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Sep 14

Book review: The Business of Software by Michael A. Cusumano

A Sloan management review distinguished professor at MIT’s Sloan school of management, Michael A. Cusumano is a leading expert on software industry, director/adviser to more than a dozen software companies world wide, and a renowned author. He is author/co-author of seven books (besides The business of software) including the bestsellers Microsoft secrets and Japan’s software factories.

The business of Software: What every manager, programmer, and entrepreneur must know to thrive and survive in good times and bad is a splendid book on the economics of building and managing a software oriented business. This enormously readable book adds the same value to the world of software business as ‘Zen and the art of motorcycle maintenance’  does to the world of literature and philosophy. As a consequence, the book should not (even if it is technically possible) be read in one day or one sitting. The reading will inspire entrepreneur’s/founder’s or product managers to think and analyze the current business model/s  of their respective organizations and will encourage them to take sound strategic decisions. On a personal front, as a beneficiary of software industry, I could relate a lot to the actual environment in a software based set up, both large and small.

The Author presents dozens of cases from his personal experiences to show how strategy is inseparable from technology and how the issues related to organization are irrevocably linked to the issues of managing technology.  In the (more than) $ 600 billion software industry, it is the business, not the technology, that determines the success or failure of an organization. The following seven sections of the book cover a comprehensive overview of software business:

  • The Business of Software: A personal view
  • Strategy for Software companies: What to think about
  • Services, Products, and More Services: How Software became a business
  • Best Practices in Software Development: Beyond the Software factory
  • Software Entrepreneurship: Essential elements of a successful Start-up
  • Start-up Case Studies: Software Products, Services, and Hybrid Solutions
  • Conclusion: The “Ideal” Versus “Realistic” Software Business

In the first section, Michael discusses how a software business is different from other business, especially the manufacturing and the services industry. How many businesses have up to 99 percent gross profit margins for their product sales? In how many business does making one copy or one million copies of a product cost about the same? In how many businesses do many product based companies eventually become services or hybrid companies (customizations, technical services, etc), whether they like it or not? And yes, the most interesting, how many businesses tolerate some 75 to 80 percent of their product development projects routinely being late and over budget, with “best practice” considered to be 20 percent on time? The answers to these vital questions add a distinction to the business of software. The uniqueness of any software business lies in the fact that a software becomes whatever function or application it addresses.

The second section is where the strategy takes control and becomes the nucleus of the discussion. For any software company to fire on all its cylinders, it needs to take good strategic decisions. Get the strategy and the management side right, and the software business can be like having a license to print money. Well, who can exemplify this better than Microsoft, Apple, IBM and Oracle. On the contrary, get the models wrong and the software company can resemble ” dinosaurs futilely trying to escape the grip of an ancient tar pit”. And in these cases, the more resources the leadership puts into the business, the more the problems become intricate and consequently, the quicker a firm dies. One idea that is a central theme throughout the book is that many software companies need to sell both the products and the services to become successful, at least to stay alive. A lot of software product companies fall unwittingly to the trap of service and hybrid based business models. A disciplined strategic approach is the most effective tool to keep an organization on its tracks. Two case studies in this context, Business Objects and i2 Technologies, are discussed in detail. In lifetime of many organizations, especially the enterprise software product firms, a majority (70 percent or more) of revenue can come from service and maintenance. From the perspective of sustainability and maintaining a good financial health of an organization, this transformation of generating a recurring revenue stream becomes indispensable. In fact, some of the start ups adopt this services based model initially to attain some financial security and once stability up to a certain level is attained, they make an effort to embed a product based model within their companies.

Another engaging part of this section discusses about markets. Software business , like any other business caters to either the mass-market or the niche market. Oracle was a market leader in database segment for many years. Over the period of time, the company has been slipping as competitors have flaked it from both sides. According to the Gartner group, IBM surpassed Oracle in database revenues in 2001. With an exception of large software companies, most of the small players target niche markets and complete in specific segments rather than all. Targeting the right market segment along with product lines (horizontal or vertical) is one of the most critical decisions for any organization. In author’s words, “Entrepreneurs and Intrapreneurs need to think about how to position their new businesses strategically and decide whether whether to emphasize products or services or to combine a hybrid solution. They need to think about the lessons from companies that have gone before them and try not to repeat the mistakes of the past in either strategy or technology management. They need to figure out who should be on the management team, what business model will be, what problems are likely to occur in bringing a product or service to market, and to attract paying customers. These and other elements are necessary to make a viable business that earns more than it spends.”

One of the most insightful sections discusses about Software Entrepreneurship. The chapter focuses on two broad topics –

  • Interpreting the odds of failure versus success
  • Some essential elements of a successful software start up

In the first topic, the book discusses some of the statistics and facts associated with start ups (and the ones that reflect that the odds are against entrepreneurs) and the various funding channels business owners can consider and evaluate. The second topic discusses elements of a successful start up. The points that constitute Michael’s checklist are:

  • A Strong management team: A modest idea with a string team with a proven record is better than a start up with a great idea and a weak team.
  • An Attractive market: The potential market should be large enough, growing fast enough and potentially profitable enough to get the attention of outside investors.
  • A compelling new product, service or a hybrid offering: The offering should be compelling to a specific type customer base.
  • Strong evidence of customer interest: Many entrepreneurs present customer’s letter of intent to purchase new product or service offering
  • A Plan to overcome “Credibility Gap”: Many customers fear that the start ups offering the new product/service will fail (as is the case for 90 percent of all start ups). This gap gives rise to another complexity called “Catch-22” in which a start up firm cannot raise more money to become credible if it cannot line up some paying customers that can service as references. Getting the first reference customer (even if it means giving the product/service for free) and partnering with an established firm are two of the several ways to build credibility.
  • A business model showing early growth and profit potential: The plan should not only contain an interesting idea but a proposition for a profitable business.
  • Flexibility in Strategy and Product offerings: Companies should have agile strategies. Successful firms are those that can reinvent themselves in accordance with the contemporary business environment. Apple, Microsoft, IBM and RHEL are some of the companies that redefined their models from time to time.
  • The potential for large payoff to investors: Market size and the feasible business model can reflect on the prospects for a return on investment to the external stakeholders.

Overall, if you love software, especially the business side of it, and are keen in building one or engaging in one, you will love insights in the book. Final two words – Highly recommended.

1 comment

  1. Prem Sagar Sharma

    Nice review. Like it.

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