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I like to check out one of the morning TV shows on one of the major US-based networks for a few minutes, as I’m eating my breakfast cereal. There are 3 major programs on at the start of the day: NBC’s Today Show (the traditional market leader), ABC’s Good Morning America (the perennial runner-up) and the recently re-branded CBS This Morning in (last place for many years).
So what the heck does this have to do with software market segmentation, you ask?
I’ve been struck by how much the morning show race reminded me of the software industry has become more vertical over time. In particular, there are some strong parallels between the software business and the morning shows with respect to the product being “soft enough” to make relatively easy product changes as part of a new segmentation strategy.
Recent changes in strategy on the TV morning shows
The Today Show has been the “10,000 lb Gorilla” of the morning shows since the beginning of the category. They’ve had a large lead over their competitors across multiple changes in on-air personnel and even societal cultural changes over the years. The Today Show’s format has been aimed at a “horizontal” audience–a little bit of something for everyone. They start with hard news at the beginning of the show and it gradually becomes “lighter”, transitioning to Pop culture, celebrities and gossip as the show progresses through its marathon 4 hour time slot.
The other two major shows have taken a real beating at the hands of NBC in the ratings, with many tweaks to their formats and even more turnover in personnel over those many years. Fundamentally they have tried to compete by “building a better Today Show”, essentially competing head on with the market leader in a horizontal fashion. But over the last couple of years, ABC and more recently CBS have changed their strategy, utilizing a much sharper segmentation than at any point previously. ABC has essentially gone “younger and lighter” over the last couple of years. The show has the least serious tone and is the most “fun” of the three, focusing a lot of time on pop culture and other topics skewed toward younger viewers. It’s paid off. Good Morning America has taken a clear lead over the Today Show due primarily to this new segmentation and to a lesser extent some personnel missteps at NBC.
After many years in last place, CBS has segmented sharply in the other direction with a shorter 2 hour program focused almost entirely on hard news and staffed by serious, credible news people. It’s too early to say how successful this will ultimately be for CBS, but they have won over this writer and have picked up some market share overall-I’m watching consistently CBS in the morning for the first time. The Today Show has been struggling to remix it formula and regain its clear lead, looking much like a complacent large company that has grown fat, dumb and happy as a result of years of unchallenged success.
Software Market Equivalents
Ok, enough about TV morning shows! How does this relate to segmentation in the software market? A very similar situation albeit in a B2B rather than B2C market, is the ERP software market. The ERP market is also a very large, horizontal market–a mass B2B software market, if you will. Just about every company in the world needs some type of ERP software to run its business, from an entry-level, basic accounting application like Intuit’s Quickbooks all the way up to very expensive, complex enterprise suites such as offered by Oracle, Microsoft, SAP and Sage.
This of course is one form of verticalization–segmentation by target customer size and sophistication. Intuit and Oracle aren’t targeting the same segments. But the ERP market is so large that over time it has also segmented by industry; nearly every industry group of any significance now has ERP software vendors with specialized applications aimed at a narrow industrial segment.
Another similar example is Medical Practice Management Software. The last time I looked, there were over ONE THOUSAND software vendors with products targeting this very large market. You would think the software requirements of most medical practices would be pretty standard across the board. But because the market is so large and lucrative, nearly every market segment (Surgeons, Gynecologists, Dentists, Chiropractors, etc.) has it’s own sub-market of competitors, with applications that speak that particular medical practice’s lingo and strictly models its business processes.
I have a personal example from earlier in my career that illustrates how important segmentation can be as part of a software company’s overall strategy. I took over as CEO of an early stage mapping software company with excellent technology but an unsophisticated business strategy. While the company had a neat technical advantage over its larger competitors, the product otherwise was positioned directly against the market leaders in that space. The primary distribution channel for the mainstream mapping products of the time was computer and electronics retailers, a notoriously tough and expensive channel. I was able to make some headway in penetrating this channel. But even with our technical feature advantage it was already too late in the game and we lacked the resources to compete and win head-to-head with the larger market leaders of that time.
So we quickly came up with a segmentation strategy that proved quite helpful. Initially we took out some features away from our primary product and created an entry level product priced far below the mainstream mapping products. This allowed us to occupy the price leader position targeting the most price-sensitive consumers, and distribute through both consumer/gaming software stores of the time as well as mass market retailers such as drug and grocery stores. The mainstream mapping software players had almost no presence in these channels due to their higher price points. This entry level product, created with minimal development costs, allowed us to generate cash flow to fund our longer term segmentation strategy which was to target the B2B market. The mainstream mapping products were fairly generic and used by business people as well as consumers, but really designed for any consumer with no business-oriented features to speak of. We were able to create a premium, business-focused version of our product which we positioned as the mapping products for mobile workers/road warriors such as sales reps and service technicians. We included important business-specific features, such as integration with the popular CRM systems of the day, which weren’t found in any of the other mainstream mapping products of the day.
Important considerations in segmentation strategy
Hopefully we’ve established that segmentation of your software market can be a very powerful tool to compete with and outflank strong competitors and ultimately maximize the value of your business. So what are the important things to consider in formulating your segmentation strategy? Let’s look at a few:
Horizontal vs. Vertical – The first thing to consider is how horizontal your segment currently is and how vertical you think you need to be to compete effectively. There is a fine line here; the more horizontal you can remain (targeting multiple segments with the same product) the higher your product’s ultimate profit potential. But you must be realistic about your market position–go as “vertical” as you need to win–or your profit potential is likely zero!
Market Maturity – The more mature the market is when you enter, the more likely it will be important to segment smartly and attack a vertical niche. Of course this or any single factor shouldn’t be used in a vacuum to create a strategy–many factors need to be considered in your segmentation decision.
Market Size – The larger the market size, the more likely it is that it’s ALREADY segmented and will likely force you to do the same. There are several prominent potential exceptions here, listed in the bullet points below.
Market experience of the company - Do you know the market well, and just as important, are you known by the market? In cases where you’re known and understand your market well, it raises your odds of success even entering with a more horizontal approach.
Levels of funding – Big companies with massive resources or heavily funded startups may be able to successfully use a horizontal approach, although many confident late entrants of this type have failed in a variety of software market categories.
IP/Technology & other strategic advantages – A true innovator with market changing IP may also be able to attack and win in an established market using a horizontal approach, as they are effectively changing the ground rules of the market. But again, I’ve witnessed many companies very confident in their technical advantage that have ended up with their hats handed to them when competing head on in an established market.
Important upfront decision–but never too late to change
Like any important business consideration, it’s far better to optimally segment the market for your products up front then to wait until you are FORCED to do so. But just like a morning TV show, in the software business it’s relatively easy–at least compared to other technology categories such as computer hardware or semiconductors– and almost never too late to modify your target segments.
What’s your feeling on how best to approach segmentation in the software business? Post a comment so we can all benefit from your experiences.
In software and hardware businesses new ideas, technologies and products come down the pike at a rapid-fire pace. Many fail immediately and some muddle along before finally fizzling out. Some meet with modest success. Only a very select few turn into long run big hits. How can you tell which products will become hits, out of a sea of mediocrity?
Not many people can differentiate between these new ideas, technologies and products at an early enough stage to profit massively from it. Keep in mind I’m not talking about small successes, but the really big ones. The ability pick the big winners out early is a rare skill set, yet one that is applicable across a wide swath of functions including general management, product planning/management, inventors, venture investing, stock analysis/selection and many more.
Short of having a brilliant mind, multidisciplinary worldview and the ability to see the future—how do you go about maximizing bets on what will hit it big and what won’t? Here are some questions that may be useful to ask when making your evaluation:
Does it solve a fundamental problem, bend a cost curve or create a new playing field?
Not every new product is based upon a fundamental technical breakthrough—but it sure helps! After all, innovation is still the basis of the technology business. This is where you look first when seeking big ideas you can profit from, something that fundamentally changes the game in a particular marketplace. One of the most spectacular examples of a breakthrough that met all three of these criteria is the personal computer. It solved some fundamental problems of the time associated with mainframe computing, certainly bent the cost curve of computing downward (and continues to due so even today) and created an entirely new ecosystem with broad societal implications. Meeting all three of these criteria is a very tall order that you won’t see often, but passing one of these three tests is almost essential for a big-time winner with staying power.
Where does it fit in the marketplace?
There are certainly many great stories of fundamental research breakthroughs without immediate, obvious market applications that ultimately found a market and became a great hit. The problem occurs when the second step—finding a market—is given short shrift, or skipped completely. This can happen when there is pure excitement and the folks funding the project have a purely technical viewpoint. The number of big successes without expert market vetting is actually pretty rare although there have been some spectacular exceptions.
We’ve all heard of the invention of super glue by accident. And Thomas Watson Senior, Chairman of the IBM Corporation in 1943 was quoted as saying: “I think there is a world market for about five computers.” Five units do not make a commercial market, but IBM made the investment anyway—and look how that turned out. But in reality the number of fundamental breakthroughs in the research lab dwarfs the number of truly successful, innovative new commercial products. So it’s important to not get too excited about these breakthroughs until a commercial application becomes obvious and realistic. Avoid at all costs the proverbial “Cure looking for a disease”, regardless of the almost mythical stories of a few massive winners borne from purely technical circumstances.
How does it compare to alternative solutions, both current and forecasted?
After deciding the breakthrough isn’t a cure looking for a disease and which market segment it fits in, it’s also very important to evaluate how it stacks up vs. rival technologies and products. And not just with respect to a current market snapshot, but looking forward as well. Forecasting really comes into play here; which technical platform has the longest runway? An example is satellite TV vs. Cable TV. When Satellite TV came into play it took a lot of market share quickly by providing innovative new services which the utility-like Cable TV companies were slow to match. But in the long run the wired infrastructure of the CableCos may provide a strategic technical advantage in that long running battle that may enable a more advanced and diverse product set.
Do the owners have what it takes to bring it to market?
This question applies not only when evaluating someone else’s product or technology—but also your own. Realistic self-reflection is important here. There have been some great new innovations that have been wasted due to bad marketing, lack of financial resources or just plain ignorance and incompetence. These weaknesses often lead to the “ arrows in the back of the pioneer”, where the folks that initially bring out the “next big thing” fail or are quickly overtaken by a more tactically skilled competitor, who improves on the idea and/or out-executes them in the market. The software spreadsheet market is instructive here, conjuring up images of several bigger fish progressively swallowing smaller ones. Visicalc was the original spreadsheet innovator overtaken by Lotus who was then in turn overtaken by MS Excel. The resources and capabilities of the innovation’s owner matters a great deal in the long run.
Is it defensible?
This is what often separates the “flash in the pan” from a true long term winner. Defensibility can be defined by the traditional technology means of patents, copyrights and trade secrets. But there are more subtle ways of defense that can be very successful in the long run: branding, entrenched distribution channels, strategic partnerships and cost advantages.
Especially in the software and hardware businesses there are tons of fast followers, who are lying in wait for an emerging trend or new market segment, where they can apply deep resources and tactical skill to out-execute the pioneers. In hardware markets the major Japanese manufacturers long ago mastered this model by taking US inventions and productizing them cheaper and better. The large Korean manufacturers then found success with this same model and most recently it’s been replicated by the Chinese. In the software business Microsoft and other large software companies have grown by either mimicking or buying up technology leaders who have pioneered a new market segment. However it’s done–make sure the next big thing is defensible before betting on it becoming a big-time, long term winner.
Does it pass muster from every angle?
As stated earlier, it really helps to be a “renaissance man” man with a multidisciplinary worldview. But people meeting that description are in very short supply, so it’s really important to employ experts across several key disciplines such as technology, finance, manufacturing and marketing, to evaluate market potential and possible weaknesses. In the technology business marketing and technology are usually the key differentiating factors, so at a minimum make sure that expertise is brought to bear in those areas during your evaluation.
There you have my view—how to do separate the winners from the losers. Post a comment with your own view of this very debatable topic.
If you go back to predictions over the past 20 years or so, we should all be independent contractors, heavily utilizing technology to work full-time from home in temporary teams, within virtual software & hardware corporations throughout the world.
Has it happened yet?
More than one definition of virtual
First of all we need to define what virtual can mean, as it can mean different things to different people. The two main ways I would segment “virtual”:
For the purposes of this article I am referring to both of these definitions when I talk about the virtual company. Workers fitting each of these definitions have the potential to offer companies increased flexibility, lower fixed costs and higher skill levels for a given project/function at a specific point in time. Of course, in many cases a worker could fit into both of these definitions.
Virtual adoption varies by function and industry
In general, companies that are early adopters of technology tend to be those that are further down the path of virtualization. This makes sense, because technology itself is a very strong enabler of the ability to use the virtual model. In the old days it was much harder to be adequately connected as a non-employee and working remotely with only a landline phone and fax machine. So industries that adopt technology faster tend to virtualize faster as well. Old line industries that have stayed with manual methods longer tend to rely more heavily on the on-premise, full-time employee model. Of course some industries just don’t lend them themselves to heavy virtualization; it’s hard for physical retailer to virtualize most of its jobs. Also, there are always exceptions to this type of generalization on an individual company and manager basis. Virtualization also varies widely by function as well. As alluded to above, it’s hard to virtualize a retail clerk. On the other end of the spectrum, programmers and some call center employees can be located wherever phone service and an internet connection are available. There are many, many other attributes that influence how quickly a particular industry or company proceeds down the virtualization path. Companies very concerned about security, for example, often evolve in this direction much more slowly than industries and companies where security is less of a concern.
Tech companies are definitely on the leading edge of the virtual trend
The Internet and related technologies have provided a tremendous platform for driving more rapid acceptance of the virtual work model. Since software and hardware companies tend to be early adopters of productivity enhancing technologies, it’s only natural that the virtual work model is progressing faster in tech companies than in most other industries. Even in companies that still rely primarily full-time employees, it’s very commonplace to work from home occasionally, or attend meetings remotely while they’re on the road via video conferencing or online meeting software. In my consulting business, I also do see quite a few small or early stage software companies who are using primarily or completely a virtual business model.
All things considered—on premise employees are still preferred
There’s no doubt there has been a slow march toward the virtual corporation over the last decade or two. In my experience, however, most hiring managers still prefer a full-employee sitting in the office next to them over all other options. There are obviously many, many exceptions to this. But on a overall basis I believe this is overwhelmingly true. People still are most comfortable with the feeling that they will be able to deal with their subordinate in person, and would rather have the added comfort of a full-time permanent employee they believe they will be able to get to know and count on heavily over the long run.
The reality is that there are trade-offs to both the virtual and old standard on-premise, full-time employee approaches. The virtual approach offers flexibility, better matching of cost and workload and the potential for a better skill fit for a particular project. The on-premise employee approach is favored because of stability, known availability, cultural fit and company-specific training. In a perfect world a mix of both would be utilized, and every project and position would be evaluated on an individual basis to decide which model is a better fit for a particular situation. I do think that in many industries this will come to pass eventually. But old habits die hard and I don’t expect we’ll totally get there in my lifetime.
So what do you think about how virtual the world is—and how virtual it becomes in the long run? What has been your experience? Post a comment and share your thoughts on where we’re at in this long running trend.
Software and hardware business are often segmented by the vertical or horizontal market they’re targeting, their technology platform, small vs. large companies and so on. One of the important ways to segment tech businesses, which isn’t often discussed, is by whether the company is sales-driven or marketing-driven in their customer acquisition strategies.
A balanced approach
Now some reading this article may ask “why wouldn’t you take a balanced approach”? Indeed, I don’t mean to suggest that either sales or marketing should be absent in the customer acquisition efforts of tech companies. There are a few scenarios that could be drawn up to support such a singular approach—but very few for sure. There are also some situations where the customer acquisition circumstances are “in between” in price, complexity, market size, etc. and you end up with a fairly balanced approach between marketing and sales. But in my experience the sales or marketing function will rise to the lead, more often than not.
Key criteria in choosing customer acquisition techniques
There are several considerations that often drive whether marketing or sales will dominate:
Marketing driven keys to success
Sales driven keys to success
The best approach isn’t always chosen
Unfortunately, logic and situation analysis doesn’t always win out when designing a customer acquisition strategy. Usually by the time a company grows to be large, their approach is in line with what’s best for the business. Of course, your chances of growing to be a big company are reduced if you make serious errors in sales and marketing strategy. But in any event, by the time a company is big they are usually utilizing both sales and marketing heavily and in the proper balance.
Startups and early stage companies are another matter. Often the emphasis on either sales or marketing is based on the experience of the founders and senior executives. If they’ve been successful in the past and their new company has a similar focus, maybe it’s fine and their approach works again. But a problem occurs when these executives start up a very different type of company than they’ve had success with in the past. It’s human nature to fall back on what I refer to as your “common business sense”, which is formed by your personal background and past experiences. This is when you can get a misalignment between what a company needs and the approach taken in the sales & marketing mix.
Even worse still is when the customer acquisition approach develops more or less haphazardly. This can happen when the founders of a company really don’t have much functional experience in sales or marketing. This occurs somewhat frequently in software and hardware companies, as many startups are created by technical types. In these cases there may be a fairly unsophisticated approach to both sales and marketing—and whatever works early may end up dominate. For example, a sales rep is hired who has some success, so the model becomes hire a lot more reps and turn them loose without much (or any) support on the marketing side. Or an early direct email campaign or online advertising generates some sales, so money is poured into that method. Unfortunately, these may not be the best approaches strategically for the business in the long run.
That’s what I think about Sales vs. Marketing driven orientations in software and hardware companies. What do you think? Post a comment with your own opinions or stories about what drives customer acquisition in high tech companies.
Is there ever a time when hiring an outside senior executive for a short term assignment in a software or hardware company is the right thing to do? If you’re based in the US, the general answer (at least up until this point) seems to be NO.
Obviously there are many exceptions to this statement. But in the great majority of cases when an executive position opens up, the next person in that role is another permanent executive hire. In the small minority of cases where there is someone designated in the role with an “Interim” tag, it’s usually someone from inside the company. In the case of Interim CEOs, it’s often a current board member. Seldom do you see someone come in from outside the company who is brought in on an Interim basis.
This is very much a US phenomenon, however. In Europe (and in the UK in particular), the use of Interim Executives is a much more common occurrence. Why is there is such a different view of this function between the two main areas of the western business world? The use of Interim Senior Managers is increasing in the US, but at a very slow rate. Past the obvious difference in labor laws which make it much harder to reduce the permanent labor force in Europe, I’ve always assumed there is a cultural reason for the European vs. US gap in Interim usage. But I’m really not sure what other reasons there are for the differences in attitude.
So are US companies missing out on a practice that could in some cases be very beneficial to their business? Let’s look at a few circumstances where hiring a senior Interim Executive might make sense:
This is probably the most common reason to retain an Interim C-level Manager. An executive has left the company–whether willingly or not. The team left behind needs leadership. You can attempt to fill this gap by temporarily putting the team under a manager of another functional area, but of course this isn’t optimal. This manager usually doesn’t have the right background to manage the function and besides probably has a full plate managing his own functional area. This is the solution you see most often, but it isn’t generally a great solution. If the time gap between the former executive leaving and the new permanent hire coming on is very short, it might be fine. But if the time period the position is open is lengthy (or worse, you hurry into a very fast new hire) the performance of this functional area can really suffer. Bringing in an experienced Interim can often be a great solution to allow you to keep momentum moving in the right direction in the area of concern, while allowing the company to take it’s time and have a careful, thoughtful hiring process for the next permanent executive.
Agents of Change
There are many different reasons that a company might benefit from utilizing a change agent. One of the more common scenarios is a company undergoing financial duress. It’s often very hard for incumbent management to make the hard decisions required to bring the company back into balance, enabling it to continue as a going concern. While a new permanent hire can take the necessary steps, it can sometimes be beneficial to use a transitory change agent like an Interim Manager to take these steps. An Interim can step in and act quickly, while the right permanent hire might take too long in circumstances where timing is critical. Also, under this approach the new permanent hire, whether a CEO, CFO, etc. can come in with a clean slate and begin his tenure on a more positive note.
Another scenario common in the software and hardware business is a rapid change in technology, or some other massive change in market dynamics. In these instances it can be quite helpful to bring in an Interim specialist in the technology or market style to guide the company through a challenging period.
More generally, while most companies highly value their corporate cultures, if care is not taken there is also a tendency for things to become a bit stale over time and worst-case produce an inbred, group-think approach to business. Sometimes a fresh, outside perspective can inject new energy and innovation into problem-solving and other aspects of the company culture, even if utilized only for a short time.
Lastly, sometimes situation arise in companies where conflict over policy or personality is tearing the company or department apart, impacting the organization’s ability to function as team working toward important common company goals. Sometimes this is a transitory issue but it can also be the result of a toxic corporate culture. In these cases, bring in an Interim Manager with no previous “dog in the hunt” can allow him or her to serve in the role of an unbiased, Honest Arbiter to bridge the divide between the warring parties.
Manage a Special Project
The final common reason to employ an Interim Senior Manager in a tech company is the ubiquitous “special project”. There are many good reasons to bring a temporary senior resource on for special projects. Sometimes a project is very, very challenging, and it makes sense to bring in the most skilled, experience expertise possible to raise the odds of success. In other instances you feel confident in the level of internal expertise to bring the project to a successful conclusion, but the proper internal candidates simply don’t have the bandwidth to serve in the leadership role for the project.
In certain circumstances such as an M&A project, a new market/technology investigation or the startup of a new division you may wish to maintain a certain level of discreetness or confidentiality in the early stages of the project.
In many of these special project cases a more traditional consulting engagement could also serve the needed purpose, rather than a deeper and lengthier Interim Management engagement. The proper engagement method depends upon long and how independent the engagement needs to be.
PJM Consulting provides Interim C-level Management Services to software and hardware companies, in addition to our core Management Consulting Services. Contact us using the information below if you’d like discuss a potential need for an Interim Manager.
These are some ideas on why and when you might want to consider hiring an Interim Senior Manager. Space was limited; I’m sure there are many prime areas I left out. Post a comment with your own thoughts on the applicability of using Interim Management in high tech companies.
It’s become pretty clear in the last couple of years that we are heading irrevocably toward a cloud-dominated future in the software business. The evidence is irrefutable. To attempt to get a traditionally licensed PC or enterprise software business funded by an institutional investor would be a suicide mission these days.
Whether it’s SaaS, PaaS, IaaS, Cloud-based, web-based, Internet-based—WHATEVER, it’s all still basically the same thing. Some folks get very snippy about all the different definitions, but they are all just different segments or interpretations of the same model: Software hosted outside of the customer’s premises and available via an Internet browser. Although the technology has improved dramatically over time, it’s really the same basic idea as ASP (application service provider) model from back before the Internet stock bubble burst.
In many cases this trend is happening for good reasons, with the primary one being the simplicity the model offers end-users. But like anything, it’s not the perfect fit in all instances. For example, I’m still not convinced this model will ever be definitely cheaper than solutions that rely more on local computing power. For that to happen, I think we’re going to need to go back to the era of much cheaper dumb terminals to replace our powerful PCs. Having all that desktop power and storage (and the associated costs) sitting on your desks unused is pretty inefficient.
In addition, I also don’t believe SaaS and other cloud-based variants are necessarily the most profitable business models for every software vendor, even though institutional investors love it. I recently had a conversation with a venture capitalist and I asked him why the VC community was so in love with software in the cloud, specifically SaaS-based models. After some discussion about the various elements of SaaS and customer premise-based software models, it really came down to something simple: traditionally licensed software companies are valued at 1-3X revenue and SaaS-based companies are valued at 5-6X revenues. Of course, it’s all about the money and this makes perfect sense. But will this valuation gap be sustainable, or is it a market inefficiency that will go away over time? But I digress, that’s a topic for a different debate….
There are some very good (and maybe not so good) reasons that certain segments won’t come completely under the spell of cloud-based computing. Let’s take a look at a few areas where I forecast the cloud won’t become dominant:
This is one of the toughest software market segments there is. Banks are notoriously difficult to penetrate, and security is paramount. I believe this will be one of the toughest segments for cloud-based solutions to penetrate, and will be even harder to dominate. Certainly they’ll be a lot of cloud-based applications in non-critical functions. But anything that gets at the core banking functions, including customer data or money will be kept private. That might be a traditional on-premises solutions or private cloud-based apps, but anything sensitive from a security viewpoint will be held tight.
I believe this will be a similar situation here to the Banking market. Certainly the Cloud has already penetrated many areas of the government, and will continue to do so. But there are larges segments of government services where the data is just too sensitive. We’ve seen a lot of embarrassing breaches lately with respect to intelligence data that absolutely needs to remain secret. I think we’ll see a pullback from this data being available via the Internet, rather than moving deeper in that direction.
Open Source and Mobile
Outside of the cloud, these are the two software segments that institutional investors will still put money into. It’s true that many mobile applications have a cloud-based back-end, and a lot of Open Source platforms are used to generate cloud-based apps. But both of these areas represent code that will sit on customer-controlled assets and will slow the adoption of a centralized model where all computing is done in the publicly-accessible cloud.
Buyers vs. Renters
Some folks just like to own stuff. While the rental model works for many due to the reduction in software and hardware investment, which saves capital for other purposes, others feel that renting is wasteful. Indeed, SaaS and other lease/rental-oriented models aren’t necessarily the cheapest in the long run. This is really a psychographic attribute that isn’t likely to change among those so-inclined.
100% Service Levels required
The Internet is a long way from the old AT&T Ma Bell monopoly when it comes to service levels. Have you ever had the power go out at a company you work at? In this day and age, when that happens, everything immediately stops. With the every-increasing reliance on Internet-based technologies (and being accelerated by cloud-based apps), the Internet connection going down can have roughly the same effect. The Amazon EC2 Cloud Services outage in April 2011 gives a sneak preview of what can happen to productivity levels if service levels are compromised on a wide scale or for a long period of time.
Security Conscious (and the Paranoid)
There are many out there among us that have their own safes rather than using a Bank’s safe-deposit box, or are building safes rooms or bomb shelters to protect against perceived threats they view as inevitable. Many others are simply very cautious and prudent, and that means holding things close to the vest and not embracing the newest technologies until they are viewed as bulletproof. The profiles vary from the prudent to the paranoid, but the common thread will be slow or no adoption of technologies that are viewed as giving up control of something important.
As we embrace cloud-based applications at an extremely fast rate, my own feeling is that we are headed toward a major, high-profile event that will slow adoption considerably. I’m not sure what form that will take, but it could easily be a major data security breach that causes real damage to a lot of people, or an Internet-based outage that brings a bunch of businesses to their knees. There are many examples already which support that these types of events are quite possible. Several times a year now I get a notice that my private data has been compromised by one vendor or another. The Amazon EC2 outage discussed above already gave a number of people pause about being held captive by this model.
So that’s my take on some areas we’ll see little (or at least slow) adoption of public cloud-based software models. Do you see other areas I left out? I’m sure this will be a bit controversial as well—some out there disagree and believe the Cloud will take over the world. I’d like to hear from all of you, regardless of your view. Post a comment to add to the debate.
The level of process in an organization is a pretty esoteric topic that I haven’t seen discussed very often, or in very much depth. Yet I believe it is critically important to any CEO looking to grow a company, particularly a software or hardware technology based company.
The reason I believe it is so important is that, in aggregate, how process-oriented your company culture is effects every nook and cranny of company operations. Oftentimes, however, senior management doesn’t even explicitly think about how much process they want governing company operations. More often than not, this part of the culture grows in a random and haphazard manner, driven by unforeseen key events that shape the level of process. Sometimes the level of structure varies dramatically by department. In these cases, managers below the senior executive level usually are driving department cultures that may or may not be process-oriented, depending upon their own operating styles. The key takeaway here is that process levels often aren’t being driven strategically, but occurring tactically or even haphazardly. This is usually a mistake–here’s why I think so.
In technology companies, in particular, the level of processes can make or destroy your business. There are three reasons that I feel there is much more sensitivity in high tech companies to process levels:
I’ll use as an example a recent experience with a client to illustrate my point. The client is a small but growing software company. They have in their culture a high level of chaos, as is common with many growing, young software businesses. The company was bootstrapped and grown out of what started as a service business, and possesses very little in the way of corporate controls or processes.
On the positive side they are very responsive, fast-moving and innovative, able to capitalize on changes in technology and inefficiencies in the market. These are very important qualities in a software startup, particularly one of the thinly capitalized variety. These attributes are the very reason they’ve been able to crack through the very early stage that kills many startups, and has allowed them to grow and thrive.
But there’s a flip-side to this type of unstructured corporate environment, however. This company lacks the discipline that is required to “stick to the plan”. Indeed, there is very little planning going on to begin with! This operating style fits great in the segments of the business where innovation is critical, such as conceiving new products. But in other areas where a more disciplined, structured approach is important, performance is much lower and is a drag on company results. While excellent at conceiving and quickly prototyping new products, follow-on releases often come out much later than planned. QA is not a formal function and the initial new releases and documentation are lower quality than they could and indeed should be. The website has very little oversight and is littered with a lack of consistency, broken links, old content and grammar & spelling errors. We’ve worked on correcting these problems — carefully — without killing the very environment that is enabling success. It’s tricky to fix without “throwing the baby out with the bathwater”.
This is just one example, and of course the level of process needed to run IBM optimally is fundamentally different from that of an early stage software startup. In your particular company, it may be very important to have a high level of formal process in one department–and just as important to minimize the level of process in another. This may be quite different altogether in other companies.
So how do you know that you need to adjust your level of process in a strategic sense? Here are a few guidelines to get you thinking about where your process level stacks up vs. what may be optimal:
Your competitors are beating you to the punch
This is a sure sign that you are bureaucratic and process-oriented relative to your market. While there may be good reasons for the processes you have installed, being consistently behind in responding to market needs can have a very negative effect on your growth prospects.
You are constantly releasing “flawed” products into the market
This is the converse to the first point above. It usually indicates you moving too fast, with too little process and structure in product development, QA and release. In truth, the end results of this approach is usually worse that being beaten to market.
Employees are complaining about so much process
I always listen to what employees are saying; they are the “canary in coal mine”, often a leading indicator of issues that later show up in your financial statements. The caveat here is that these types of complaints can also indicate a hiring problem. Make sure you’re not hiring people who’s operating style aren’t a good fit with the way the company needs to operate.
Employees are complaining about the lack of process controls
The converse to the point directly above is when employees are complaining about how much chaos exists in the company. While the point above about watch for hiring mismatches rings true here as well, this is often the time you need to take a hard look at adding some structure to how you operate.
There’s absolutely no “chaos” in your organization–and little or no innovation as well
I have a rule of thumb when it comes to pricing new products: if no one is complaining about price, you probably are leaving money on the table. My “chaos corollary” is similar: if there is no chaos in your operations that folks are complaining about, you probably have created an environment so process-oriented it will limit your innovation and resulting revenue.
Generally speaking, I have a bias towards a little less process and a bit more chaos in software and hardware companies. Often excessive process is just a bad band-aid covering up poor hiring practices. Nothing allows you to minimize process like a strong, responsible, empowered group of employees. Creating the environment to hire and retain highly responsible people generally leads to a company getting done everything it needs to, with a good level of innovation to boot–while keeping formal process to a minimum.
I recommend holding off adding new processes until you absolutely have to, because going the other direction is much more difficult. But in fact, it’s important to have the proper balance if you want your company to function optimally. Analyze what the proper level of structure and process is not just for your company overall, but in each discrete operating segment of your business.
There you have it–my view on how to analyze and instill the proper amount of formal process for your company. What’s your view on this topic? Post a comment to expand the discussion.
The focus of my consulting practice is on commercial software product businesses, whether traditionally licensed, mobile, open source, SaaS–or some combination of all. While many software product businesses are originally organized with that purpose in mind, a remarkably large number of others started in another business. Let’s take a look at a few service-oriented scenarios which tend to grow into or spin off software product businesses:
Software (consulting) services
It’s very common for a product to be developed out of a software services company, which can mean a range of services such as consulting or outsourcing. These companies are being asked to design/create full applications, either for internal use by end user customers or as actual commercial software products. As a result, these service companies are in good position to recognize software product opportunities; sometimes these products are created by a funded service contract (if the service company is savvy enough to retain code rights!).
This is a very similar situation to the Software Services example above, with a couple of important differences. Government contractors are often not pure software development organizations; they may create hardware or provide other services as their government customers dictate. So they may not have a culture which emphasizes software development. Even more importantly, it can be tricky to retain rights to code developed with government funding–contracting expertise and an upfront emphasis on rights retention are critical in these circumstances.
Another common scenario is software developed within a hardware or systems-oriented company. While not strictly fitting into the service category, I’ve included this example because it’s another common way software product companies are started that doesn’t fit the traditional methodology. The fact is that even in hardware companies these days, most of the innovation and IP is software-based. So it’s not at all unusual to see software developed as part of a systems approach that is later seen as having a market as a standalone application, apart from the hardware. Many successful software companies have started as spin-offs from hardware or systems-oriented companies.
Here’s another slightly different flavor of the Software Consulting Services example we began with. VARs are solutions providers for end user customers and are frequently asked to extend existing applications which are lacking in some way, integrate these solutions with other applications, or even write a standalone custom application. They are therefore well-positioned to get an early view of (and sometimes a customer-funded head-start developing) products needed to satisfy unfilled end users needs.
End users often have in-house development capabilities and develop their own applications. In this case, the “service” organization is the internal IT department. These applications are often developed because of a “hole” in the existing commercial product offerings available in the marketplace. Forward thinking organizations may further develop and then spin-off these internal applications into commercial products.
So that’s a look at how organizations which aren’t-software product-oriented end up with a software product business. It can be a really great way for a software business to start–but there are many things that can prevent the successful transition into a going concern software product business. Here’s a list of a few:
Issues Which Can Prevent Success:
This is a frequent culprit in the failure of product businesses which are developed in the various service environments as discussed above. Depending upon the parent’s business, a mismatch in culture can come from a lack of understanding of either the software or product aspects of the resulting new business. For example, the management team of and “end-user” company that has developed a product may not be sufficiently software-savvy to make the right decisions to put the new business on a solid footing. A business executive in a software services company may not understand what it takes to develop a product to commercial product standards, or successfully market it. One of the biggest mismatches in culture often occurs within a government contractor. The “common business sense” required to be successful in the contracting business is shockingly different than that of a commercial software product business. The cultures are nearly polar opposites–It’s like English vs. French.
Often the cultural differences listed above or low overall capitalization of the parent company leads to the most common problem of these software product spin-offs: lack of proper initial capitalization. One of the attractive aspects of the software business is that it requires much less investment capital that a manufactured goods business–but it’s still a product business. Product businesses require more capital than service businesses. So even if you’ve created a great mousetrap, if you don’t have the money required to continue to develop it as well as market it–at least until you’re cash-flow positive–failure is quite likely.
Maybe the most common problem of all is the lack of “productization” of the software application prior to launch as a commercial product. The level of usability, functionality and reliability required in the commercial product marketplace far exceeds the standards of the custom software application market. When you are supporting a single company directly with a custom app, you can afford a level of support which can overcome minor deficiencies in the areas listed. Once rolled out to a mass market of users in the software product marketplace, these deficiencies can kill a promising new product very quickly.
One of the areas of expertise lacking in a service-oriented company (almost by definition) is Product Marketing/Management/Planning. The lack of this functional expertise can lead to a number of mistakes. One of the elementary mistakes that I see surprisingly often is not ensuring that you are making a novel “contribution to the market”. A software product startup with the 19th product to enter an existing market, with no discernable competitive advantage, is a great way to lose money.
Lack of software product industry experience
If you add up the potential mistakes listed above, most of them can be mitigated by the addition of software-product company operating experience. Sadly, in many instances the parent service company senior management is too proud or simply ignorant and unable to acknowledge this weakness. This potential weakness can be alleviated by hiring an experienced operating executive, or retaining a software product industry management consultant such as PJM Consulting.
The bottom line to all of this is that there are alternatives to the more conventional approaches of creating a traditional investor-funded or founder-bootstrapped software product company. Whether created intentionally from the beginning or a “happy accident”, companies started this way can provide an advantage of significantly reduced capital-requirement-to-profitability compared to traditional startup methods. But there are potholes and roadblocks that must be avoided to prevent crib death of embryonic software startups born this way.
So that’s some of the lessons I’ve learned with regards to creating product businesses from service companies. Is this something you’ve done or witnessed others attempt?–what were your results? Pitch in with your two cents — post a comment to expand the discussion.
One of the least well understood activities in growing a hardware or software business is the building of distribution channels. This looks very easy to the uninitiated, but in reality it’s extremely difficult. There are many subtleties that are far from obvious, and some aspects that are necessary for success are downright counter-intuitive. Building a distribution channel for your company is difficult in the best of circumstances.
How hard is it when there are no current, obvious existing channel partners already selling your category of products to start with?
It’s very hard. In fact, most people in the know would likely tell you to forget about it, and not even try. That might actually be pretty good advice, because this activity could easily become a real time and money sink if you’re not careful.
But the other side of the coin is that this might be the circumstance where building a channel carries the very highest potential payoff. One of the great truths I’ve discovered in my career is that the most effective marketing and sales strategies are the ones that haven’t yet become mainstream in your marketplace. Once a strategy or tactic becomes very popular, the results become watered down until at some point it’s marginally attractive at best. In terms of strategy, this move fits in the “high risk, high reward” category. But the payback, if successful, is extremely high.
In terms of strategy, creating your own channel definitely fits in the “high risk, high reward” category. Because while it’s very difficult, if successful, you alone among all competitors in your segment will have the leverage and resulting strategic advantage that a well-executed channel strategy can provide.
So the question is how do you go about this? Where do you even start if there are no existing channel partners for your category? Let’s take a look at a few places to mine that I’ve found some success in the past:
This is the most fertile place to begin, imo. The first step is to think strategically about what type of software application or hardware product is complementary to yours. Whose product might it make sense to integrate with your own, for example? These types of potential strategic partners might also have existing channel partners that might be interested in selling your product as a companion product. An example scenario that I recently successfully implemented for a client was an analytics software company that uses a lot of data to help forecast and mitigate decision risk. We were able to attract a number of channel partners in two adjacent categories: Business Intelligence (BI) and Project Management. Both of these categories are large, with good-sized existing channels selling their solutions. BI creates a lot of date which could be used by my client’s software for forward-looking action, and the Project Management category involves a lot of complex decision-making and risk mitigation which was a natural fit for my client’s software.
Private Label/OEM products
Potential OEMs are another great place to look for channel partners. One obvious possibility is hardware OEMs for a software company, where the software might be integrated with the hardware for a full solution. If the hardware OEM has a channel, Voilà! you have a channel. Even if the hardware company isn’t interested in an OEM relationship, you might be able to entice them into a more vanilla reseller relationship with light or no integration. Lastly, you can always approach their channel directly to sell you software as an add-on product to the hardware vendor’s.
The first two categories above are pretty fertile with respect to creating a channel from scratch. After mining those two approaches, we’re getting into the area where you’ll need some really creative thinking. The first idea is former employees; I’ve seen many VARs who have started their systems integration business by specializing in their old employers products after leaving the mother ship. Another similar possibility is a former employee who lives in or moves to another country; they might start an entrepreneurial “exclusive” distributorship in that country.
Very similar to the “Former Employee” category above is partnering with employees of former competitors whom you may know or come across. They will likely have similar knowledge and skill sets to your former employees, so the same type of potential applies. The only caveat here is you need to be careful of any existing relationships with your competitors or special agendas that could poison a potential relationship.
This category of prospective partner is again very similar to the former employee and competitor categories in terms of potential. A user or former user who loves your product and who you have a good relationship with can be a good candidate for an entrepreneurial VAR/distributor startup, whether domestic or international. The area to be careful of here is they may be very skilled in your product and some internal operating specialty, but may be poorly prepared to market, sell and run an overall business. This of course is a potential risk in the former employee and competitor categories as well.
These are some ways you can take the difficult step of creating your own channel from ground zero. Has anyone else tried this–what were your results? What are your ideas on how best to go about it? Please post a comment to expand the discussion.