Ownership of Open Source

Writing about open source issues has been on my list for awhile because it’s so important to have a good strategy for using it. Thanks to John Curtis at Quotient for taking it off my list with a great post. Check out “Let’s talk about ownership” for a clear discussion of the major issues.

Are You Working On or In Your Business?

In a recent post, I mentioned that an article I’d written for TexasCEO magazine would show up soon on their web site. Here’s a link to the article and a picture from the party held at Annie’s in downtown Austin to celebrate publication of the current edition.

Defining Product versus Services Businesses

The genesis of this post is a comment I made about product companies at a large networking event earlier this week in Houston:

“If you think you’re a product company and you haven’t developed a repeatable sales model, then you’re a services company.”

In other words, if every deal closed is in a different vertical market and/or solves a different problem, then the transition from a services company to a product company is incomplete. What is the effect on the value of your company?

How to grow a company’s value is a topic I spend a great deal of time thinking about, and the 20/20 Outlook process focuses on aligning a company with others in the industry to grow a private company’s valuation. While that’s a vital driver of any corporate strategy, let’s consider how the form of a company’s offerings (specifically, products versus services) impacts its market value.

One attraction of starting a product company is the relatively rapid growth in valuation possible in comparison to that of a pure services company. To see why this is a critical issue, go to Yahoo Finance and compare the ratio of revenue to enterprise value for half a dozen public companies that derive most of their revenue from either products or services. For example, the well-run government services company Raytheon’s trailing twelve months’ revenue is $25 billion yet their enterprise value is only $18 billion, a ratio of 0.7. Compare that with your favorite products companies and you’ll find much higher ratios for well-run products companies.

Of course, customers demand varying amounts of service to accompany product purchases, thus few so-called product companies are successful without offering services as well. The percentage mix of product and services revenue can determine profitability and valuation, so it’s important to characterize the difference between products and services.  Products and services both solve problems, but in their purest form, they do it differently. The chart below depicts these differences.

Cost – Any problem can be solved with enough services, but the cost may not attract any customers. Creating a product to solve the problem is an alternative, and the gap for customers who want more customization than the product offers can be filled with services.

Fit – Services by their nature enable delivery of customized solutions. Products exist because enough problems of a certain class can be solved well enough to satisfy most needs with a generalized solution.

EBITDA – Earnings vary widely, yet as a general rule, the EBITDA of a well-run product company can easily double that of a well-run services company of similar size.

In the software industry, for example, it’s fairly common for a services company to evolve into a product company over time. Consider the continuum below that depicts such an evolution, starting on the left with totally service-based solutions (“Custom Services”) and incorporating product-like characteristics as we move to the right and end with Product/Service solutions.

To the right of Custom Services is “Packaged Services.” Once you’ve solved the same problem several times, you can package a partial solution (60%? 80%?) that can be customized for each customer. Basing the price of the solution on value rather than level of effort (hours), profitability increases.

Continuing to the right, next to Packaged Services is “Product-Related Services.” If your staff becomes expert at designing, implementing, integrating, and managing solutions using highly desirable but complex products, the result is a scarce resource that can be sold at a premium and that raises your margins. The classic historical example is a services company that became a leading expert at implementing SAP systems.

If yours is a well-run product business or is evolving into one, the benefits include higher EBITDA and a higher valuation than those of a similarly-sized services business (“product only”). And finally, the highest valued companies are often those that have desirable products with an abundance of product-related services available, whether supplied internally or by partners.

As the line between products and services blurs with the introduction of new types of products delivered in new ways, it’s important to understand how value is derived. Does the statement about claiming to be a product company without developing a repeatable sales process ring true?

I ask forgiveness for some sweeping generalizations. Certainly, exceptions to this high-level look at valuation abound. Feel free to point them out and elaborate or disagree.

The Evolution of Internet Access

Long-time friend Paul Gillin is an acknowledged expert on social media who has written several books on the subject. I highly recommend subscribing to his excellent blog and newsletter where he continually shares what he’s found through helping firms work out their social media strategies.

In my own busy end of the year, I overlooked a piece in one of his December newsletters until this morning. In it he summarized five important insights picked up at the Web 2.0 Summit in San Francisco:

  1. Make marketing a service to customers
  2. You need a mobile strategy, and faster than you probably thought
  3. Social is the killer app (surprised, right?)
  4. Simulations are a powerful incentive to engage
  5. Everything on the Web

Supporting point #2 he included these projections regarding the transition we’re making toward mobile devices supplanting notebooks as our primary platform:

What implications does this have for your business? Will mobile devices totally supplant notebooks? Not likely, any more than notebooks have made desktop PCs disappear. What we’re seeing is a proliferation of devices in multiple form factors, all driven by data accessible via internet, with the user interface being packaged applications in more cases and browsers in fewer instances:

“Google’s Eric Schmidt made an interesting point: smart phones are actually more useful than PCs because they know more about the user, including location, and can deliver a more personal level of utility. This doesn’t mean PCs are going away. Rather, the plunging price of flat-panel displays will make PCs more of a dashboard for a user’s business and entertainment needs. However, the browser will be only one of several ways people will access the Internet.”

For more information, check out “Five Lessons from the Web 2.0 Summit“!

Thoughts During Freakish Weather

Freakishly cold weather meant waking up to no electricity this morning. Having to break two early appointments due to temperatures in the teens gave me time to think, and I remembered that it was exactly a year ago when I filed the papers establishing 20/20 Outlook LLC.

Moving beyond 30 years of mostly C-level jobs has been exciting, challenging, and gratifying. The exciting part is meeting many fascinating and gutsy people who are willing to take chances in order to follow their dreams. The past year’s challenge has been building a personal brand around what I do. Gratification comes from seeing how the 20/20 Outlook process resonates with CEOs and others who hear about it.

I’m thankful for having experienced a wide variety of responsibilities over the years. Most of the time I knew I had the best job in the company. While I was building strategic partnerships at the world’s fastest-growing networking company, the CEO’s verbal job description was “go make good things happen and keep me posted.” I learned from experts how to formulate business plans and implement integration plans successfully from arguably the most successful software acquisition company ever. A billion-dollar company recruited me to lead product direction for their 100+ software products and help transition from independent product lines to solutions. In between, I helped grow business for half a dozen startups.

Now I’m given the opportunity to apply what I’ve learned and draw on the wisdom of people I know by advising CEOs of small- and medium-size companies on new growth strategies. Helping them move beyond the “CEO dilemma” and into new levels of business activity is the dream. Working with truly courageous people every day and seeing them succeed in moving to the next level is more a gift than a job.

What Is It About Texas?

A few nights ago, I attended an event honoring the subject of TexasCEO magazine’s current cover story, Clayton Christopher. I met some other amazing people there and have been thinking since about the experience since then.

(Full disclosure: I have an article the print edition that will also be posted on the TexasCEO web site soon.)

The manner in which our country was born resulted in a population that loves being free to follow their dreams, and for 200+ years, millions of other dreamers have immigrated here. Over a 30-year career in high tech, I traveled the United States meeting wonderful people everywhere I went. Living recently in the Detroit area for several years is a prime example where, despite its exaggeratedly negative reputation, I found incredibly intelligent and highly motivated people building new companies and pursuing their careers with great passion.

If you’re a native Texan or an adoptee of this state, though, you can’t escape what a distinctive place it is. You’re deeply aware of the unique loyalty of its residents and the power of its brand. The shape of the state and its flag are recognizable by people living all over the globe. Many people who grew up in and live in other states have affection for those places, yet nowhere else do you find people who so deeply identify with the state they live in. Why is this true?

When I lived in Dallas during the 90’s, I made a good friend who’d grown up in New York City. By fifteen years into his career, he and his wife had lived in six cities in vastly different regions of the country. When I asked how they came to reside in Dallas, he said they had made a very deliberate decision to move there.

The couple had lived in Texas once before. It was during the 1980’s immediately after a huge downturn in the state’s then-dominant energy industry. The memory of how Texans responded to the economic crisis had stuck with them ever since. Instead of the complaints and despair they might have expected, the universal attitude was optimism. The general attitude was “OK, what can we do now?” and people started planning a new business or a new career. When they started their family, they made a conscious decision to move back to Dallas because they wanted to rear their children among people with a can-do, optimistic outlook on life.

Another anecdote: a CEO friend relocated his company to Austin from Silicon Valley in early 2009 to take advantage of  the large pool of available technical talent and the friendly business climate. While those reasons prompted him to move, what also keeps him here is the love of the state’s optimistic attitude which he mentions often.

Targeted at the state’s business leaders, TexasCEO magazine published its first issue in May 2010. Its articles continually reflect that Texas optimism. The current January/February edition focuses on bootstrapping a business. It’s full of stories about people in different industries and different parts of the state who have successfully created new companies.

So what it is it about Texas? What I’ve encountered upon returning after living out of state several years are people who recognize obstacles yet choose to believe they can overcome them with creativity and hard work. Having grown up around people like that is something I truly appreciate.

So for Texas friends, am I way off base? What is it that you like the most about the state?

For non-Texas friends, does this resonate with you, or are all of us Texans just weird?

What’s New for 2011

The move to share the 20/20 Outlook process is accelerating in 2011!

First, we were asked to develop a sidebar article for the cover feature of the Jan/Feb issue of TexasCEO magazine. Watch for a notification here when it’s available, plus a tweet and a LinkedIn update. (By the way, the twitter name is @2020outlook, and buttons for email, LinkedIn, Skype, RSS, and twitter can be found in the upper right corner of the 20/20 Outlook web site.)

Secondly, chapters of a book in process will soon start showing up on a new blog site that’s under development. Each chapter will feature a dialog between a new CEO and their mentor, with each conversation based on a principle contributed by a different serial CEO friend.

After leading companies to success for years, serial CEOs develop valuable principles that don’t often make it into business school classes. Having repeatedly seen the same situations and outcomes, he/she develops “intuition” in the form of simple rules of thumb for how to handle specific business circumstances.

This new site will help aspiring business leaders manage and grow their businesses by absorbing simple yet profound lessons from successful serial CEOs.  It offers these CEOs a chance to give back by sharing these precious principles  with new and aspiring business leaders. Written in the form of a dialog between a new CEO and their mentor, some are amusing and some are painful, yet each offers a  valuable lesson about managing a business to new levels of success.

Just drop an email to bob@2020outlook.com if you’d like to see new chapters as they emerge every few weeks. If you choose to, you’ll be able to interact with the CEOs and others who will comment on and discuss the chapters.

We ‘ll be sure and let you know when the new blog site is ready.

Happy New Year!

Top IT Trends for 2011

Cascadia Capital LLC is a Seattle-based independent investment bank founded in 2000. They recently announced their top information technology predictions for 2011, based on insights from their work with private and public growth companies.

The six trends are:

  1. Increased competition between growth equity and strategic acquirers
  2. M&A, not IPOs, drive shareholder liquidity
  3. Web content management, analytics, marketing automation and customer
    relationship management (CRM) convergence
  4. SMB adoption of cloud services will drive consolidation of cloud vendors
  5. HIPPA compliance drives M&A for healthcare IT sector
  6. Technology enabled services companies become acquisition targets

Do you agree with their predictions? What would you add?

Choose Your Diet Carefully

A good friend shared an analogy. He described a scientific study of bears where one group of bears ate a diet of nuts and berries while a second group ate marshmallows. All seemed content with their diet, and both groups increased their weight. The result? Bears eating nuts and berries successfully survived the long winter, while those on a marshmallow diet couldn’t make it.

Marshmallows represent business activities that make us feel good, like a calendar full of meetings. They trick us into thinking that we’re doing something worthwhile, when in fact they are wasting time.

For many companies, the current economy equates to a long, hard winter. To survive and thrive, focus on the nuts and berries, i.e. focus on tasks that move you toward your business goals – and skip the marshmallows!

Every Portfolio Has (at least) One

Every private equity and venture capitalist investor I talk to has at least one portfolio company that stalls out. The company survives the original investment rounds to become an “established” business. Soon thereafter, the management team opts to focus on a single aspect of the business, e.g., “we’re going to focus on growing the customer base.” The monthly mantra becomes “keep the pedal down on sales, manage operational issues, and carefully manage cash.”

These activities are crucial to survival, yet the danger is that the CEO and management team can get comfortable working in the business and forget to work on the business. Neglecting to put a rational plan and adequate resources in place to enhance company value (including growing revenue) often leads to an abrupt plateauing of valuation that takes months and even years to recover from.

Initiating and maintaining productive relationships with relevant organizations at the right time establishes a decision-making context that maximizes the valuation of technology businesses. Created specifically to increase shareholder value, the 20/20 Outlook process enables a CEO to:

  1. view company value through the lens of potential acquirers,
  2. adjust market strategy and offerings accordingly, and
  3. initiate and maintain strong ties with key companies that can drive valuations ever higher.

The key is to intervene well in advance of a slowdown and put an enlightened process in place. Not doing so risks the ultimate loss of mega dollars and significant market share.

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