. Is the product complex to sell? Is it complex to install? If a typical installation is highly complex and customized for the client, there may be a high level of services required that can only be delivered by experts within the company. If this is the case, a direct model usually work best.

If there is what I would term a “medium” complexity to the product, this often lends itself to the utilization of VAR and System Integration partners. This class of partners is attracted to products that allow them to bill configuration and service hours, which is really how they make their money. This key here is that the product isn’t so complex that the partners can’t be reasonably trained on the product, to deliver these services somewhat independently in the field, with a minimum of hand-holding by the vendor.

The last case is a product which is very simple and standard, or has minimum customization that can be performed by the end user. This level of product complexity usually lends itself to multiple distribution channels, including direct and mass market channels, which provide great distribution breadth, but minimal support. VARs and Integrators may also sell products of this nature, but they won’t put much focus on them, since they don’t drive service revenue. VARs will essentially “take orders” for this type of product as a convenience to their clients. They won’t be a “strategic” channel for this type of product, but since they are a large channel, the sales can still add up to a substantial total—so you shouldn’t ignore them if they are appropriate.

How High is the Product Price?

A high price can lead you in two different directions: Direct-only, or to a VAR/Systems Integration distribution strategy. If you’re selling an Enterprise Software Product into a narrow niche, with an average deal size of $2M, you’re probably going to end up selling the product direct.

If, however, you selling a $50-100K average sized deal, and the addressable market is a bit larger and more well-defined, it’s very possible that the VAR/Integrator channel may provide real leverage.

For products that fit into the $9.95-$995.00 range, a multi-channel marketing and distribution model may once again be your best bet. Products in this price range usually are very standard or have user-customizable features, and lend themselves to “sales-intensive” distribution channels, rather than support intensive. This could mean a focused direct marketing model with direct downloaded software sales from a website, or sales through computer retailers or mass market stores.

What does the Promotion Mix look like?

High priced, directly distributed products tend to have very simple promotion plans. The reason for this is that high priced products typically have small focused markets, so it’s pretty simple to get your marketing message to the customer. The simplest promotion strategy is what I call “Door to Door marketing.” Door to Door marketing means relying on the sales force exclusively to promote your product—with little or no investment in marketing programs. Or maybe due to limited resources, your promotional budget only allows a monthly Ad in a highly targeted trade journal. These aren’t strategies that I generally recommend, but for narrow markets, it is sometime appropriate. Bottom line, simple promotional strategies are generally only advisable for direct distribution approaches.

If on the other hand, you have available to you a large budget and a wide variety of promising promotional programs, that often is coupled with a broad distribution strategy. If you’re promoting in many different places, that may drive demand in a variety of different channels. In general, I say use them all. And I’m rarely a proponent of selling “indirect only”—you tend to lose valuable information without a direct link to the customer. You will also leave money on the table by giving up margin on customers that would prefer to buy direct. But occasionally companies are so dependent upon channels, that it doesn’t make sense to manage the channel conflict, and deflect the ill will that selling direct sometimes generates within a channel.

What Channels are available to you?

Oftentimes, the decision on how to sell is made for you. If your company is in a missionary situation where you are creating a new market, or you are in a very narrow niche, you usually don’t have any choice but to sell direct. If it’s a new market, channels might develop later. But in most cases, selling direct initially, either solely or in conjunction with channels, is highly advisable. There is no channel in the world that will be able to figure out how to sell a product—that the company itself hasn’t figure out how to sell itself. It’s always good to conduct trial and error marketing/sales campaigns directly, and then transfer that knowledge to your channels.

If you have a product that is broadly attractive to a variety of channels, and you have the resources to promote and sell effectively through all of them, I say go for it. As I stated early on in this article, it’s my belief that this is the best way to optimize your return on assets. The only caution is to make certain that you have the necessary resources, and are in a position to support all channels. If not, it’s better to “go slow” and add channels one at time—if you alienate a channel, they have a very long memory, and it will be hard to get back in their good graces.

One type of partner we haven’t discussed yet is the OEM. In some cases, there may be a large, dominant player in your business that you are tempted to pursue as an OEM channel partner. While occasionally this leads to making the principals of a small company quite rich, I’ve found in most cases its fools gold. No one sells your product like you do. Most OEM deals that I see end up with revenue levels in the range of 5-10% of the small company’s initial expectations. This can still be a substantial, important source of revenue. But the message I’ll leave you with is that I prefer early OEM deals to be non-exclusive, rather than exclusive. The exception is for a product that fits in a new market you don’t plan to participate in directly. Too many times I’ve seen clients “bet the farm” on a major OEM early in theie development, and the company was either killed or severely wounded by the experie
nce. Pursue OEMs, but it is usually best to do so as part of an overall, comprehensive distribution strategy.

How does the customer want to buy?

Finally, the most important question to consider is “how and where does the customer want to buy?” One of my most closely held beliefs is that you maximize revenue by offering the customer a product that is priced, packaged and sold via the channel he is most comfortable with. So if your prime prospect is a direct buyer, sell direct. If it’s a diverse audience that has a number of preferences on where to buy, strive to be in all of those channels. This may be the most important advice that I can provide.

That’s my review of the Direct vs. Indirect Sales & Marketing decision. I’m sure there are a lot of different experiences out there on this topic—what’s your experience been? Post a comment in my Blog, or drop me a note via email. I’d love to hear your thoughts.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

4 Comments by admin on January 11, 2006
filed in Business Models, Corporate Strategy, Distribution Channels, Online Marketing, Pricing, Product Marketing/Management, Promotion, Retail, VARs, enterprise software, sales