The Phases of SaaS Grief
July 24, 2018 | Posted By: Marty Abbott
Over a decade of helping on-premise and licensed software companies through the transition to “Something as a Service” – whether that be Software (SaaS), Platform (PaaS), Infrastructure (IaaS), or Analytics (AaaS) – has given us a rather unique perspective on the various phases through which these companies transition. Very often we find ourselves in the position of a counselor, helping them recognize their current phase and making recommendations to deal with the cultural and operational roadblocks inherent to that phase.
While rather macabre, the phases somewhat resemble those of grieving after the loss of a loved one. The similarities make some sense here, as very often we work with companies who have had a very successful on-premise and/or licensed software business; they dominated their respective markets and “genetically” evolved to be the “alphas” in their respective areas. The relationship is strong, and their past successes have been very compelling. Why would we expect anything other than grieving?
But to continue to evolve, succeed, and survive in light of secular forces these companies must let their loved one (the past business) go and move on with a new and different life. To be successful, this life will require new behaviors that are often diametrically opposed to those that made the company successful in their past life.
It’s important to note that, unlike the grieving process with a loved one, these phases need not all be completed. The most successful companies, through pure willpower of the management team, power through each of these quickly and even bypass some of them to accelerate to the healing phase. The most important thing to note here is that you absolutely can move quickly – but it requires decisive action on the part of the executive team.
Phase 1: Denial This phase is characterized by the licensed/on-premise software provider completely denying a need to move to an “X” (something) as a Service (XaaS, e.g. SaaS, PaaS) model.
Commonly heard quotes inside the company:
- “Our customers will never move to a SaaS model.”
- “Our customers are concerned about security. IaaS, SaaS and PaaS simply aren’t an option.”
- “Our industry won’t move to a Cloud model – they are too concerned about ownership of their data.”
- “To serve this market, a solution needs to be flexible and customizable. Proprietary customer processes are a competitive advantage in this space – and our solution needs to map exactly to them.”
Reinforcing this misconceived belief is an executive team, a sales force, and a professional services team trapped in a prison of cognitive biases. Hypothesis myopia and asymmetric attention (both forms of confirmation bias) lead to psychological myopia. In our experience, companies with a predisposed bias will latch on to anything any customer says that supports the notion that XaaS just won’t work. These companies discard any evidence, such as pesky little startups picking up small deals, as aberrant data points.
The inherent lack of paranoia blinds the company to the smaller companies starting to nibble away at the portions of the market that the successful company’s products do not serve well. Think Seibel in the early days of Salesforce. The company’s product is too expensive and too complex to adequately serve the smaller companies beneath them. The cost of sales is simply too high, and the sales cycle too long to address the needs of the companies adopting XaaS solutions. In this phase, the company isn’t yet subject to the Innovator’s Dilemma as the blinders will not let them see it.
Ignorance is bliss…for awhile…
How to Avoid or Limit This Phase
Successful executive teams identify denial early and simply shut it down. They establish a clear vision and timeline to move to the delivery of a product as a service. As with any successful change initiative, the executive team creates, as a minimum:
- The compelling reason and need for change. This visionary element describes the financial and operational benefits in clear terms that everyone can understand. It is the “pulling” force necessary to motivate people through difficult times.
- A sense of fear for not making the change. This fear becomes the “stick” to the compelling “carrot” above. Often given the secular forces, this fear is quite simply the slow demise of the company.
- A “villain” or competitor. As is the case in nearly any athletic competition, where people perform better when they have a competitor of equivalent caliber (vs say running against a clock), so do companies perform better when competing against someone else.
- A “no excuses” cultural element. Everyone on the team is either committed to the result, or they get removed from the team. There is no room for passive-aggressive behavior, or behaviors inconsistent with the desired outcome. People clinging to the past simply prolong or doom the change initiative. Fast success, and even survival, requires that everyone be committed.
Phase 2: Reluctant but Only Partial Acceptance
This phase typically starts when a new executive, or sometimes a new and prominent product manager, is brought into the company. This person understands at least some of – and potentially all of – the demand side forces “pulling” XaaS across the curve of adoption, and notices the competition from below. Many times, the Innovator’s Dilemma keeps the company from attempting to go after the lower level competitors.
Commonly heard quotes inside the company:
- “Those guys (referring to the upstarts) don’t understand the complexities of our primary market – the large enterprise.”
- “There’s a place for those products in the SMB and SME space – but ‘real’ companies want the security of being on-premise.”
- “Sure, there are some companies entertaining SaaS, but it represents a tiny portion of our existing market.”
- “We are not diluting our margins by going down market.”
The company embarks upon taking all their on-premise solutions and hosting them, nearly exactly as implemented on-premise, as a “service”.
Many of the company’s existing customers aren’t yet ready to migrate to XaaS, but discussions are happening inside customer companies to move several solutions off-premise including email, CRM and ERP. These customers see the possibility of moving everything – they are just uncertain as to when.
How to Avoid or Limit This Phase
The answer for how to speed through or skip this phase is not significantly different than that of the prior phase. Vision, fear of death, a compelling adversary, and a “no excuses” culture are all necessary components.
Secular forces drive customers to seek a shift of risk. This shift is analogous to why one would rent instead of owning a home. The customer no longer wants the hassle of maintenance, nor are they truly qualified to perform that maintenance. They are willing to accept some potential increase in costs as capex shifts to opex, to relieve themselves of the burden of specializing in an area for which they are ill-equipped.
If not performed during the Denial phase, now is the time to remove executives who display behaviors inconsistent with the new desired SaaS Principles
Phase 3: Pretending to Have an Answer
The pretending phase starts with the company implementing essentially an on-premise solution as a “SaaS” solution. With small modifications, it is exactly what was shipped to customers before but presented online and with a recurring revenue subscription model. We often like to call this the “ASP” or “Application Service Provider” model. While the revenue model of the company shifts for a small portion of its revenue to recurring services fees, the solution itself has not changed much. In fact, for older client-server products Citrix or the like is often deployed to allow the solution to be hosted.
The product soon displays clear faults including lower than desired availability, higher than necessary cost of operations, higher than expected operating expenses, and lower margins than competitors overall. Often the company will successfully hide these “SaaS” results as a majority of their income from operations still come from on-premise solutions.
The company will often use nebulous terms like “Cloud” when describing the service offering to steer clear of direct comparisons with other “born SaaS” or “true SaaS” solutions. Sometimes, in extreme cases, the company will lie to itself about what they’ve accomplished, and it will almost always direct the conversation to topics seen as differentiating in the on-premise world rather than address SaaS Principles.
Commonly heard quotes inside the company:
- “Our ‘Cloud’ solution is world class – it’s the Mercedes of all solutions in the space with more features and functionality than any other solution.”
- “The smaller guys don’t have a chance. Look at how long it will take them to reach feature parity. The major players in the industry simply won’t wait for that.”
- “We are the Burger King of SaaS providers – you can still have it your way. And we know you need it your way.”
Meanwhile, customers are starting to look at true SaaS solutions. They tire of availability problems, response time issues, the customization necessary to get the solution to work in a suitable fashion and the lack of configurability. The lead time to implementation is still too long.
Sales people continue to sell the product the same way; promising whatever a customer wants to get a sale. Engineers still develop the same way, using the same principles that made the company successful on-premise and completely ignorant of the principles necessary to be successful in the SaaS world.
How to Avoid or Limit This Phase
It’s not completely a bad thing to launch, as a first step, a “hosted” version of a company’s licensed product. But the company must understand internally that it is only an interim step.
In addition to the visionary and behavioral components of the previous phases, the company now must accept and be planning for a smaller functionality solution that will be more likely adopted by “innovators” and “early majority” companies. The concept of MVP relative to the Technology Adoption Lifecycle is important here.
Further, the company must be aggressively weeding product, sales, and technology executives who lack the behaviors or skills to be successful and seeding the team with people who have “done this before”. Sales teams must act similarly to used car sales people in that they can only sell “what is on the lot” that will fit customer “need”, as compared to new car sales people who can promise options and colors from the factory (“It will take more time”) that more precisely fit a customer’s “want”.
Phase 4: Fear
The company loses its first major deal or two to a rival product that appears to be truly SaaS and abides by SaaS Principles. They realize that their ASP product simply isn’t going to cut it, and Sales people are finally “getting” that the solution they have simply won’t work. The question is: Is the company too late? The answer depends on how long it took the company to get to this position. A true SaaS solution is at the very least months away and potentially years away. If the company moves initially right to the “Fear” stage and properly understands the concepts behind the TALC, they have a chance.
Commonly heard quotes inside the company:
- “We’re screwed unless we get this thing re-architected in order to properly compete in the XaaS space.”
- “Stop behaving like we used to – stop promising customizations. That’s not who we are anymore.”
- “The new product needs to do everything the old product did.” [Incorrect and prone to failing]
- “Think smaller, and faster. Think some of today’s customers – not all of them – for the first release. Understand MVP is relative to the TALC.” [Correct and will help drive success]
How to Avoid or Limit This Phase
This is the most easily avoided phase. With proper planning and execution in prior phases, a company can completely skip the fear stage.
When companies find themselves here, its typically because they have not addressed the talents and approach of their sales, product, and engineering teams. Sales behaviors must change to only sell what’s “on the car lot”. Engineers must understand how to build the “-ilities” into products from day 1. Product managers must switch to identifying market need, rather than fulfilling customer want. Executives must now run an entirely different company.
Final Phase: Healing or Marginalization
Companies successful enough to achieve this phase do so only through launching a true XaaS product – one that abides by XaaS principles built and run by executives, managers and individual contributors who truly understand or are completely wedded to learning what it means to be successful in the XaaS world.
The phases of grief are common among many of our customers. But unlike grieving for a loved one, they are not necessary. Quick progression, or better yet avoidance, of these phases can be accomplished by:
- Establishing a clear and compelling vision based on market and secular force analysis, and an understanding of the technology adoption lifecycle. As with any vision, it should not only explain the reason for change, but the positive long-term financial impact of change.
- Ensuring that everyone understands the cost of failure, helping to instill some small level in fear that should help drive cultural change.
- Ensuring that a known villain or competitor exists, against which we are competing to help boost performance and speed of transition.
- Aggressively addressing the cultural and behavioral changes necessary to be successful. Anyone who is not committed and displaying the appropriate changes in behavior needs to be weeded from the garden.
This shift often results in a significant portion of the company departing – sometimes willingly and sometimes forcefully. Some people don’t want to change and can find other companies (for a while) where their skills and behaviors are relevant. Some people have the desire, but may not be capable of changing in the time necessary to be successful.
Image Credit: Tim Gouw from Pexels
Subscribe to the AKF Newsletter
Factors Driving SaaS and XaaS Adoption
July 12, 2018 | Posted By: Marty Abbott
XaaS (e.g. SaaS, PaaS) mass-market adoption is largely a demand-side “pull” of a product through the Technology Adoption Lifecycle (TALC). One of the best books describing this phenomenon is the book that made the TALC truly accessible to business executives in technology companies, Crossing the Chasm.
An interesting side note here is that Crossing the Chasm was originally published in 1991. While many people associate the TALC with Geoffrey Moore, it’s actual origin is Everett Rogers’ research on the diffusion of innovations. Rogers’ initial research focused on the adoption of hybrid corn seed by rural farmers. Rogers and team expanded upon and generalized the research between 1957 and 1962 when he released his book Diffusion of Innovations. While the 1962 book was a critical success, I find it interesting that it took nearly 30 years to bring the work to most technology business executives.
Several forces combine to incent companies within each phase of the TALC to consider, and ultimately adopt, XaaS solutions. Progressing from left to right through the TALC, companies within each phase are decreasingly less aware of these forces and increasingly more resistant to them until the forces are overwhelming for that segment or phase. Innovators, therefore, are the most aware of emerging forces, seek to use them for competitive advantage and as a result are least resistant to them. Laggards are least aware (think heads in the sand) and most resistant to change, desiring status quo over differentiation.
While the list below is incomplete, it has a high degree of occurrence across industries and products. Our experience is that even when they are experienced in isolation (without other demand side XaaS forces), they are sufficient to pull new XaaS products across the TALC.
Demand Side Forces
Talent Forces: Opportunity, Supply and Demand
The first two forces represent the talent available to the traditional internally focused corporate IT organization. The rise of XaaS offerings and the equity compensation opportunities inherent to them has been a vacuum sucking what little great talent exists within corporate IT. This first force really serves to add insult to injury to the second force: the initial low supply of talented engineers available in the US.
Think about this: Per-capita (normalized for population growth) US graduates for engineers within the US has remained relatively constant since 1945. While there has been absolute growth, until very recently that growth has slightly underperformed relative to the growth in population. Contrast this with the fact that college graduation rates in 2012 were higher than high school graduation rates in 1940. Add in that most engineering fields were at or near economic full employment during the great recession and we have a clear indication that we simply do not produce enough engineers for our needs. The same is true on a global level.
This constrained supply has led to alternative means of educating programmers, systems administrators, database administrators and data analysts. “Boot Camps”, or short courses meant to help teach people basic skills to contribute to the product and IT workforces, have sprung up around the nation to help fulfill this need. Once trained, the people fulfill many lower level needs in the product and IT space, but they are not typically equivalent to engineers with undergraduate degrees.
Constrained supply, growing demand and a clear differentiation in employment for engineers working in product organizations compared to IT organizations means that IT groups simply aren’t going to get great talent. Without great talent, there can be no great development or operations teams to create or run solutions. As such, the talent forces alone mandate that many IT teams look to outsource as much as they can: everything from infrastructure to the platforms that help make employees more efficient.
Core vs. Context
Why would a company spend time or capital on running third party solutions or developing bespoke solutions unless those activities result in competitive differentiation? Doing so is a waste of precious time and focus. Companies simply can’t waste time running email servers, or building CRM solutions and soon will find themselves not spending time on anything that doesn’t directly lend itself to competitive advantage.
Put simply, anytime a company can’t maximize profit margins through keeping in-house systems highly utilized, they should (and will) seek to outsource the workload to an IaaS provider. Why purchase a server to do work 8 hours a day and sit idle 16? Why purchase a server capable of handling peak period of 10 minutes of traffic, when a server one fifth its size is all that’s needed for the remainder of the day?
Part of staying competitive is focusing on profit maximization to invest those profits in other, higher return opportunities. Companies that don’t at least leverage Infrastructure as a Service to optimize their costs of operations and costs of goods sold (if doing so results in lowered COGS) are arguably violating their fiduciary responsibility.
Risk is the probability that an event occurs, multiplied by the impact of that event should it occur. Companies that specialize in providing a service, whether it be infrastructure as a service or software as a service typically have better skills and more experience in providing that service than other companies. This means that they can both reduce the probability of occurrence and likely the impact of the occurrence should it happen. Anytime such a risk shift is possible, where company A can shift its risk of operating component B to a company C specializing in managing that risk at an affordable price, it should be taken. The XaaS movement provides many such opportunities.
Time to Market
One of the most significant reasons why companies choose either SaaS or IaaS solutions is the time to market benefit that their usage provides. In the SaaS world, it’s faster and easier to launch a solution that provides compelling business efficiencies than purchasing, implementing and running that system in-house. In the IaaS world, infrastructure on demand is possible and companies need not wait for onerous lead times associated with ordering and provisioning equipment.
Focus on Returns
Most projects, including packaged software purchased and implemented on site are delivered late and fail to produce the returns on which the purchase was predicated. Further, these projects are “hard to kill”, with millions invested and long depreciation cycles; companies are financially motivated to “ride” their investments to the bitter end in the hopes of minimizing the loss. In the extreme, XaaS solutions offer a simple way to flee a sinking ship: leave. Because the solution is leased, you can (obviously with some work) switch to a competing provider. Capital is freed up in the company for higher return investments associated with revenue rather than costs.
The outcomes of these factors is clear. In virtually every industry, and for nearly every product, companies will move from on-premise or built-in-house solutions to XaaS solutions. CEOs, COOs, CTOs and CIOs will all seek to “Get this stuff out of my shop!”
Companies that believe it will never happen in their industry are simply kidding themselves and completely ignoring the outcomes predicted within the technology adoption life-cycle. Every company needs to focus on fewer, higher value things. Every company should outsource risky operational activities if there is a better manager of that risk than them. Every company is obligated to seek better margins and greater profitability – even those companies in the not for profit sector need to maximize the benefit of every donated dollar. Every company seeks opportunities to bring their value to market faster. And finally, few companies can find the great talent in today’s market necessary to be successful in their corporate IT and product operations endeavors.
If you produce on-premise, licensed software products and have not yet considered the movement to a SaaS solution, you need to do so now. Failing to do so could mean the demise of your company.
We are experts in helping companies migrate products to the XaaS model. Contact us - we would love to help you.
Subscribe to the AKF Newsletter
Agile and Dealing With The Cone of Uncertainty
July 8, 2018 | Posted By: Dave Berardi
The Leap of Faith
When we embark on building SaaS product that will delight customers we are taking a leap of faith. We often don’t even know whether or not the outcomes targeted are possible. Investing and building software is often risky for several reasons:
- We don’t know what the market wants.
- The market is changing around us.
- Competition is always improving their time to market (TTM) releasing competitive products and services.
We have to assume there will be project assumptions made that will be wrong and that the underlying development technology we use to build products is constantly changing and evolving. One thing is clear on the SaaS journey – the future is always murky!
The journey that’s plagued with uncertainty for developing SaaS is seen throughout the industry and is evidenced by success and failure from big and small companies – from Facebook to Apple to Salesforce to Google. Google is one of many innovating B2C companies that have used the cone of uncertainty to help inform how to go to market and whether or not to sunset a service. The company realizes that in addition to innovating, they need to reduce uncertainty quickly.
For example, Google Notebook, a browser-based note-taking and information sharing service, was killed and resurrected as part of Google Docs and has a mobile derivative called Keep. Google Buzz, Google’s first attempt at a social network was quickly killed after a little over a year in 2011. These are just a few B2C examples from Google. All of these are examples of investments that faced the cone of uncertainty. Predicting successful outcomes longer term and locking in specifics about a product will only be wasteful and risky.
The cone of uncertainty describes the uncertainty and risk that exist when an investment is made for a software project. The cone depicts the amount of risk and degree of precision for certainty thru the funnel. The further out we try to forecast features, capabilities, and adoption, the more risk and uncertainty we must assume. This is true for what we attempt to define as a product to be delivered and the timing on when we will deliver it to market. Over time, firms must make adjustments to the planned path along the way to capture and embrace changing market needs.
In today’s market we must quickly test our hypothesis and drive innovation to be competitive. An Agile product development life cycle (PDLC) and appropriately aligned organization helps us to do just that. To address the challenge the cone represents, we must understand what an Agile PDLC can do for the firm and what it cannot do for the firm.
Address the Uncertainty of the Cone
When we use an Agile approach, we must fix time and cost for development and delivery of a product but we allow for adjustment and changes to scope to meet fixed dates. The team can extend time later in the project but the committed date to delivery does not change. We also do not add people since Brooks Law teaches us that adding human resources to a late software project only delays it further. Instead we accelerate our ability to learn with frequent deployments to market resulting in a reduction in uncertainty. Throughout this process, discovery of both what the feature set needs to be for a successful outcome and how something should work is accomplished.
Agile allows for frequent iterations that can keep us close to the market thru data. After a deployment, if our system is designed to be monitored, we can capture rich information that will help to inform future prioritization, new ideas about features and modifications that may be needed to the existing feature set. Agile forces us to frequently estimate and as such produce valuable data for our business. The resulting velocity of our sprints can be used to revise future delivery range forecasts for both what will be delivered and when it will be delivered. Data will also be produced throughout our sprints that will help to identify what may be slowing us down ultimately impacting our time to market. Positive morale will be injected into the tams as results can be observed and felt in the short term.
What agile is not and how we must adjust?
While using an Agile method can help address the cone of uncertainty, it’s not the answer to all challenges. Agile does not help to provide a specific date when a feature or scope will be delivered. Instead we work towards ranges. It also does not improve TTM just because our teams started practicing it. Company philosophies, principles, and rules are not defined through an Agile PDLC. Those are up to the company to define. Once defined the teams can operate within the boundaries to innovate. Part of this boundary definition needs to start at the top. Executives need to paint a vivid picture of the desired outcome that stirs up emotion and can be measurable. The vision is at the opening of the cone. Measurable Key Results that executives define to achieve outcomes allow for teams to innovate making tradeoffs as they progress towards the vision. Agile alone does not empower teams or help to innovate. Outcomes, and Key Results (OKRs) cascaded into our organization coupled with an Agile PDLC can be a great combination that will empower teams giving us a better chance to innovate and achieve desirable time to market. Implementing an OKR framework helps to remove the focus of cranking out code to hit a date and redirects the needed attention on innovation and making tradeoffs to achieve the desired outcome.
Agile does not align well with annual budget cycles. While many times, an annual perspective is required by shareholders, an Agile approach is in conflict with annual budgeting. Since Agile sees changing market demands, frequent budget iterations are needed as teams may request additional funding to go after an opportunity. It’s key that finance leaders embrace the importance of adjusting the budgeting approach to align with an Agile PDLC. Otherwise the conflict created could be destructive and create a barrier to the firms desired outcome.
Applying Agile properly benefits a firm by helping to address the cone and reducing uncertainty, empowering teams to deliver on an outcome, and ultimately become more competitive in the global marketplace. Agile is on the verge of becoming table stakes for companies that want to be world class. And as we described above noting the importance of a different approach to something like budgeting, its not just for software – it’s the entire business.
Let Us Help
AKF has helped many companies of all sizes when transitioning to an organization, redefining PDLC to align with desired speed to market outcomes, and SaaS migrations. All three are closely tied and if done right, can help firms compete more effectively. Contact us for a free consultation. We would love to help!
Subscribe to the AKF Newsletter
SaaS Principles Part 2
June 29, 2018 | Posted By: Marty Abbott
Following our first article on the conflict between licensed products and SaaS solutions, we now present a necessary (but not always sufficient) list of SaaS operating principles. These principles are important whether one is building a new XaaS (PaaS, SaaS, IaaS) solution, or migrating to an XaaS solution from an on-premise, licensed product.
These principles are developed from the perspective of the product and engineering organization, but with business value (e.g. margins) in mind. They do not address the financial or other business operations needs within a SaaS product company.
1. Build to Market Need – Not Customer Want
Reason: Smaller product (less bloat). Lower Cost of Goods (COGS). Lower R&D cost.
Customer “wants” now help inform and validate professional product management analysis as to what true market “need” is for a product. Products are based on the minimum viable product concept and iterated through a scientific method of developing a hypothesis, testing that hypothesis, correcting where necessary and expanding it when appropriate. Sales teams need to learn to sell “the cars that are on the lot”, not sell something that is not available. Smaller, less bloated, and more configurable products are cheaper to operate, and less costly to maintain.
2. Build “-ilities” First
Reason: Availability, Customer Retention, and high Revenue Retention.
Availability, scalability, reliability, and nearly always on “utility” are now a must have, as the risk of failure moves from the customer in the on-premise world to the service provider. No longer can product managers ignore what was once known as NFRs or “Non-Functional Requirements”. The solution must always meet, as a bare minimum, the availability and response times necessary to be successful while scaling in a multi-tenant way under hopefully (significant) demand.
3. Design to be Monitored
Reason: Availability, Customer Retention, and high Revenue Retention.
Sometimes considered part of the “ilities” to achieve specifically high availability, we call this one out specifically as engineers must completely change behavior. Like the notion of test driven development, this principle requires that engineers think about how to log and create data to validate that the solution works as expected before starting development. Gone are the days of closing a defect as “working as designed” – we now promote solutions to production that can easily validate usage and value creation and we concern ourselves only with “Does it work as expected for customer benefit?”
4. Design for Easy and Efficient Operations – Automate Always
Reason: Lower COGS. Availability.
Everything we do to develop product and deliver a customer experience needs to be enabled through automation: environment creation, product releases, system analysis, database upgrades, etc. Whether this happens within a traditional operations team, a DevOps group, or product engineering, automation is part of our “whole product” and “ships” with our service solution upgrades.
5. Design for Low Cost of Operations
Reason: Lower COGS.
Automation helps us lower the cost of operations, but we must also be cognizant of infrastructure related costs. How do we limit network utilization overall, such that we can lower our costs associated with transit fees? How do we use less memory footprint and fewer compute cycles to perform the same activity, such that we can reduce server infrastructure related costs? What do we really need to keep in terms of data to reduce storage related costs? Few if any of these things are our concerns on-premise, but they all affect gross margin when we run a SaaS business.
6. Engage Developers in Incident Resolution and Post Mortems
Reason: Faster Time to Resolution. Availability. Better Learning Processes.
On premise companies value developer time because new feature creation trumps everything else. SaaS companies know that restoring services is more important than anything else. Further, developers must understand and “feel” customer pain. There is no better motivation for ensuring that problems do not recur, and that we create a learning organization, than ensuring engineers understand the pain and cost of failure.
7. Configuration over Customization
Reason: Smaller Product. Lower COGS. Lower R&D Cost. Higher Quality.
One “core”, lots of configuration, no customization is the mantra of every great SaaS company. This principle enables others, and aids in creating a smaller code base with lower development costs and lower costs of operations. Lower cyclomatic complexity means higher quality, lower cost of future augmentation, and lower overall maintenance costs.
8. Create and Maintain a Homogeneous Environment
Reason: Lower COGS.
Just as the software that enables our product should not be unique per customer, similarly the infrastructure and configuration of our infrastructure should not be unique per customer. Everyone orders off the menu, and the chef does not create something special for you. The menu offers opportunities for configurations – sometimes at costs (e.g. bacon on your burger) but you cannot substitute if the menu does not indicate it (e.g. no chicken breast).
9. Publish One Single Release for All Customers
Reason: Decreased COGS. Decreased R&D Cost (low cost of maintenance).
The licensed software world is lousy with a large engineering burden associated with supporting multiple releases. The SaaS world attempts to increase operating margins by significantly decreasing, ideally to one, the number of versions supported for any product.
10. Evolve Your Services, Don’t Revolutionize Them
Reason: Easier Upgrades. Availability. Lower COGS.
No customer wants downtime associated with an upgrade. The notion is just ridiculous. How often does your utility company take your service offline (power for instance) because they need to perform an “upgrade”? Infrequently (nearly never) at best – and if/when they do it is a giant pain for all customers. Our upgrades need to be simple and small, capable of being reversed, and “boil the frog” as the rather morbid saying goes. No more large upgrades with significant changes to data models requiring hours of downtime and months of preparation on the part of a customer.
11. Provide Frequent Updates
Reason: Smaller product (less bloat). Lower COGS. Lower R&D cost. Faster Time to Market (TTM).
Pursuant to the evolutionary principle above, updates need to happen frequently. These two principles are really virtuous (or if not performed properly, vicious) when related to each other. Doing small upgrades, as solutions are ready to ship, means that customers (and our company) benefit from the value the upgrades engender sooner. Further, small upgrades mean incremental (evolutionary) changes. Faster value, smaller impact. It cures all ills and is both a dessert topping and floor wax.
12. Hire and Promote Experienced SaaS Talent
Reason: Ability to Achieve Goals and SaaS Principles.
Running SaaS businesses, and developing SaaS products require different skills, knowledge and behaviors than licensed, on premise products. While many of these can be learned or trained, attempting to be successful in the XaaS world without ensuring that you have the right knowledge, skills, and abilities on the team early on is equivalent to assuming that all athletes can play all sports. Assembling a football team out of basketball players is unlikely to land you in the Super Bowl.
13. Restrict Access
Reason: Lower Risk. Higher Availability.
Licensed product engineers rarely have access to customer production environments. But in our new world, its easy to grant it and in many ways it can be beneficial. Unfortunately, unfettered access increases the risk of security breaches. As such, we both need to restrict access to production environments and ensure that the engineering team has access to appropriate trouble shooting data outside of the production environment to ensure rapid problem and incident resolution.
14. Implement Multi-Tenancy
Reason: Lower COGS.
Solutions should be multi-tenant to enable better resource utilization, but never all-tenant to ensure that we have proper fault isolation and appropriate availability.
How is your SasS product performing? Need a checkup? We can help
Need help with your SaaS migration?
Subscribe to the AKF Newsletter
The Many Unfortunate Meanings of Cloud
June 5, 2018 | Posted By: Marty Abbott
Enough is enough already – stop using the term “Cloud”. Somewhere during the last 20 years, the term “Cloud” started to mean to product offerings what Sriracha and Tabasco mean to food: everything’s better if we can just find a way to incorporate it. Just as Sriracha makes barely edible items palatable and further enhances the flavor of delicacies, so evidently does “Cloud” confuse the unsophisticated buyer or investor and enhance the value for more sophisticated buyers and investors. That’s a nice analogy, but it’s also bullshit.
The term cloud just means too many things – some of which are shown below:
The real world of cloud offerings can be roughly separated into two groups:
This group of companies know, at some level, that they haven’t turned the corner and started truly offering “services”. They support heavy customization, are addicted to maintenance revenue streams, and offer low levels of tenancy. These companies simply can’t escape the sins of their past. Instead, they slap the term “cloud” on their product in the hopes of being seen as being relevant. At worst, it’s an outright lie. At best, it’s slightly misleading relative to the intended meaning of the term. Unless, of course, anything that’s accessible through a browser is “Cloud”. These companies should stop using the term because deep down, when they are alone with a glass of bourbon, they know they aren’t a “cloud company”.
This group of companies either blazed a path for the move to services offerings (think rentable instead of purchasable) products or quickly recognized the services revolution; they were “born cloud” or are truly embracing the cloud model. They prefer configuration over customization, and stick to the notion of a small number of releases (countable on one hand) in production across their entire customer base. They embrace physical and logical multi-tenancy both to increase margins and decrease customer costs. These are the companies that pay the tax for the term “cloud” – a tax that funds the welfare checks for the “pretenders”.
The graph below plots Cloud Pretenders, Contenders and Not Cloud products along the axes of gross margin and operating margin:
Consider one type of “Pretender” – the case of a company hosting a single tenant, client customized software release for each of their many customers. This is an ASP (Application Service Provider) model. But there is a reason the provider of the service won’t call themselves an ASP: The margins of an ASP stinks relative to that of a true “SaaS” company. The term ASP is old and antiquated. The fix? Just pour a bit of “cloud sauce” on it and everything will be fine.
Contrast the above case with that of a “Contender”: physical and logical multi-tenancy at every layer of the architecture and \ a small number of production releases (one to three) across the entire customer base. Both operating and gross margins increase as maintenance costs and hosting costs decrease when allocated across the entire customer base.
Confused? So are we. Here are a few key takeaways:
- “Cloud” should mean more than just being accessed through the internet via a browser. Unfortunately, it no longer does as anyone who can figure out how to replace their clients with a browser and host their product will call themselves a “Cloud” provider.
- Contenders should stop using the term “Cloud” because it invites comparison with companies to which they are clearly superior: Superior in terms of margins, market needs, architecture and strategic advantage.
- Pretenders should stop using the term “Cloud” for both ethical reasons and reasons related to survivability. Ethically the term is somewhere between an outright lie and an ethically contentious quibble or half-truth. Survivability comes into play when the company believes its own lie and stops seeing a reason to change to become more competitive.
AKF Partners helps companies create “Cloud” (XaaS) transition plans to transform their business. We help with financial models, product approach, market fit, product and technology architecture, business strategy and help companies ensure they organize properly to maximize their opportunity in XaaS.
The Scale Cube - Architecting for Scale
Microservices for Breadth, Libraries for Depth
SaaS Migration Challenges
When Should You Split Services?
Subscribe to the AKF Newsletter
The Top Five Most Common Agile PDLC Failures
April 27, 2018 | Posted By: Dave Swenson
Agile Software Development is a widely adopted methodology, and for good reason. When implemented properly, Agile can bring tremendous efficiencies, enabling your teams to move at their own pace, bringing your engineers closer to your customers, and delivering customer value
quicker with less risk. Yet, many companies fall short from realizing the full potential of Agile, treating it merely as a project management paradigm by picking and choosing a few Agile structural elements such as standups or retrospectives without actually changing the manner in which product delivery occurs. Managers in an Agile culture often forget that they are indeed still managers that need to measure and drive improvements across teams.
All too often, Agile is treated solely as an SDLC (Software Development Lifecycle), focused only upon the manner in which software is developed versus a PDLC (Product Development Lifecycle) that leads to incremental product discovery and spans the entire company, not just the Engineering department.
Here are the five most common Agile failures that we see with our clients:
- Technology Executives Abdicate Responsibility for their Team’s Effectiveness
Management in an Agile organization is certainly different than say a Waterfall-driven one. More autonomy is provided to Agile teams. Leadership within each team typically comes without a ‘Manager’ title. Often, this shift from a top-down, autocratic, “Do it this way” approach to a grass-roots, bottoms-up one sways way beyond desired autonomy towards anarchy, where teams have been given full freedom to pick their technologies, architecture, and even outcomes with no guardrails or constraints in place. See our Autonomy and Anarchy article for more on this.
Executives often become focused solely on the removal of barriers the team calls out, rather than leading teams towards desired outcomes. They forget that their primary role in the company isn’t to keep their teams happy and content, but instead to ensure their teams are effectively achieving desired business-related outcomes.
The Agile technology executive is still responsible for their teams’ effectiveness in reaching specified outcomes (e.g.: achieve 2% lift in metric Y). She can allow a team to determine how they feel best to reach the outcome, within shared standards (e.g.: unit tests must be created, code reviews are required). She can encourage teams to experiment with new technologies on a limited basis, then apply those learnings or best practices across all teams. She must be able to compare the productivity and efficiencies from one team to another, ensuring all teams are reaching their full potential.
- No Metrics Are Used
The age-old saying “If you can’t measure it, you can’t improve it” still applies in an Agile organization. Yet, frequently Agile teams drop this basic tenet, perhaps believing that teams are self-aware and critical enough to know where improvements are required. Unfortunately, even the most transparent and aware individuals are biased, fall back on subjective characteristics (“The team is really working hard”), and need the grounding that quantifiable metrics provide. We are continually surprised at how many companies aren’t even measuring velocity, not necessarily to compare one team with another, but to compare a team’s sprint output vs. their prior ones. Other metrics still applicable in an Agile world include quality, estimation accuracy, predictability, percent of time spent coding, the ratio of enhancements vs. maintenance vs. tech debt paydown.
These metrics, their definitions and the means of measuring them should be standardized across the organization, with regular focus on results vs. desired goals. They should be designed to reveal structural hazards that are impeding team performance as well as best practices that should be adopted by all teams.
- Your Velocity is a Lie
Is your definition of velocity an honest one? Does it truly measure outcomes, or only effort? Are you consistent with your definition of ‘done’? Take a good look at how your teams are defining and measuring velocity. Is velocity only counted for true ‘ready to release’ tasks? If QA hasn’t been completed within a sprint, are the associated velocity points still counted or deferred?
Velocity should not be a measurement of how hard your teams are working, but instead an indicator of whether outcomes (again, e.g.: achieve 2% lift in metric Y) are likely to be realized - take credit for completion only when in the hands of customers.
- Failure to Leverage Agile for Product Discovery
From the Agile manifesto: “Our highest priority is to satisfy the customer through early and continuous delivery of valuable software”. Many companies work hard to get an Agile structure and its artifacts in place, but ignore the biggest benefit Agile can bring: iterative and continuous product discovery. Don’t break down a six-month waterfall project plan into two week sprints with standups and velocity measurements and declare Agile victory.
Work to create and deliver MVPs to your customers that allow you to test expected value and customer satisfaction without huge investment.
- Treating Agile as an SDLC vs. a PDLC
As explained in our article PDLC or SDLC, SDLC (Software Development Lifecycle) lives within PDLC (Product Development Lifecycle). Again, Agile should not be treated as a project management methodology, nor as a means of developing software. It should focus on your product, and hopefully the related customer success your product provides them. This means that Agile should permeate well beyond your developers, and include product and business personnel.
Business owners or their delegates (product owners) must be involved at every step of the PDLC process. PO’s need to be embedded within each Agile team, ideally colocated alongside team members. In order to provide product focus, POs should first bring to the team the targeted customer problem to be solved, rather than dictating only a solution, then work together with the team to implement the most effective solution to that problem.
AKF Partners helps companies transition to Agile as well as fine-tune their existing Agile processes. We can readily assess your PDLC, organization structure, metrics and personnel to provide a roadmap for you to reach the full value and benefits Agile can provide. Contact us to discuss how we can help.
Subscribe to the AKF Newsletter
SaaS Migration Challenges
March 12, 2018 | Posted By: Dave Swenson
More and more companies are waking up from the 20th century, realizing that their on-premise, packaged, waterfall paradigms no longer play in today’s SaaS, agile world. SaaS (Software as a Service) has taken over, and for good reason. Companies (and investors) long for the higher valuation and increased margins that SaaS’ economies of scale provide. Many of these same companies realize that in order to fully benefit from a SaaS model, they need to release far more frequently, enhancing their products through frequent iterative cycles rather than massive upgrades occurring only 4 times a year. So, they not only perform a ‘lift and shift’ into the cloud, they also move to an Agile PDLC. Customers, tired of incurring on-premise IT costs and risks, are also pushing their software vendors towards SaaS.
SaaS Migration is About More Than Just Technology – It is An Organization Reboot
But, what many of the companies migrating to SaaS don’t realize is that migrating to SaaS is not just a technology exercise. Successful SaaS migrations require a ‘reboot’ of the entire company. Certainly, the technology organization will be most affected, but almost every department in a company will need to change. Sales teams need to pitch the product differently, selling a leased service vs. a purchased product, and must learn to address customers’ typical concerns around security. The role of professional services teams in SaaS drastically changes, and in most cases, shrinks. Customer support personnel should have far greater insight into reported problems. Product management in a SaaS world requires small, nimble enhancements vs. massive, ‘big-bang’ upgrades. Your marketing organization will potentially need to target a different type of customer for your initial SaaS releases - leveraging the Technology Adoption Lifecycle to identify early adopters of your product in order to inform a small initial release (Minimum Viable Product).
It is important to recognize the risks that will shift from your customers to you. In an on-premise (“on-prem”) product, your customer carries the burden of capacity planning, security, availability, disaster recovery. SaaS companies sell a service (we like to say an outcome), not just a bundle of software. That service represents a shift of the risks once held by a customer to the company provisioning the service. In most cases, understanding and properly addressing these risks are new undertakings for the company in question and not something for which they have the proper mindset or skills to be successful.
This company-wide reboot can certainly be a daunting challenge, but if approached carefully and honestly, addressing key questions up front, communicating, educating, and transparently addressing likely organizational and personnel changes along the way, it is an accomplishment that transforms, even reignites, a company.
This is the first in a series of articles that captures AKF’s observations and first-hand experiences in guiding companies through this process.
Don’t treat this as a simple rewrite of your existing product –
Answer these questions first…
Any company about to launch into a SaaS migration should first take a long, hard look at their current product, determining what out of the legacy product is not worth carrying forward. Is all of that existing functionality really being used, and still relevant? Prior to any move towards SaaS, the following questions and issues need to be addressed:
Customization or Configuration?
SaaS efficiencies come from many angles, but certainly one of those is having a single codebase for all customers. If your product today is highly customized, where code has been written and is in use for specific customers, you’ve got a tough question to address. Most product variances can likely be handled through configuration, a data-driven mechanism that enables/disables or otherwise shapes functionality for each customer. No customer-specific code from the legacy product should be carried forward unless it is expected to be used by multiple clients. Note that this shift has implications on how a sales force promotes the product (they can no longer promise to build whatever a potential customer wants, but must sell the current, existing functionality) as well as professional services (no customizations means less work for them).
Many customers, even those who accept the improved security posture a cloud-hosted product provides over their own on-premise infrastructure, absolutely freak when they hear that their data will coexist with other customers’ data in a single multi-tenant instance, no matter what access management mechanisms exist. Multi-tenancy is another key to achieving economies of scale that bring greater SaaS efficiencies. Don’t let go of it easily, but if you must, price extra for it.
Who Owns the Data?
Many products focus only on the transactional set of functionality, leaving the analytics side to their customers. In an on-premise scenario, where the data resides in the customers’ facilities, ownership of the data is clear. Customers are free to slice & dice the data as they please. When that data is hosted, particularly in a multi-tenant scenario where multiple customers’ data lives in the same database, direct customer access presents significant challenges. Beyond the obvious related security issues is the need to keep your customers abreast of the more frequent updates that occur with SaaS product iterations. The decision is whether you replicate customer data into read-only instances, provide bulk export into their own hosted databases, or build analytics into your product?
All of these have costs - ensure you’re passing those on to your customers who need this functionality.
May I Upgrade Now?
Today, do your customers require permission for you to upgrade their installation? You’ll need to change that behavior to realize another SaaS efficiency - supporting of as few versions as possible. Ideally, you’ll typically only support a single version (other than during deployment). If your customers need to ‘bless’ a release before migrating on to it, you’re doing it wrong. Your releases should be small, incremental enhancements, potentially even reaching continuous deployment. Therefore, the changes should be far easier to accept and learn than the prior big-bang, huge upgrades of the past. If absolutely necessary, create a sandbox for customers to access new releases, but be prepared to deal with the potentially unwanted, non-representative feedback from the select few who try it out in that sandbox.
Wait? Who Are We Targeting?
All of the questions above lead to this fundamental issue: Are tomorrow’s SaaS customers the same as today’s? The answer? Not necessarily. First, in order to migrate existing customers on to your bright, shiny new SaaS platform, you’ll need to have functional parity with the legacy product. Reaching that parity will take significant effort and lead to a big-bang approach. Instead, pick a subset or an MVP of existing functionality, and find new customers who will be satisfied with that. Then, after proving out the SaaS architecture and related processes, gradually migrate more and more functionality, and once functional parity is close, move existing customers on to your SaaS platform.
To find those new customers interested in placing their bets on your initial SaaS MVP, you’ll need to shift your current focus on the right side of the Technology Adoption Lifecycle (TALC) to the left - from your current ‘Late Majority’ or ‘Laggards’ to ‘Early Adopters’ or ‘Early Majority’. Ideally, those customers on the left side of the TALC will be slightly more forgiving of the ‘learnings’ you’ll face along the way, as well as prove to be far more valuable partners with you as you further enhance your MVP.
The key is to think out of the existing box your customers are in, to reset your TALC targeting and to consider a new breed of customer, one that doesn’t need all that you’ve built, is willing to be an early adopter, and will be a cooperative partner throughout the process.
Our next article on SaaS migration will touch on organizational approaches, particularly during the build-out of the SaaS product, and the paradigm shifts your product and engineering teams need to embrace in order to be successful.
AKF has led many companies on their journey to SaaS, often getting called in as that journey has been derailed. We’ve seen the many potholes and pitfalls and have learned how to avoid them. Let us help you move your product into the 21st century. See our SaaS Migration service
Subscribe to the AKF Newsletter
Technical Due Diligence Best Practices
January 23, 2018 | Posted By: Marty Abbott
Technical due diligence of products is about more than the solution architecture and the technologies employed. Performing diligence correctly requires that companies evaluate the solution against the investment thesis, and evaluate the performance and relationship of the engineering and product management teams. Here we present the best practices for technology due diligence in the format of things to do, and things not to do:
1. Understand the Investment/Acquisition Thesis
One cannot perform any type of diligence without understanding the investment/acquisition thesis and equally as important, the desired outcomes. Diligence is meant to not only uncover “what is” or “what exists”, but also identify the obstacles to achieve “what may or can be”. The thesis becomes the standard by which the diligence is performed.
2. Evaluate the Team against the Desired Outcomes
The technology product landscape is littered with the carcasses of great ideas run into the ground with the wrong leadership or the wrong team. Disagree? We ask you to consider the Facebook and Friendster battle. We often joke that the robot apocalypse hasn’t happened yet, and technology isn’t building itself. Great teams are the reasons solutions succeed and substandard teams behind those solutions that fail technically. Make sure your diligence is identifying whether you are getting the right team along with the product/company you acquire.
3. Understand the Tech/Product Relationship
Product Management teams are the engines of products, and engineering teams are the transmission. Evaluating these teams in isolation is a mistake – as regardless of the PDLC (product development lifecycle) these teams must have an effective working relationship to build great products. Make sure your diligence encompasses an evaluation of how these teams work together and the lifecycle they use to maximize product value and minimize time to market.
4. Evaluate the Security Posture
Cyber-crime and fraud is going to increase at a rate higher than the adoption of online solutions pursuant to a number of secular forces that we will enumerate in a future post. As such, it is in your best interest as an investor to understand the degree to which the company is focused on increasing the perceived cost of malicious activity and decreasing the perceived value of said malicious activity. Ensure that your diligence includes evaluating the security focus, spending, approach and mindset of the target company. This need not be a separate diligence for small investments – just ensure that you are comfortable with the spend, attention and approach. Ensure that your diligence properly evaluates the risk of the target solution.
5. Prepare Yourself and the Target
Any diligence will go better if you give the acquisition/investment target an opportunity to prepare documents. Requesting materials in advance allows the investment target an opportunity to prepare for a deep discussion and ensures that you can familiarize yourself with the product architecture and product development processes ahead of time. Check out our article on due diligence checklists which includes a list of items to request in advance.
6. Be Dynamic and Probe Constantly
While a thorough list of items to discuss is important, it is equally important to abide by the “2 ears and one mouth” rule: Spend more time listening than talking. Look for subtle clues as to the target’s comfort with particular answers. Are there things with which they are uncomfortable? Are they stressing certain words for a reason? Don’t accept an answer at face value, dig into the answer to find the information that supports a claim.
7. Evaluate Debt
Part of the investment in your target could well be an ongoing premium payment against past technical debt. Ensure that you properly evaluate what debt the company has acquired, and how they are paying the interest and premium payments against that debt.
1. Don’t Waste Too Much Time (or money) on Code Reviews
The one thing I know from years of running engineering teams is that anytime an engineer reviews code for the first time she is going to say, “This code is crap and needs to be rewritten.” Code reviews are great to find potential defects and to ensure that code conforms to the standards set forth by the company. But you are unlikely to have the time or resources to review everything. The company is also unlikely to give you unfettered access to all of their code (Google “Sybase Microsoft SQLServer” for reasons why). That leaves you at the whims of the company to cherry-pick what you review, which in turn means you aren’t getting a good representative sample.
Further, your standards likely differ from those of the target company. As such, a review of the software is simply going to indicate that you have different standards.
Lastly, we’ve seen great architecture and terrible code succeed whereas terrible architecture and great code rarely is successful. You may find small code reviews enlightening, but we urge you to spend a majority of your time on the architecture, people and process of the acquisition or investment.
2. Don’t Start a Fight
Far too often technology diligence sessions start in discussion and end in a fight. The people performing the diligence start asking questions in a way that may seem judgmental to the target company. Then the investing/acquiring team shifts from questions to absolute statements that can only be taken as judgmental. There’s simply no room for this. Diligence is clinical – not personal. It’s not a place to prove who is smarter than whom. This dynamic is one of the many reasons it is often a good idea to have a third party perform your diligence: The target company is less likely to feel threatened by the acquiring product team, and the third party is oftentimes more experienced with establishing a non-threatening environment.
3. Don’t Be Religious
In a services oriented world, it really doesn’t matter what code or what data persistence platform comprises a service you may be calling. Assuming that you are acquiring a solution and its engineers, you need not worry about supporting the solution with your existing skillsets. Debates around technology implementations too often come from a place of what one knows (“I know Java, Java rocks, and everything else is substandard”) than what one can prove. There are certainly exceptions, like aging and unsupported technology – but stay focused on the architecture of a solution, not the technology that implements that architecture.
4. Don’t Do Diligence Remotely
As we’ve indicated before, diligence is as much about teams as it is the technology itself. Performing diligence remotely without face to face interaction makes it difficult to identify certain cues that might otherwise be indicators that you should dig more deeply into a certain space or set of questions. Examples are a CTO giving an authoritative answer to a certain question while members her team roll their eyes or slightly shake or bow their heads.
You may also want to read about the necessary components of technical due diligence in our article on optimizing technical diligence.
AKF Partners performs diligence on behalf of a number of venture capital and private equity firms as well as on behalf of strategic acquirers. Whether for a third party view, or because your team has too much on their plate, we can help. Read more about our technical due diligence services here.
Subscribe to the AKF Newsletter
Definition of MVP
April 3, 2017 | Posted By: AKF
We often use the term minimum viable product or MVP but do we all agree on what it means? In the Scrum spirt of Definition of Done, I believe the Definition of MVP is worth stating explicitly within your tech team. A quick search revealed these three similar yet different definitions:
- A minimum viable product (MVP) is a development technique in which a new product or website is developed with sufficient features to satisfy early adopters. The final, complete set of features is only designed and developed after considering feedback from the product’s initial users. Source: Techopedia
- In product development, the minimum viable product (MVP) is the product with the highest return on investment versus risk…A minimum viable product has just those core features that allow the product to be deployed, and no more. Source: Wikipedia
- When Eric Ries used the term for the first time he described it as: A Minimum Viable Product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.
I personally like a combination of these definitions. I would choose something along the lines of:
A minimum viable product (MVP) has sufficient features to solve a problem that exists for customers and provides the greatest return on investment reducing the risk of what we don’t know about our customers
Just like no two teams implement Agile the same way, we don’t all have to agree on the definition of MVP but all your team members should agree. Otherwise, what is an MVP to one person is a full featured product to another. Take a few minutes to discuss with your crossfunctional agile team and come to a decision on your Definition of MVP
Subscribe to the AKF Newsletter
Build v. Buy
April 3, 2017 | Posted By: AKF
In many of our engagements, we find ourselves helping our clients understand when it’s appropriate to build and when they should buy.
If you perform a simple web search for “build v. buy” you will find hundreds of articles, process flows and decision trees on when to build and when to buy. Many of these are costcentric decisions including discounted cash flows for maintenance of internal development and others are focused on strategy. Some of the articles blend the two.
Here is a simple set of questions that we often ask our customers to help them with the build v. buy decision:
1. Does this “thing” (product / architectural component / function) create strategic differentiation in our business?
Here we are talking about whether you are creating switching costs, lowering barriers to exit, increasing barriers to entry, etc that would give you a competitive advantage relative to your competition. See Porter’s Five Forces for more information about this topic. If the answer to this question is “No – it does not create competitive differentiation” then 99% of the time you should just stop there and attempt to find a packaged product, open source solution, or outsourcing vendor to build what you need. If the answer is “Yes”, proceed to question 2.
2. Are we the best company to create this “thing”?
This question helps inform whether you can effectively build it and achieve the value you need. This is a “core v. context” question; it asks both whether your business model supports building the item in question and also if you have the appropriate skills to build it better than anyone else. For instance, if you are a social networking site, you *probably* don’t have any business building relational databases for your own use. Go to question number (3) if you can answer “Yes” to this question and stop here and find an outside solution if the answer is “No”. And please, don’t fool yourselves – if you answer “Yes” because you believe you have the smartest people in the world (and you may), do you really need to dilute their efforts by focusing on more than just the things that will guarantee your success?
3. Are there few or no competing products to this “thing” that you want to create?
We know the question is awkwardly worded – but the intent is to be able to exit these four questions by answering “yes” everywhere in order to get to a “build” decision. If there are many providers of the “thing” to be created, it is a potential indication that the space might become a commodity. Commodity products differ little in feature sets over time and ultimately compete on price which in turn also lowers over time. As a result, a “build” decision today will look bad tomorrow as features converge and pricing declines. If you answer “Yes” (i.e. “Yes, there are few or no competing products”), proceed to question (4).
4. Can we build this “thing” cost effectively?
Is it cheaper to build than buy when considering the total lifecycle (implementation through endoflife)
of the “thing” in question? Many companies use cost as a justification, but all too often they miss the key points of how much it costs to maintain a proprietary “thing”, “widget”, “function”, etc. If your business REALLY grows and is extremely successful, do you really want to be continuing to support internally developed load balancers, databases, etc. through the life of your product? Don’t fool yourself into answering this affirmatively just because you want to work on something neat. Your job is to create shareholder value – not work on “neat things” – unless your “neat thing” creates shareholder value.
There are many more complex questions that can be asked and may justify the building rather than purchasing of your “thing”, but we feel these four questions are sufficient for most cases.
A “build” decision is indicated when the answers to all 4 questions are “Yes”.
We suggest seriously considering buying or outsourcing (with appropriate contractual protection when intellectual property is a
concern) anytime you answer “No” to any question above.
Subscribe to the AKF Newsletter
< 1 2