The Long View

When to get out of the way of the bulldozers

Several years ago I had an opportunity to become an author of some technical books. My publisher includes me in his occasional email missives to current and former authors and editors. Recently he sent out a message that describes his struggles with issues surrounding the piracy of the electronic versions of our books. Part of his observations questioned the wisdom of recent lawsuits against Google for their Google Print project. His position is that print-only publishers will sooner or later go the way of the Great Auk and the Dodo Bird. It's better to deal with the issues surrounding digital publishing than to stick one's head in the sand and hope that it will go away.

I'm not sure that print publishing will actually be dead in my lifetime, But as a consumer I hate all the DRM (Digital Rights Management) solutions out there. I thwart DRM on music at every opportunity. I rip CD's to DRM-free high-bitrate MP3's then convert it to low-bitrate WMA format to load on my portable player. It's a pain to do the two-step process, but the resulting files can be archived onto CD's and I can play 'em anytime, anywhere, on any device.

I've been working on a team that has been developing computer-based content for education of technology entrepreneurs. We wanted everyone on the team to evaluate a textbook from Stanford University and we all ponied up the $42 to purchase the e-book from Zinio. I had trouble getting it to recognize my license to read the damn book on the machine from which I purchased, downloaded and installed the book, let alone the next machine that I buy and to which I will attempt to transfer the book! And if the mechanism were to make it easy for the transfer, how easy will it be to pirate the copyrighted material?

I'm glad it's not my problem to solve, but filing lawsuits doesn't solve the problem, and refusing to allow distribution of information in an electronic format or searching of content using online search tools doesn't solve the problem either; it only marginalizes the content. If I'm an author hoping to get a lot of copies of my book out there, then marginalizing my work isn't what I'm about.

My deeper concern about DRM, patent and copyright issues is that the criminal prosecutions and litigation are evidence of a failure of innovation. The world is changing, which is always a threat, but also (always, always) an opportunity. Maybe the old business models don't work. Look at what some companies are doing with open source (free as in beer) software. Rather than fight it, they're recognizing the technical viability of these products, and finding ways of adding value that creates a viable business model. The marketing of creative works and other Intellectual property too might need to be re-thought.

I don't have a solution to the fair-use and "piracy" problems, but I do know that standing in front of the digital bulldozer by filing lawsuits isn'g going to solve it either.

It's NOT the code, stupid!

The other day I read this very interesting article by John Mark Walker on open source software (I’m looking forward to John’s promised follow-up installment). One of Walker’s central points is that the genesis of open source (and free as in beer) projects has been in large part due to the undeniable trend toward the commoditization of software. Both the growth in open source software and the underlying forces that have led to its ascendancy suggest that businesses in the software industry need to shift their value proposition away from the executable code itself to service, support, training and related consulting services.

Walker also points out that the smaller the market for a particular type of software – viz. vertical market applications – the less likely we are to see open source projects gaining a foothold. However there is an important lesson here for vendors who are fortunate enough not to yet see any pressure from open source products in their space.

I have observed and been involved in a number of vertical-market application projects. All of these have had their genesis as custom applications that were adapted and marketed to a broader market. One of the biggest mistakes that I see software companies make in this transition is to look at the actual code as a valuable asset. In my opinion, the code is more often than not actually a liability.

• The original code almost always implements business logic that is far too granular and company-specific to make the software usable by a broader market. The very elements that make it attractive to the original customer make it unacceptable as a vertical.
• The original code is not usually architected to withstand the extensive modifications necessary either to meet the needs of its initial target market, or to keep up with changing customer needs; as a result, “code decay” sets in very quickly, making the software increasingly expensive to maintain.
• I have never seen – either in my own experience or in the observation of other software developers – an instance when code did not improve in the process of a re-write. In fact, there is usually a quantum improvement in design – you know where you’re going.

Where the real value lies is in the knowledge and understanding that the company has of the target market and their needs. The actual code is a commodity, and should be the first thing that a company should discard when making the transition from a custom system to one targeted at a broader vertical market. Doing so clears the way for getting a properly designed and architected system into production quickly, preserving the early-to-market advantage without dragging along all of the baggage inherent in the original code.

Marketing Custom Software

Until a little more than a year ago, I was a partner in a firm that wrote custom business software. Despite my academic background in marketing, and my experience as a marketing manager (in other industries), the task of figuring out how to market our services had me flummoxed. My partners and I as well as many of our colleagues around the country used to lament how difficult it was to identify good prospects. Our closing rate was excellent once we got in front of a company that was serious about making an investment in a custom application. However, we failed to keep the pipeline of work filled because we so seldom got into that position.

With the benefit of distance from that business lending perspective, and a renewed study of the marketing art, I have come to an understanding of the mistakes I made, and some idea of how I would do things differently.

Of course, what I’d neglected was some of the first principles of marketing, but didn’t realize it at the time. Most companies like ours (small shops targeting small- to medium-sized businesses without a significant IT department) describe their business just as I did above – custom business software. What I failed to recognize was that I was describing our industry or our occupations, not our product. As a result, I was denying our company half of what makes up a viable value proposition – what it is that you’re selling.

Some professions can get away with this neglect to some extent. If you’re a patent attorney, a property & casualty underwriter or a CPA, it’s easy for a potential client to say “Oh, then I’d call you when…” If you present yourself as a developer of custom business software, it is much less likely that another business person could complete that sentence.

The other half of the value proposition – to whom you are selling – was also missing. We’d sell any kind of a system to any kind of customer. Indeed, as our technical skills and customer base grew, we saw this as a competitive advantage; we could do more things for more customers using a wider variety of technical tools. This made it impossible to focus our efforts on any particular market segment or niche, which may have increased our likelihood of making contact with potential customers.

As a result, we ended up trying to figure out how to implement some kind of marketing plan without the very foundation on which a marketing plan rests – the value proposition.

Small wonder our company struggled with how to market custom software!

I’ll be posting more on this topic – stay tuned.

The Elimination Game

I was reading Guy Kawasaki's blog the other day and ran across this comment:

True or false: The most important part of a business plan is the section about the management team. The answer is False.* The executive summary, all one page of it, is the most important part of a business plan. If it isn't fantastic, eyeball-sucking, and pulse-altering, people won't read beyond it to find out who's on your great team, what's your business model, and why your product is curve jumping, paradigm shifting, and revolutionary.

When working with entrepreneurs to hone their pitch, I often make the point that the goal of each pitch they make, whether in an oral or written form is to get to the next step in the process. However, the goal of the investors is to filter out a majority of potential deals, including yours. I often draw an analogy between the purpose of any investment-seeking communication and a resume to make this point.

The purpose of a resume in the hiring process is to eliminate you from consideration for the position. The hiring manager has time to interview five people for the position. She conveys this to the HR department, and they end up with 100 resumes. What's their task? To winnow the list down to the 5 candidates that the manager can handle. As a result, they're looking not for the five strongest candidates, but a reason to put the other 95 into the discard pile.

This is also true for any of the elements that an entrepreneur uses to gain the attention of potential investors -the elevator pitch, an extended pitch, the executive summary, the business plan, the formal presentation. Angel investors and VC's might have a deal-flow of 200 or more opportunities each month, and might only invest (in the case of a VC) in a half-dozen companies in a year. So again, it's a winnowing process to separate the far more plentiful chaff to get at the kernel or two of wheat. If you bore, obfuscate, confuse or raise questions that can't be answered within the medium in use at the moment, the potential investor mentally calls "next" and moves on. You don't get another chance to make it to the next level with that investor.

On that last point (raising issues that can't be addressed adequately in the medium at hand), we were working with a company that had some outstanding legal issues involving their IP with a former investor group, and they were including this information in a 10-minute pitch! While the issues appeared to be minor, there is no opportunity to explain the nuances of this in a 10-minute pitch. Better to leave issues like this that could put off a marginally interested investor to the formal presentation when the investor's questions can be fully addressed. Or (if it is indeed a minor issue) leave it to the due diligence process!

I think it is helpful to adjust your mind-set to the realization that in any selling situation, whether you're selling yourself for a job, selling your company to investors or selling a product to a potential customer, that the prospect is often looking for a reason to eliminate your proposition from consideration. Thus you can easily (if you're not careful) give your audience reason to place your proposition into the "discard pile".

Productivity and Convergence

First let me apologize to my regular readers - both of them (the homeless fellow that takes refuge from the cold in the Detroit Public Library and reads my blog, and my snowbird father in Florida - Hi Dad!) -  for having been remiss in posting. I hate to post unless I have something interesting to say, and I've been a bit distracted with other matters recently.

Next, let me recommend some reading that leads into the topic of this post. Marcy, my wife, received Thomas L. Friedman's The World is Flat as a Christmas gift. After I attended a local event (Rob Pasick's Leaders Read at the Ann Arbor IT Zone) that had a panel discussion of this book, I determined that she hadn't yet started it, and took possession of it.

I can't stress enough that this book is an absolute MUST READ for anyone, but most importantly for anyone involved in business, public policy and education.

End of book plug.

One of the many, many interesting things that I ran across in Friedman's book related directly to my last post in which I mention that the promised productivity improvements of IT systems haven't been realized because the business processes often haven't caught up with the technology.

Friedman quotes Stanford economist Paul Romer - "When people asked, 'Why didn't the IT revolution lead to more productivity right away?' it was because you needed more than just new computers, you needed new business processes and new types of skills to go with them." Friedman echoes this thought when he states "Introducing new technology alone is never enough. The big spurts in productivity come when a new technology is combined with new ways of doing business."

Friedmann describes a convergence of ten technology-related forces which "begat the convergence of a set of business practices and skills that would get the most out of" these technologies. He draws a parallel with the introduction of electricity to industrial production in the 19th century - that it took not just the ability to generate and distribute electricity, and the invention of electric motors to transform production. It also took the development of experienced "factory architects, electrical engineers and managers who understood the comlementarities among the electric motor, the redesign of the factory and the redesign of the production line" before electricification really had an impact on industrial production.

So while Friedman reinforces my point, I am excited by his assertion that the world is rapidly acquiring a cadre of managers who understand this, and who are establishing the new processes and the new ways of doing business that the new technologies make possible.