Filling the Gaps
In a post called “Chief Marketing Obstacles: The Treacherous Trail to CMO Success” in Texas Enterprise, the authors did a marvelous job of laying out the challenges that chief marketing officers face in gaining the management clout needed to operate effectively. In responding to the article, I noted how the CMO can fill the gaps that exist in the organization.
For me, filling gaps has been a recurring theme for years. After taking my first management job in software development with absolutely no training, my psychology education helped me observe the group’s interactions and notice what was required for success. It became obvious that I needed to fill any missing gaps in the group’s combined competencies if we were to be as successful as possible. Whenever possible, the gap filler was me.
I noticed an interesting parallel after moving into product management. When the goal is to contribute a “whole product” solution, it can require capabilities outside an organization’s ability to deliver. Options for filling the gap include staff training, contract or consulting help, or partnering with another organization to acquire the needed product capabilities or features.
As I climbed the ranks and handled senior management positions in several functional areas, that early observation about filling the gaps proved to be valuable once again. Given a finite amount of people in any organization I managed, competency gaps had to be filled without additional headcount. Options included staff training, contract or consulting help, or partnering with another organization, yet the one always available was… me. If it were possible for me to learn the needed skills, then we had the resources to achieve our objectives.
If you manage a company or part of it, it’s good to keep in mind your responsibility to deliver a “whole product” and consider all the options available to fill the gaps.
Understate or Overhype?
“Marketing slime!” I used the term back when I developed software, then became its target after moving to the dark side (marketing).
Such statements are usually good-natured, yet tension can arise between software engineers and marketers when discussing appropriate language to describe a product. Engineers by nature must be very precise and may prefer to losing a prospect over misleading them. Marketers want to draw attention to a product by describing it in the most compelling terms possible and may prefer to stretch the meaning of a desirable word rather than lose a prospect.
Each group has a point. Prospects notice quickly and lose interest when a product description exceeds reality. On the other hand, an opportunity to address their problem can be derailed if a product description is devoid of words that connect with their needs.
Think about it like this. The diagram below represents the continuum between understatement and overhyping. Overhyping product capabilities hurts prospects by misleading them into thinking a problem can be solved when it can’t. Understating capabilities prevents them from solving their problem because they don’t fully understand what the product can do.
Clarity is the goal. What does the product do? What types of problems can be realistically solved? Language that both clarifies and motivates is the goal. Sales success is the result.
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.
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:
- Make marketing a service to customers
- You need a mobile strategy, and faster than you probably thought
- Social is the killer app (surprised, right?)
- Simulations are a powerful incentive to engage
- 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.
A Milestone for 20/20 Outlook
Exactly six months ago, 20/
20 Outlook LLC officially opened for business. If it seems longer than six months, you’re right – planning started over 18 months ago. I felt “nudged” in a new direction and began exploring how to deliver value to CEOs of private companies. The answer ultimately lay in combining an unusual (some might say “weird”) combination of C-level experience in partnerships, acquisitions, and product strategy for startups through billion dollar companies to create the 20/20 Outlook process.
In February, I set a goal to achieve a certain level of business in six months, and we’re on track to surpass that goal this month. Experienced friends in the consulting business say it takes a year to get it off the ground, so it’s exciting to reach this milestone in the middle of what no one but Washington would call a booming economy.
Most new businesses move in different directions once launched, and this one is no exception. Connecting with great clients was planned, and working with some great CEOs to help them achieve their goals is exciting. What was unanticipated is how many people have said “you should write a book” (more on that soon).
No one could be surrounded with a more supportive group of industry friends, comprising serial CEOs, C-level execs, VPs, VCs, private investors, consultants, and other computing industry leaders. Thanks to each of you for being so open and helpful with your advice and encouragement.
Finally, a special note of thanks goes to Mike Shultz, Infoglide Software CEO. His willingness to be a sounding board and continual idea source for 20/20 Outlook is deeply appreciated.
