Once Upon a Time in Software, a Services Company did Compete

Post by
Scott Francis

A friend of mine recently asked me about going to work for a software vendor, we'll call ACME. Well, specifically, what I thought of their prospects in the market, rather than what it is like to work there (after all, I don't work there, and have never worked there). He was asking me because I'm familiar with the market space that company competes in. I thought a story/fable/parable might be a good way of addressing the question, because I don't think my answer is really unique to his company/market/situation.

As a card carrying member of more than one corporate alumni group i'll offer my opinion by way of comparison, by referring back to my travelogue from a previous employer. This story is from the second epoch, primarily, stretching from the time my employer at the time, we'll call it WidgetWorks, actually had a paying customer, to the time the product actually got good (version 3... isn't it always version 3?). WidgetWorks was going from small niche vendor to the big gorilla vendor on the block (biggest fish in a small pond). But at the time, it was only slightly larger than rivals in terms of revenue, but a greater percentage of revenues were coming from software licensing and being reinvested in software development than its rivals.

my 2 cents that I delivered to my friend:

ACME is the "ABC Consulting" of the market niche ACME was competing in. What? you say you don't remember "ABC Consulting", that it was before your time? Well, i think that's the point. long before the dot-com bust hit, WidgetWorks put a hurt on ABC. There was a whole year when they really kicked our butt at some small accounts (or turned really big $ accounts into small $ accounts). They essentially gave away software in order to get into the customer and do consulting. It was a consulting business with interesting software assets. In the short run, they built cooler stuff than stodgy WidgetWorks did with its cross-platform XVT UI. If you don't know XVT, be glad. If you do, share a quick shuddering chill down your spine with me.

But in the long term, WidgetWork's ability to keep improving the product won out. We had real core product, and we had a good set of complementary desktop products around those (want fries with that sir?) and we started targeting ABC's sales opportunities and customer base, and pretty soon they sold for a song to Giant Enterprise Software Company X, which as you recall, had a few accounting issues that led to an untimely demise and unwinding of all assets to creditors who promptly mothballed everything into escrow accounts and sent all the employees to the 9 moons of Jupiter (or was it Europe?) or something like that. It didn't happen overnight. It took two years to break down ABC with relentless product improvements and sales execution. But at the end of that two years we could do things in days that represented weeks of effort for them. There was no longer an apples-to-apples comparison.

I think ACME is in a similar boat. most of their revenue comes from services, and while its easy for them to throw together a slick UI/demo, looks like they're having trouble scaling their dev organization and doubling down on their initial product innovations they seemed to have when they first demo'ed their software. They have some interesting stuff in the software kit, but it looks pretty replicable by a smart software company a la WidgetWorks. The overall lesson? when the product company competes against a services company at selling product, the product company wins unless they're stupid or the market changes to make their software irrelevant. Its usually just a matter of time before the services company can't compete selling (or even giving away) software.

If i were ACME, competing against a new WidgetWorks in the new space, I'd figure out how to unload the software assets or open-source them, and then turn my company into a good deployment company with specialization on the market niche they already know so well. Even better, do a good business converting ACME customers to WidgetWorks' products! With that as a carrot, I'd call WidgetWorks and sign on as a premier partner. They'd probably get higher consulting rates than they get now, and WidgetWorks would have one less competitor and might get slightly higher software prices, and would gain an able partner who understand the space, strengths, and weaknesses of the product suite. Everybody wins! Pop the champagne. Or, if ACME wants to keep doing software, they can unload their services business/unit to a company like us (BP3) and we'll take that pesky services business off their hands! (if you're a software company in the BPM space, we'd be interested... ) Heck, the WidgetWorks folks might want to use that strategy themselves (spinning off their services).

Moral of the story is, if you get most of your revenue from services, and there's a really good product company in your space, don't get caught up on a software business. Remember what your DNA is, and who you are. Here's a good test for whether your software has value - go into the market and look for Angel or VC funding to start a software company with the software assets your company will donate to the pot. If you can't get any takers, you don't have a compelling proposition... and if the smart money won't invest, should you? (well, you might, but you at least understand at this point that you are taking on a bigger risk - no one will want to buy it - the software company/assets - from you!)

Think about whether competition or cooperation will be better for your business overall. Can you leverage your strengths (services team / reach, deep knowledge of a niche, customer contacts and relationships) into a bigger business helping someone else's software company, rather than fighting them tooth-and-nail?

When I think back to ABC Consulting, I imagine that they could have done quite a good business consulting on top of WidgetWorks software, and my old employer would have loved to have gotten into some of their customers without such a dogfight. A marriage of convenience, sure, but a profitable one.

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