As a mentor and coach to emerging technology companies in the Portland area for the Oregon Entrepreneurs Network I see quite a few software start up’s. And, no big surprise, they’re all cloud-based delivery models. Yet, as I look at many established software companies (the ones with real customers) they are typically traditional, on-premise software solutions. Why is that? Is it because the upstarts just don’t “get it?” Is it because “real” software companies just don’t do SaaS?
Or is it, perhaps, because established software companies find it very hard to transform themselves to this new model? My personal experience is that it’s this last reason that is holding many companies back - it’s not an easy change - and it seems so much less risky to “stick to the knitting” and keep doing what is tried and true. And what about those customers, certainly they don’t want to make this big a change? Or do they?
An April 14th New York Times article entitled “The Business Market Plays Cloud Computing Catch-Up” published a very good job exposing some of these challenges but also the inevitability of this change. A change that already has transformed the B2C sector and now is getting significant attention and investment in the B2B sector. A very telling indicator is the US government’s “Federal Cloud Computing Strategy” report that has identified one quarter of the government’s total IT spending, that’s $20 billion by the way, as a “potential target” for migration to the cloud. And then there’s IBM, the epitome of corporate, B2B technology, that forecasts it will have $7 billion in cloud-based revenue by 2015.
Could it be that sticking to the “tried & true” may not be the safest choice for traditional, on-premise software companies these days? My vote is that it’s not, and those loyal, locked-in customers may not be quite so loyal and locked-in as some companies are counting on. The fact of the matter is, the real driver for all of this is not technology at all, it’s simple customer value. The traditional, on-premise model is very expensive and problematic for both the provider and the customer. From purchase, implementation, upgrades, availability, use, quality, affordability and even security, the cloud offers clear and substantial benefits over the “legacy” approach. LinkedIn’s IPO (the first in a projected flood) is pretty compelling evidence that there’s substantial value.
Customer value has driven the technology industry from the earliest days - ok it’s not always been clear and clean, but it’s been like gravity - a force that you ignore at your own peril. But in this case, the value is also great on the provider side, now more than ever. From Amazon’s BeanStalk, Google’s App Engine, Salesforce’s Force, VMWare’s Cloud Foundry even Microsoft’s Azure, the (last?) bastion of on-premise computing - they all are radically changing the economics of developing and delivering software applications in the cloud. So, we have the perfect storm for industry transformation - high perceived customer value, low cost production and delivery and boat-loads of investor’s money convinced that this is the best place for a great return.
The Spanish philosopher, George Santayana said in his famous quote: “Those who cannot remember the past are condemned to repeat it.” And, the past is littered with thousands of companies (even whole industries) that have disappeared because they failed to adapt to new market realities. I think the cloud qualifies as one of these industry-changing “new market realities”.
And, if I’m right you have a choice - remember & transform or forget & fade away.
A recent McKinsey journal article provided a sobering look at the top 500 non financial US company’s top line growth performance. During a 10 year span from 1997 - 2007 only 1/3 of these companies (revenues over $500M) experienced compound annual growth rates of greater than 10%. The average rates are one half this if we look at the companies over a longer period, from 1965 to 2008 with just 5.2% 3-Year CAGR percent. This is against a median GDP growth rate for the same period of 3.2%. Finally, 44% of the companies with growth rates of over 15% between 1994 and 1997, they went on to say, were growing at rates lower than 5% ten years later!
Above average growth rates clearly are tough to create and even tougher to sustain over more than just a few years. Why so many casualties? Why is it so hard to maintain top line growth? Certainly there are many different factors that play into this, but one that I firmly believe is at the root of this issue is the lack of a consistent focus on delivering superior customer value.
A concerted long term focus on delivering superior customer value that in turn produces long term sustained, superior growth and profitability is hard to do, clearly. Few companies can maintain this focus across their markets over time because they don’t maintain a customer value driven culture across their organization. They may have portions of their organization that do this from time to time, they may get “lucky” and strike a rich vein of value for a while, but it’s not sustainable.
Physics tells us that an object at rest tends to remain at rest and an object that is moving, without constant energy applied, will eventually grind to a halt. Inertia in the physics has another name in organizations - complacency. Without the north star focus on customer value, organizations tend to look inward and become self-satisfied and self-deceived. And when this happens they start losing their value advantage because, just like nature, value loss creates a vacuum of opportunity for other organizations to pursue. Value in today’s fast-moving tech world has a shorter and shorter “half-life” - it decays quickly, sometimes quite abruptly.
The end of this article alludes to the core value issue when the authors state: “...the benefits of patience and discipline: patience to nurture new growth platforms over many years and discipline to uncover the types of growth that will create the most value.” But, in my opinion, this still begs the question what “nurtures” new growth platforms and how do you “uncover” growth that creates value. I firmly believe the patience and discipline needs to be in discovering and delivering superior value to a specific group of intended customers.
So how’s your top line growth? What does your 5/10 year CAGR look like? These are a great indicator of your will and ability to create and maintain superior customer value? Tough questions to answer for sure, but even tougher to ignore. What are your thoughts? I’d love to hear from you!
According to dictionary.com, value is “the worth of something in terms of the amount of other things for which it can be exchanged or in terms of some medium of exchange.” Ok, that’s a start, but it doesn't really provide much help for our purposes here, so let's dig a bit deeper into this funny thing called value. In my opinion it’s THE most important and relevant questions facing every human organization.
Value answers the fundamental question every customer asks when they buy a product: "what do I get for my money?" It is the sum total of the benefits received for the money spent and it can actually be positive or negative. If what I'm buying is intrinsically or extrinsically MORE worth more than what I pay for it, it's positive and I've gained value for the money I spent. On the other hand, if it's worth less - bummer - I just lost value and paid more that what I should have. As an equation: Value = Price - Cost.
Over the years, I've come to the realization that understanding value and how it is created and destroyed is the very essence of a business. It's so important yet so apparently missed by so many that I thought it would be a good opportunity to create a business that helps companies find and deliver it! VALUE:driven delivers superior value to our customers by helping them to discover and deliver superior value to their customers.
So back to my working definition of value, here it is: Value is the full set of experiences, including price, that an organization delivers to it's intended customers within a specific timeframe. It is at the root of all wealth creation and, therefore, it's force behind the growth and demise of all business and industry. There are some new terms to define in this definition, which I'll get into in my next blog post. But catch Miki's latest post because he speaks to the notion of "intended customer".
Think about your business: How does this definition help you view your business in a new and better way? What are the experiences that you are delivering and, most importantly, are they delivering a net positive, neutral or negative value to your customers? How do you know this for sure and how do you improve it?
These are all the topics of my future blog posts, so stay tuned!