In our last blog post, we had discussed, 'Platforms, not just products", a chapter from Michael Cusomano's 'Staying Power'.
In this post, we're going to continue our discussion of Staying Power with the second chapter 'Services, not just products (or Platforms)'.
The goose that laid the golden eggs is quite an interesting story. Success in product software can be a little like it. However, there is more to it. In the second part of his book, Cusumano gives a very nice analysis of the other side of the software business: services. And it actually turns out that pure product firms are, by far, the minority. Most successful software companies have a mix of products and services, and this mix changes throughout the lifecycle of the company and the products at hand.
Given all the facts listed, it seems reason enough to spend some time on the services aspect of Staying Power.
Yet another interesting point is that product software is being “servitized” by the upcoming SaaS offerings and cloud computing. I would not necessarily say that products are becoming services, but I would say that products could be services, or at least partly be services. (Along the lines of “the whole product” concept by Geoffrey Moore).
Cusumano has a lot of convincing numbers in his book about services vs. product ratios in successful companies. Services revenue streams are just too important to ignore, and actually, only very few can be pure-play product firms (Microsoft, Adobe, maybe the Games software industry).
From 0 cost per copy to 0 value per copy
The sad and hard truth of the software business is the fact that you can indeed sell unlimited copies at marginal costs, but also that the value of you product can be reduced to 0 in no time. Creative destruction in the software sector can be extreme! You are left with in depth industry knowledge, and forced to move towards services in such a situation.
All things taken into consideration, it is very clear that you shouldn’t bet on a 100% products based business as an ISV. You need to mix it with services, and you need to carefully track the revenue and profit streams of both services and product/license income, in order to be able to move with the market/demand, and keep your company healthy.
Perhaps your dream is to create a clean-cut target for takeover, by having a high value product without the complexities of services and in depth industry knowledge, but it usually isn’t that easy or straightforward. The value of your company lies in the products, but the IP is in more that just the products.
High quality offshore teams can be an extremely valuable asset as well for both your products as well as your services strategy.
Interesting numbers in this chapter also come from the part about the consolidation in IT services and products. In both these groups of firms, the total number of firms has peaked around 1996-1998. From that point on, the number of firms has been declining owing to takeovers and consolidations. This means that the market is maturing which is bad news for services startups, but even worse news for product startups. This is because: with services you scale with the amount of capable people you have, but with products you have a typical winner takes all, or almost all. Consequently, as a products company, you are either extremely successful as the market leader, or marginally successful as the challenger, or you are setting yourself up for failure. For services companies it is less extreme: you can still deliver services as long as you have good people and a good understanding of your domain which is yet another reason to take services into serious consideration.
Cusumano has some interesting thoughts on SaaS and Cloud Computing. It almost looks like an excellent hybrid: software as a service. But actually, there is more to this than just “servitizing” products. SaaS is in many cases is a new provisioning mechanism of a solution. And that solution is usually part product – part service. And Salesforce.com shows it can be pretty much product. So by no means are products becoming services…..it is more complex than that. And besides, as far as the “product or service” question goes, SaaS and Cloud are giving us a lot more food for thought when it comes to new ways of complementing and creating new platforms.
Productizing your services and “servitizing” your products.
I think it is fair to say that products and services are pretty much two sides of the same coin. And typical product people should think about the potential of “servitizing”, and typical services people can look into productizing. Streamlining and standardizing services to almost become products can definitely reap huge benefits in scale and efficiency.
Approach it as a Hybrid from the start, and cherish both these aspects, because they are more complementary than you realize; two sides of the same coin, if you will. And the coin is about solving a problem. And excellent staff is the driving force behind your success for both sides of that coin!
We’ll continue talking about Capabilities in the next blog post.
We recently conducted a survey on Cloud/SaaS adoption by ISVs. We have compiled the results from this survey into an informative report that will help guide your decision on switching to the Cloud.