Exceptional software leaders are the rule

Chapter three - from the book Secrets of Software Success

Stephan Schmbach's story -

a. Aspiring to the virtually impossible

b. Recruiting the top programmers

c. Finding the funding

d. Meeting the press

e. Internationalising almost overnight

Result? In 1998, Intershop went public on the German stock exchange Neuer Markt with an IPO valued at about $300 million.

Essential characteristics of software leaders

- must be technology visionaries

- be extreme risk takers and hope for immense returns
(note: risk = challenges taken up. They are NOT crazy. They DO NOT bet on ONE opportunity; instead, they take multiple risks that yield multiple options for success.)

They bet on multiple options to prepare for all uncertainties. Examples:

Microsoft did NOT bet on the success on the Windows PC OS only. They developed an operating system TOGETHER with IBM for a DIFFERENT operating system.

SAP prefers to ADAPT than SHAPE standards. Investing in several standards simultaneously.

- Be ready to fail, "fail quickly" than avoid mistakes
The key thing in this business is to make mistakes quickly and correct them EVEN FASTER.

- Must aim high

Flip Filipowski founded Platinum Technology, gave himself 10 years to reach a BILLION in revenues...he took ELEVEN (11).

Bill Gates took 15 (Fifteen) years to reach a billion in revenues.

Intel, Oracle and SAP took LONGER than 10 years.

"In our global survey, we found an extremely strong correlation between high aspiration level and company success. Of the successful companies, 93 percent had a CLEAR and AMBITIOUS vision, whereas only 25% of the less successful companies had that same aspiration level".

- They are builders of highly dynamic organisations

Intel Grove of Intel describes it, "You need to plan the way a fire department plans. It cannot anticipate WHERE the next fire will be, so it has to shape an energetic and efficient team that is capable of responding to the unanticipated as well as to any ordinary event".

- They build extremely flat , team based organisations

- They create a culture that attracts and retains talent

- They have TEAMS at the TOP
Many of today's start up companies - and even the software giants - are NOT led by a single leader. Rather, many companies are led by leadership TEAMS.

Examples,

Concurrent Computer Corporation - $340million business with 3,500 employees
Jim Sims - Company visionary Chairman and CEO
Toscanini - Analytical, with realistic views, firm grasp of financial figures. VP and Controller

SAP
Dietmar Hopp - Chairman - down to earth, fact-driven leadership style, with an emphasis on planning and control.

Plattner - co chairman and CEO, takes "technology visionary role".

Oracle
Larry Ellision - Oracle's public face and conveyor of its vision.
Ray Lane - Ensures Oracle delivers

- They must grow or go

- They must have the mindset to WIN the race

A New Business Called "Software"

Chapter Two

Types of software businesses - differentiated by 5 eras:

1. Independent programming services
2. Software products
3. Enterprise solutions
4. Packaged software for the masses
5. Internet and value-added services

Differences between Enterprise solutions and Packaged software:

1. Enterprise solutions always need customisation.
2. Substantial time and effort to get it up and running.
3. ERP software cost - 30% on licence 70% on professional services to implement product
4. ERP sell far fewer copies

Business Dynamics - Case study

CUC started offering software products in addition to individual programming services, it also entered into the hardware market.

1 year later it lost $430k.

In 1985, CUC posted $2.4M in LOSSES on $1.5M in revenues.

Why did CUC fail?

Because CUC failed to address the differences in managing software SERVICES and managing software PRODUCTS.

What are the differences?

a. cost structure
b. demand volume
c. competition intensity
d. geographic presence
e. relationship management

Enterprise solutions firms must address the above continuously as both the product and services are linked to product installation.

Product business - Business Dynamics

a. Low barrier to entry
b. Low capital investments

In software product companies, most of the cost of software is in the design and coding of it. Including marketing and sales costs too. While variable costs are low, there is a LARGE upfront fixed costs for development of the product.

Therefore, in the case of Microsoft, Microsoft must sell millions of $209 operating systems to recover its billion-dollar investment in cost of development.



Dosmetic markets even the size of the United States may be too small to reach such high sales volume.



Case study:


Intershop a German software start up moved to the U.S. just two years of its founding.



MANY SOFTWARE PRODUCT FIRMS KNOW ONLY ONE TARGET: THE WORLD!



Only a tiny fraction will succeed in that market.



Important to note: LAW OF INCREASING RETURNS



The law states that a product that advances in market share tends to get even FURTHER ahead and sell even MORE copies, while the one that falls behind tends to fall even further BEHIND. Advantage and disadvantages tend to magnify rapidly. This law leads to a very high market concentration after a short time, leaving FEW WINNERS and many losers.

Why?

1. The ability of programs to operate together and exchange information is critical; thus people buy the same software as the people usually communicate with. Users enjoy "increasing returns" from their software as other users also begin to use it.

2. Once users are trained on certain software products, they are less likely to switch to others because they would have to be retrained.

3. Since software products are often difficult to evaluate objectively, decision makers often buy whatever is most popular.

How to achieve it?

It is crucial to reach more than 40% market share within a certain niche within 12 to 18 months.If your competitor is well behind, word of mouth in the marketplace starts spreading the message that you are the market leader and once that happens, market share can be expected to increase beyond 50% of the following 12 months' sales.

So, you have to move with speed with carefully laid out plans!



Business dynamics - Professional services business



The law of increasing returns DOES NOT exist in the service business.



But it shares similar traits of a product business.


- Low entry barriers
- Constant threat of new entrants
- High pace of innovation



However, the service firm business model is radically different.



Case study:



A 1996 McKinsey analysis of 22 companies showed that the cost of revenue is MORE THAN 4 TIMES as high at software services firms than at product companies.



Why?



If Anderson Consulting builds a custom made software solution for a customer today, and a similar one for another customer tomorrow, the cost of both of them is NOT radically different.

It is quite different from the radical cost for the second CD-ROM copy in the product business.



Market leadership


There is NO RACE for market leadership. Since every product is custom made, the customer's desire to remain with a market leader is not as strong as with software products.

For these reasons, smaller local professional services providers can be very successful.

Case in point: Andersen Consulting with revenues of $6.6 billion in 1997 reached a global market share of LESS THAN 6%.

Challenge of managing the two business types simultaneously


The enterprise solution companies CANNOT address these issues by coping with ONLY ONE business type. Organisational separation and different marketing approaches for EACH business within the company must help solve the problem.

Case study:

ADV Orga a leading enterprise solution company in Germany in the early 1980s with more than 500 employees failed to do cope.

There were NO CLEAR ORGANISATIONAL separation between their product and service businesses.

Whenever there were many service projects, developers were pulled off the product business to support those projects. As a result, product development was often put on hold and market launches were delayed.

Furthermore, marketing was handled similarly for both products and services.

In 1989 ADV Orga was sold with heavy losses. Their main competitor SAP addressed those differences mainly via partnering in professional services and rose to global market leadership.

Leadership is important - leaders must accept the uncertainty AND thrive on it. Leadership is one of the most important ingredient in software success.

- read the book for more details.

It's like riding a bull

This is a book review / with excerpts from the book "Secrets of Software Success"

Chapter one

Software is nothing but pure knowledge in codified form. Software makes hard cash and software companies make millionaires out of programmers, assistants and receptions...and of course the marketing and sales people.

So everyone should jump in and make money? Yeah...apparently so because ANYONE can start a software company. The big question is "What happens hereafter?"

70% - yes SEVENTY percent of the computer industry's revenues were from products that did not exist 2 years ago, according to The Economists in 1996.

Summary? - CTO of Microsoft Nathan Myhrvold sums it best -
"No matter how good your product is - you are ALWAYS EXACTLY 18 MONTHS AWAY FROM FAILURE."

Many can start a software company, very few can run it.

Victims?
Wordperfect
Lotus
DBase

So what makes the difference?

Simple answer, according to the book.
The product must be good, BUT the key difference is the COMPANY'S MANAGEMENT.

I quote from the book "the management of software firms is a balancing act. Success depends on simultaneously striking the balance within and between key management areas, from internal areas such as LEADERSHIP, PEOPLE MANAGEMENT and PRODUCT DEVELOPMENT to more EXTERNAL areas like MARKETING AND PARTNERING."

Although some software companies spend more of the budget on marketing than McDonalds, only few spend it wisely.

The firms that succeeds does the following:

1. Communicating a CLEAR VALUE proposition to customers.
2. Do not advertise product FEATURES
3. Advertise company BRANDS
4. Introduce new products TWICE a year
5. Apply creative software entry-pricing techniques to build customer base
6. Innovative approaches to PR
7. Let partners pay for extravagant promotions
8. Establish and communicate completely new platforms
9. Build marketing alliances
10. Preinstall software - to reach, sustain, or take over the pole position to become the "category killers"

It is growing their partners that makes software companies grow themselves

There is NO growth without partnering activities in the software industry. Alliances are NOT a convenience; in most cases they are a matter of survival.

Most of the successful companies GIVE AWAY 80% of the total revenues created WITH their partners.

These partnership are often informal and few written contracts confirm them. They move in and out of what they term "Partner Webs".

Conclusion:
John F. Keane founder of the $1 billion professional software service firm says "It's also like riding a bull. You really have to be aware of the bull's movements. Because every time you think you succeeded, you are thrown off the bull".

Profit is NOT cash

Your profit and loss statement tells you how your company has performed during the financial period. It also includes NON CASH items, aka expenses or income not spent or received yet.

You can therefore make a profit and NOT have any cash!

To have better cash flow management, you have to speed up your working capital cycle. How?

- Minimising stocks
- Getting debtors to pay up quickly and more regularly

Examples of NON CASH items -
a. Depreciation
b. Accrued charges
c. Accrued income
d. Translation gains/losses of foreign currencies
e. Profit/Loss on disposal of fixed assets

Where do you stand? Financially.

Many years ago, I read this book How to Grow Rich by Frank Newman and Dr. Muriel Newman. I thought that I could "beat" the odds and attain wealth earlier.

I guess most of us tend to "follow" this graph trend, although the $ in value would differ and the perception of whether you are wealthy or not is quite relative.

To see where you stand, I would cite the "wealth ruler" based on Robert Kiyosaki's book "Retire Young Retire Rich"

On page 102, he states:

Upon retirement at age sixty-five, the income WITHOUT working falls into these categories:

Poor $25,000 or less per year
Middle class $25,000 - $100,000 per year
Affluent $100,000 - $1M per year
Rich $1M or more per year
Ultra-rich $1M or more PER MONTH

So, where do you stand today?