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The New Software Industry: Michael Cusumano

Michael Cusumano is with the MIT Sloan School of Management, and has written several books on the changing software industry; he spoke today about the changing business of software.

In general, there is a decline of new enterprise software product revenues, and growth in services and maintenance sales. There are a number of new business models, including SaaS and ad-supported software.

Software companies tend to move from being product companies to services or hybrid product/services companies (maintenance revenue is usually included in services). However, there’s a different evolution curve that shows where companies focus on product innovation, then on process innovation (e.g., making the product more efficiently), then on services innovation.

The number of publicly-owned software companies peaked in 1997 at around 400 companies. IT services firms peaked in 1999 at around 500 companies. Web companies, which can be launched with significantly less capital (due to distribution mechanisms and development tools/methodologies), had a peak in 1999 before dropping in the crash, but are now climbing to an even higher peak.

Cusumano showed a graph of three business model dimensions: revenue model, delivery model, and customers, with traditional software product vendors at the origin of the graph, and various other models scattered throughout the cube. He also asked the question, is the rise in services and new business models temporary or permanent? The “temporary” argument says that we’re in a transition phase between platform and business model innovations; the “permanent” argument (with which I agree) says that software is now commoditized and prices will fall to close to zero as we embrace SaaS and ad-supported models.

Being an MIT geek, Cusumano had slide after slide of data analysis about his research on software product companies. For example, average product company revenue crossed over in 2002 so that services revenue was larger than product revenue; also, firms at 24+ years of age have more services than product revenue. The age phenomena contributes to the date-based phenomena, since many of the large enterprise product vendors are reaching this level of age maturity now. There’s an interesting cycle where services are very attractive for revenue generation, but then reach a point (in terms of % of revenue) where they are performed relatively inefficiently and, due to lower profit margins, are not as profitable as product; eventually, as companies become better at providing services (e.g., reusability), it swings to a more positive contributor to profitability. Market cap follows a similar pattern, although the centre (when services are undesirable) portion of the graph is broader.

Similar things are happening with hardware companies: more than 50% of IBM’s revenue, for example, is from services.

He had some interesting comments on the way that software product companies should incorporate services into their business model: it should be planned and exploited as opposed to just happening by accident, as it does with many product companies.

He ended up with some key questions:

How to manage the mix of products, services and maintenance efforts and revenue within a product company.
How to “servitize” products, to make them less generic and more customizable.
How to productize services; a great point that he made here is that it’s best served by creating two professional services organizations with different mandates.

The New Software Industry: Ray Lane

I’m at the Microsoft campus in Mountain View attending the New Software Industry conference, put on by Carnegie Mellon West and the Haas School of Business. I interviewed a few of the people from CMU West a few months ago about the new Masters of Software Management program, and ended up being invited to attend here today. Since I’m down here for TUCON this week, it was just a matter of coming in a day early and fighting the traffic down from the city this morning (although I left San Francisco at 7:30 this morning, I still arrived late, around 9:15).

Unfortunately, I missed the brief opening address which, according to the program, featured Jim Morris, Dean of CMU West, and Tom Campbell, Dean of Haas, so my day started with Ray Lane of Kleiner Perkins (formerly of Oracle) talking about the personal enterprise, or what I would call Enterprise 2.0.

Lane started with a discussion about how the software industry is changing, including factors such as packaging (including SaaS) and vertical focus. I found it interesting, if not exactly surprising, that he has a very American-centric view of the industry, so that he’s really talking about the software industry in the U.S., not the global industry; he spoke about India and China gaining market share in software as some sort of external force as opposed to part of the industry.

He had some interesting points: a call to action, which including leveraging community power via mashups and other collaborative methods; and a look at how platforms are moving from monoliths to clouds (i.e., services exist in cloud and are called as required). He covered some basic about Web 2.0 and web-driven capabilities. Since I’ve been so immersed in this for such a long time, there wasn’t much new here for me, although he had some interesting examples, particularly about collaboration and user-driven content.

He talked about the “personal enterprise”, where consumer web applications inspire new enterprise applications, or what many of us have been talking about as Enterprise 2.0. He makes a great point that somehow, being at home allows us to just try something new online, whereas the act of going into the office makes us want to spend a year evaluating rather than just trying something, and how we need to change that notion.

He gave seven laws for Enterprise 2.0 applications:

serves individual needs
viral/organic adoption
contextual personalize information
no data entry or training required
delivers instantaneous value
utilizes community, social relationships
minimum IT footprint

I’d love to expand further on each of these, but I’m trying to get this conference blogging back to something like real-time, so that will have to wait for another post.

He finished up with some examples of personal enterprise applications, with some discussion about what each of them contributed to advancing software industry business models:

Services: Webex, Skype, RIM, Google
Applications: Salesforce.com, NetSuite, RightNow
Collaboration: SuiteTwo, Visible Path

Access to the Microsoft guest wifi is tightly guarded and requires an hour or so turnaround to get login credentials, so this first post is coming out late and the other will trickle along throughout the day. All of the posts for this conference are available here.

BPMN poster and templates

There’s a public domain BPMN poster and set of Visio templates on SourceForge for free download.

Via BPM.com.

A month of travel

Forgive me readers, for I have slacked off. It’s been 8 days since my last blog post. I blame the Canadian government, who insist on me doing my personal taxes by April 30th.

I’ve had a number of vendor product demos over the past several weeks, and it’s time to start blogging about them before I start into a month of travel: I’m giving a presentation at the TIBCO user conference in San Francisco next week, then attending the BEA user conference in Atlanta the following week, a few days vacation in Nova Scotia after that, then on to Las Vegas for a presentation at the Shared Insights Portals and Collaboration conference. Watch for live blogging from all three conferences, although not from my vacation.

ProVision 6.0 release

I finally made it home from Chicago around 1:30 this morning: United Airlines wimped out and cancelled all their flights, but Air Canada came through in the crunch.

I’m now on a Proforma webinar about their new V6.0 release of ProVision, of which I had a brief preview at their user conference last fall. Some highlights:

Browser-based access for collaboration, although I suspect that this does not include full modelling capabilities based on the comments that I heard at the user conference.
Web services access to Knowledge Exchange — this is pretty exciting, and I’d like to hear about more of this. For example, if ProVision exposed process models via a web service, could a BPMS consume that model directly?
Embedded Crystal Report functionality, which I recall was a big deal for the user conference attendees.
Updated UI in their desktop application, which was looking a bit dated.
The concept of dimensions in models, which allows for alternative versions to be created based on specific dimensions, where a dimension may be, for example, geography, or as-is versus to-be. In one model, then, you can compare North American as-is models with European to-be models, or whatever else you want to define based on your dimensions. Pretty powerful stuff.

I’m not familiar enough with ProVision to tell exactly what’s new and what was there before, but it does look like some significant improvements in this version.

ProVision 6.0 is being released over the next two weeks. A replay of the webinar will be available on their website.

BrainStorm BPM Day 2: Pat Dowdle

I was wrong, the last one wasn’t my last session, I had time for one more: Pat Dowdle on a Roadmap to Implementing Process-Based Management, based on CAM-I’s emerging Process-Based Management (PBM) assessment and framework. There’s a number of pieces to this:

Mindset/culture (how things are done; values, rules, practices)
End-to-end processes (classification; portfolio; structure)
Process-based measures (process performance; incentives/compensation)
Initiative integration: (ABC/M; ISO/quality standards; Six Sigma)
All centred around customer expectations

He went through a management model for process ownership, from a process council to process owners to team leaders and the team, and talked about a roadmap to PBM through the seven key milestones: awareness, commitment, engagement, managing processes, integration, embed and optimization. In this, he talks about moving from process metrics to transformation metrics once processes start to integrate across the organization: critical for moving from local optimized processes to global optimization, which seems to be my personal theme for the day. He also names the transitions between the seven milestones: discovery, foundation, transition, transformation (moving from managing processes to integration), institutionalization and realization.

There’s a presentation on the CAM-I website that goes into more detail about PBM including much of this, and quite a bit of material of theirs on BPMInstitute.org (just search for CAM-I). Check out slide 13 on the CAM-I presentation for a great chart that maps different quality programs (such as Six Sigma) against their seven milestones.

My flight home just cancelled, so I may hang around a bit longer…

BrainStorm BPM Day 2: Dan Madison

Last session of the day for me: I’m headed off to the airport following this, although I realize that the probability of a flight in or out of Chicago being on time when it’s snowing is near zero. With some luck, I’ll make it home tonight. The only thing that I’m missing is some sessions where the vendors get to show off their products, and a final wrapup keynote.

This session by Dan Madison is on Creating the “To Be” Process, something that I often do with customers, and I’m always looking to learn new tips and techniques from others who do the same thing. This session is part of the Organizational Performance symposium, the first of those that I’ve attended these two days.

He suggests a number of “lenses of analysis” to look at processes and derive the “to be” processes from the problems seen in that process.

First, create a customer report card, which for each ranked criteria, shows the current process performance (usually around quality and timeliness), what the best possible performance in that process would look like, and the two main competitors or outsourcers.

Second, look at the things that frustrate the people who are currently participating in the process, since there’s a high correlation between frustration and quality problems: frustration has the ability to act as a lens focussed on problem areas. Once frustrations are identified, the process participants tend to generate a ton of ideas on how to fix the problems, and there’s a huge amount of buy-in for changing the process from the grassroots level. I’ve definitely seen this with my customers. There was an audience question about how to keep this from becoming a bitch session, and Dan said that he uses some basic rules if things start to go that way: only process problems are discussed, not people problems; and each person can only bring forward their three main frustrations.

Third, look at the time required for each type of work in the process: processing, waiting, rework, moving, inspecting and setup. He finds that processing — the actual work — is typically only 2-20% of the time, which indicates that there’s a huge amount of inefficiency in the process. Of that small percentage, even all of that may not be time that adds value to the process. If you’ve automated your process with BPM, then you can gather this information with your system, but if your processes are still manual, then figuring out how your process breaks down will be manual, too.

Fourth, a cost lens such as activity-based costing; ABC calculates what it really costs to deliver a specific product or service by looking at the labour, overhead and material costs of each step in a process.

Fifth, a quality lens such as Six Sigma for measuring defect rates or some other relevant quality measure.

Last, take a look at benchmarks and best practices, by looking at your direct competitors and what they’re doing; and by looking at companies that have a process similar to your problem process and are considered to be world class, regardless of their industry.

He then moved on to design principles for the to-be process:

Design the process around value-adding activities.
Provide a single point of contact for customers and suppliers.
If the inputs coming in to the process naturally cluster, create a separate process for each cluster.
Ensure a continuous flow of the “main sequence.”
Bring downstream information needs upstream.
Involve as few people as possible in performing a process [our old adage of reducing handoffs lives!].
Ensure 100% quality at the beginning of the process.
Use co-located or networked teams for complex issues.
Redesign the process first, and then automate it.

Putting it all together, creating the to-be is the synthesis of:

Customer feedback
Worker frustrations
Time analysis
Cost analysis
Quality analysis
Benchmarking and best practices
Design principles
Information technology

Dan’s obviously experienced at this: he does it as a consultant, he teaches process mapping and improvement at the local university, and he has a couple of books that he’s written on it. I haven’t read his books, but I’ll be checking them out soon.

BrainStorm: Meeting my peeps in Chicago

I’m starting to see more and more familiar faces at these BPM conferences, and this one is no exception: I’ve met Gregg Rock and Tom Dwyer of BPMInstitute.org at a couple of conferences now, finally met Brett Champlin at the last Gartner conference, and Bruce Silver and I meet up so often that our spouses are starting to get suspicious. 🙂 There’s also the people who work for the vendors — I seem to see many of the same ones at every show, and these shows must be some small form of purgatory for them.

It’s also fun to meet people who I’ve only met online previously, and I’ve had a couple of those experiences here in Chicago. David Novick, who added a comment to my blog that turned into an email conversation, recognized me in one of the sessions — I guess that Rannie’s new headshot of me is paying off. At lunch, I happened to sit at the same table as Barbara Saxby from Ramco, who was on a webinar that I moderated last month. And Jean Campagna of Resolvit found me yesterday evening at the vendor showcase/drinks party to say that her colleague was sending me a hello: apparently her colleague back at the office has been reading my blog to Jean over the phone.