This is not only the topic of my new blog but also the book which I just finished reading. This is a 2004 book but very relevant even today in the business of software. The author is Michael A Cusumano, Co-author of another famous title – “Microsoft Secrets”. Let me take this blog-opportunity to review this book. This is one of the very few books which I have seen talking about software business in particular and more importantly very very few which talks about software services. This book mainly talks about the software business in general, business models, revenue models, products, services and hybrids, strategy, people, management, software development and finally case studies of many such software companies some of which were successful and many closed shops. I will be quoting few things in the ensuing paragraphs and all will be highlighting mostly what the author says rather than my personal opinion but I don’t think my opinions are far from his anyways. My main goal here is to provide a detailed summary so that who don’t have time to read the book will get a good enough summary and hopefully will create enough curiosity to pick a copy!!
The author talks about the strategy and the kinds of companies that exist and the difference between them. Summary goes like this: there are broadly three types of companies, viz... Product based, Service based and the Hybrid ones. Companies must constantly pay attention to the strategies and the business models at all times continuously evolving their technical skills and core technologies. In software development, it is just as important to decide what doesn’t go in as it is to decide on what goes in. Companies should have a strategy and specific organizational capabilities to support that strategy and carry them through both good times and bad times. Product companies has higher (exponential) growth in margin but very low success rate and on the other hand service based companies has moderate success rate but the margins are very low and is highly labor-intensive and less profitable. Ofcourse hybrid model provides the best of both worlds but requires high organizational skills to manage both but he concludes that this might represent a new business model by itself. For product companies it is the economy of scale but for service based it is the economy of scope that is the Holy Grail. Economies of scope can be achieved by structuring knowledge such as how to do requirements, manage projects, customize applications, conduct testing and more importantly how to reuse this in different projects without affecting the IP of the clients. It can also be achieved from clever account management. He also talks about some of the financial metrics that conveys the measure of health of software companies – they are revenues, sales productivity or revenues per employee, expense boundaries (say 25 to 30% of total revenues), R&D budget usually, general administration budget, profit target (20 to 30% of revenues as operating income) etc. His conclusion on one of the strategy points is that, when a software company targets enterprises, it has more ways of succeeding, even if it fails to develop a best-selling product. Another point to note in strategizing is to make a selection on whether you are targeting a “horizontal offering” (broad set of customers) or focus on specific industries or applications, what is called the vertical market segments. One of the observations he makes (from data) is that rapidly growing companies have much better chances of survival. He outlines three basic strategies of rapid growth: scaling, duplicating, and granulating. Scaling is simply doing more of what one is already doing but for more of similar clients; Duplicating is primarily extending same strategy to other geographical markets or to other similar markets (as opposed to exact). Granulating is diversifying offerings and the organization structure by creating new, small business units to target new opportunities. A word of caution is that, diversification into related areas and technologies are usually good ways to grow, compared to unrelated diversification. Recurring revenue will be very helpful if one can find a way to strategize the same. He goes ahead and states that the goal of every software company should be to establish large and growing revenues that are recurring. As the saying goes – “get their data, and their hearts and minds will follow J”. He divides the companies based on strategy as one of these – platform leader (e.g.: Microsoft) or follower or complementor. Basically strategy of a company should take care of all these and be precise and in summary the strategy of a company should determine what kind of an organization you want to be.
After strategy he talks about the business model, importance of strategy over there, and the revenue model. Also are the discussions about the product versus services debate and his conclusion is that “the key choice is not simply whether to be a services company or a products company, but how much emphasis to place on one type of business over the other”. He also stresses the point about how business models may need to change with the economic times as well. A word of advice for new companies that niche applications and new platforms are the best places to look for software product and service opportunities but with a caution that one should focus on solutions rather than the technology itself.
Then he talks about software entrepreneurship as a whole which I enjoyed thoroughly and he talks about some of the very critical issues one needs to follow or atleast should have considered and is the basis for creating a bigger organization and also to get funding. Accepting VC money when it is not needed and accepting more than you need can often become what he calls the “Kiss of Death” (he analyzes this completely which I will skip and leave it those who will read this book!!). He has devised an 8-point plan to evaluate effectiveness of companies especially startups which goes as:
1. A strong Management Team
2. An Attractive market
3. A compelling new product, service or hybrid solution
4. Strong Evidence of Customer Interest
5. A plan to overcome the “Credibility Gap”
6. A business model showing early growth and profit potential
7. Flexibility in Strategy and Product offerings
8. The Potential for a Large Payoff to Investors
Finally he does a through analysis of four software product start-ups, three software services start-ups and there hybrid solutions start-ups with an equal number of failures and success through his eight-point plan, and is very educative and an eye opener is many issues.
One of the points that made me think was that his conclusion on Software services and VC funding – he says “Venture Funding is often the kiss of death for an IT services firm. It is a form of artificial wealth and the overwhelming tendency is to spend it. This is essential to create a company but more often than not it encourages a firm to expand its headcount and overhead commitments or its marketing plans to levels it cannot sustain”. But this is what I agree totally “A talented software services company should always remain profitable by managing head count and expenses carefully”. A service based company creates relationships with customers, they may build technologies but they cater to the needs of the individual clients. To be efficient, they need to learn how to leverage technology and knowledge gained in one project to other projects without compromising customer confidentiality.
Overall he has done a very good job reviewing different types of software companies and how to strategize, create business and revenue models, what are the points to watch out for, and more importantly he has analyzed many such companies giving us an insight on what works and what don’t. Overall a great book for a budding software entrepreneur and I recommend highly.
BTW I hope I was able to give a detailed summary of the book, enough to enthuse a budding entrepreneur to read this book. I constantly read such business books and I am hoping I will provide a detailed review through my blogs. Please let me know some of the pluses and minuses of such reviews so that I can better it for my next reviews.
Monday, June 16, 2008
Wednesday, June 11, 2008
A Safer India is a MUST : IT power of India and Protecting ourselves
This has been bothering me for quite a while, particularly more so when I visited US last month and saw how few other countries were being pushed. This being a very touchy subject, I debated myself a few times on whether I should blog or not and my emotion had a better of me, and hence here is the blog. No I am not such a big guy to talk about such a big subject nor this is something related to SME space alone, but I feel it is a pan India issue which I like to bring it here.
Today India is pretty much equated with IT in the US (may be so in the whole of Western World). Indian economy is doing really well (inspite of the US slowdown, petrol prices going through the roof, financial markets being sluggish etc) and most of the success is attributed to the rise of IT and the brand/image that India has in the global market. Today IT continues to be one of the main contributors fuelling the growth of Indian economy. Overall, Indian business is doing great globally, which makes it our duty to safeguard this image or brand of India globally and ensure the market and the economy grows.
In this scenario, many countries are vying for a share in the global IT spending of which India always gets a lion’s share. Almost every country has a nice story advertising as to why outsourcing to their country/region is way better than doing it to India. Some countries are employing different ways and means to divert business to their country, not excluding such below the belt tactics as, “We are safer than India” line. Safer? This word really bothered me a bit and started this whole thought process of mine – why are they safer (are they really safer? and why are we not? Do you think that a bit of fear in the global market can turn the market elsewhere? Do you think some one might actually try doing this? After all, this is billions of dollars market and a few doubts here and a few scares there can probably change the mind set and turn the customers away (remember a small lead is all it took to make US citizens almost drive away the Chinese made toys). For all you know, someone who wants a bigger share of this pie, who wants to give a bad image to India in the global market, can probably do the most dreadful and shameful act, you never know. If these people can create a dent to our image, they would have achieved what they wanted and can send out bad signal to the rest of the world. It doesn’t matter where the dent has happened; it is India which stands to lose.
It stands to logic that, the least suspected person does a criminal act and the most suspected gets the blame. This may be the case here too. We need to be very careful. One of the first things we do when we construct a house is to secure ourselves and I guess we need to do something similar here for our country too– don’t know how, but we have to do it on a war footing. This might even mean allocating a huge budget, taxing us more (say adding Security cess), drastic measures that may hurt the economy to some extent in the short term. It is still worth every penny spent, saving our industry, brand, economy and more importantly 1000s of innocent lives.
I sincerely hope that the government and the concerned security agencies are actually making sure that the right steps are being taken. Prevention is one million times better than the cure. Home Land security is a good example in the US, they have introduced many innovative steps and security procedures to prevent a repeat of 9/11 and I hope we do something similar before something of that nature happens. Safer India is a better India for everyone.
Today India is pretty much equated with IT in the US (may be so in the whole of Western World). Indian economy is doing really well (inspite of the US slowdown, petrol prices going through the roof, financial markets being sluggish etc) and most of the success is attributed to the rise of IT and the brand/image that India has in the global market. Today IT continues to be one of the main contributors fuelling the growth of Indian economy. Overall, Indian business is doing great globally, which makes it our duty to safeguard this image or brand of India globally and ensure the market and the economy grows.
In this scenario, many countries are vying for a share in the global IT spending of which India always gets a lion’s share. Almost every country has a nice story advertising as to why outsourcing to their country/region is way better than doing it to India. Some countries are employing different ways and means to divert business to their country, not excluding such below the belt tactics as, “We are safer than India” line. Safer? This word really bothered me a bit and started this whole thought process of mine – why are they safer (are they really safer? and why are we not? Do you think that a bit of fear in the global market can turn the market elsewhere? Do you think some one might actually try doing this? After all, this is billions of dollars market and a few doubts here and a few scares there can probably change the mind set and turn the customers away (remember a small lead is all it took to make US citizens almost drive away the Chinese made toys). For all you know, someone who wants a bigger share of this pie, who wants to give a bad image to India in the global market, can probably do the most dreadful and shameful act, you never know. If these people can create a dent to our image, they would have achieved what they wanted and can send out bad signal to the rest of the world. It doesn’t matter where the dent has happened; it is India which stands to lose.
It stands to logic that, the least suspected person does a criminal act and the most suspected gets the blame. This may be the case here too. We need to be very careful. One of the first things we do when we construct a house is to secure ourselves and I guess we need to do something similar here for our country too– don’t know how, but we have to do it on a war footing. This might even mean allocating a huge budget, taxing us more (say adding Security cess), drastic measures that may hurt the economy to some extent in the short term. It is still worth every penny spent, saving our industry, brand, economy and more importantly 1000s of innocent lives.
I sincerely hope that the government and the concerned security agencies are actually making sure that the right steps are being taken. Prevention is one million times better than the cure. Home Land security is a good example in the US, they have introduced many innovative steps and security procedures to prevent a repeat of 9/11 and I hope we do something similar before something of that nature happens. Safer India is a better India for everyone.
Wednesday, June 4, 2008
SMEs: Is this the end of the Plain Vanilla outsourcing?
“The ability to focus and differentiate is the main secret of success for SMEs” says John McCarthy, Vice president Forrester Research on how Indian SMEs can succeed in the highly competitive crowded outsourcing market (Source NASSCOM’s NEWSline April 2007 Issue no.66), in the report “The SME Survival Kit”.
Another very strong statement by the same Forrester research in the same report goes as “Going forward, only one to three Indian offshore service providers will emerge as true multi-line, multi-geography players. The remaining will have to focus to create sustainable growth and differentiation in the marketplace”.
Very strong statements and a very clear black & white message for SMEs – differentiate or die, Specialize or perish and there is no way out. I totally agree with this. SMEs have to concentrate becoming a domain or a niche expert rather than trying to do everything. Market won’t allow too many players once it matures and I am sensing that the market today is in that state, and the best strategy for SMEs is to find a niche which suits their skills and their liking and offer solutions and services that help them increase the expertise in the chosen niche area. Also I don’t think one should size up the market initially (if you have good info about it well and good but don’t sweat it out to find the info). The market is generally big enough for startups and SMEs to work/start in and once you are in the water and get wet, slowly you will figure out what the market is, where it is heading and you always modify/alter/suit your strategy/business based on the new learning anyways.
Once the focus is set, and a niche area is selected, every step forward should always make you closer or better in the chosen niche and it is very critical not to sidestep from your final goal, as the saying goes if you don’t know where you are going, any road taken is fine and SMEs should not be treading this road today (or any day as a matter of fact). If you follow this path, yes growth will be slow (compared to plan vanilla outsourcing growth) but it will be a sure way and you will be laying a very good foundation and one day you can build a multi-storied palace on that. Moreover outsourcing has matured so much that if you are not providing value to the client (other than the person and his skill set), it means basically there is no value proposition beyond the usual outsourcing proposition and you are replaceable. On the other hand if you give a clear and a unique value addition, a niche expertise or a domain expertise which is more than the person, there is every chance that you might win the deal even if you are put against one of the biggies. Remember, today multi-sourcing is the preferred path with a clear reason being reduction of risk (of depending upon one vendor) and horses for courses theory, select the expert for the work in question (ofcourse you can bring the puzzle sourcing here which I wrote about in an earlier blog).
I feel expertise in a given niche area/focus is clearly the best way to grow in the value chain of the outsourcing and I also feel that the difference between products and services is graying down and probably the right time for service based companies to invest in products too (may be to sell or to use internally as tools to achieve faster rate, lesser cost and pass on the benefits to the client) and can use that as a differentiation / unique proposition your firm offers and you can concentrate on all these if we (SMEs) are focused in a given niche area rather than plain vanilla outsourcing.
As a lasting comment, though SMEs are under constant threat with focus and differentiation as the key for success, even larger companies are under the threat of global competition and I am sure Indian biggies are under severe pressure to figure out a competitive strategy to compete with MNC biggies which are making inroads into their pie by M&A activities or otherwise (EDS acquired by HP, IBM growing very strategically, etc) – watch out something drastic by Infosys and WIPRO in the coming days for sure.
Another very strong statement by the same Forrester research in the same report goes as “Going forward, only one to three Indian offshore service providers will emerge as true multi-line, multi-geography players. The remaining will have to focus to create sustainable growth and differentiation in the marketplace”.
Very strong statements and a very clear black & white message for SMEs – differentiate or die, Specialize or perish and there is no way out. I totally agree with this. SMEs have to concentrate becoming a domain or a niche expert rather than trying to do everything. Market won’t allow too many players once it matures and I am sensing that the market today is in that state, and the best strategy for SMEs is to find a niche which suits their skills and their liking and offer solutions and services that help them increase the expertise in the chosen niche area. Also I don’t think one should size up the market initially (if you have good info about it well and good but don’t sweat it out to find the info). The market is generally big enough for startups and SMEs to work/start in and once you are in the water and get wet, slowly you will figure out what the market is, where it is heading and you always modify/alter/suit your strategy/business based on the new learning anyways.
Once the focus is set, and a niche area is selected, every step forward should always make you closer or better in the chosen niche and it is very critical not to sidestep from your final goal, as the saying goes if you don’t know where you are going, any road taken is fine and SMEs should not be treading this road today (or any day as a matter of fact). If you follow this path, yes growth will be slow (compared to plan vanilla outsourcing growth) but it will be a sure way and you will be laying a very good foundation and one day you can build a multi-storied palace on that. Moreover outsourcing has matured so much that if you are not providing value to the client (other than the person and his skill set), it means basically there is no value proposition beyond the usual outsourcing proposition and you are replaceable. On the other hand if you give a clear and a unique value addition, a niche expertise or a domain expertise which is more than the person, there is every chance that you might win the deal even if you are put against one of the biggies. Remember, today multi-sourcing is the preferred path with a clear reason being reduction of risk (of depending upon one vendor) and horses for courses theory, select the expert for the work in question (ofcourse you can bring the puzzle sourcing here which I wrote about in an earlier blog).
I feel expertise in a given niche area/focus is clearly the best way to grow in the value chain of the outsourcing and I also feel that the difference between products and services is graying down and probably the right time for service based companies to invest in products too (may be to sell or to use internally as tools to achieve faster rate, lesser cost and pass on the benefits to the client) and can use that as a differentiation / unique proposition your firm offers and you can concentrate on all these if we (SMEs) are focused in a given niche area rather than plain vanilla outsourcing.
As a lasting comment, though SMEs are under constant threat with focus and differentiation as the key for success, even larger companies are under the threat of global competition and I am sure Indian biggies are under severe pressure to figure out a competitive strategy to compete with MNC biggies which are making inroads into their pie by M&A activities or otherwise (EDS acquired by HP, IBM growing very strategically, etc) – watch out something drastic by Infosys and WIPRO in the coming days for sure.
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