What Kind of Software Business are You In?

Strategy is about making choices between what to do and what not to do. Richard Rummelt says good strategy is a “coherent response to – and approach for overcoming – the obstacles to progress.” How do you define progress?

Some people use activity as a synonym for progress. However, progress is knowing the result and working towards it. If you substitute a result for a different result and say that you will resume working toward the original result after completing the substitute result, then you are no longer making progress on the original result. Substituting vaporware for programming the real thing to meet a deadline is no longer making progress on the original result.

Activity measures inputs, but results are the measure of outputs. Progress is measured by completed outputs. Software is invisible. Software is executed as code made by programmers, but its purpose fulfilled when used by the customer for the results it provides the business.

Software can be sold as something to help realize a solution, in which the intellectual property characteristic of software might be second priority to realizing the solution for the end customer. In this case, the seller might not be a software intellectual property company, but more of a systems integrator building custom “glue code” between other software companies systems to realize a specific implemented solution for a single customer. These kinds of software companies use skilled personnel and their time to achieve the output of individual solutions. Because these companies do not produce intellectual property that can propagate in a way that’s decoupled from their personnel’s interaction, then this software business is managing a personnel system to reach customer implementation milestones. This kind of software company leverages code to be used in the most specific of ways to the customer.

Software can also be sold as intellectual property, letting external system integrators leverage the intellectual property to realize a solution. These kinds of software companies make different decisions. They prioritize for distributing their intellectual property in a way that is decoupled from their personnel’s time. The skilled personnel and their time in these companies is spent on creating and honing the intellectual property so it will have a balanced set of characteristics. These characteristics are distribution, maintainability across multiple customers and environments and leveraging code to be used in the most high value scenarios.

Progress in one of these businesses means something different than progress in the other type of business. Both types of companies act in the same world. The difference is in how they approach the world and the marketplace. Both kinds of companies might use software modules, but how they use them is different.

If your business is the tight systems integrator for other software products, then you will need to manage more people to scale. Creating line of business applications for large customers, by integrating other peoples intellectual property will mean that it will be considered a waste to focus energy on the distribution characteristics of your software. This is because it is assumed this solution is so tightly coupled and paid for by the large business, that it will not be distributed to any other business. This type of business does not benefit from the type of $0 incremental unit cost characteristic of software intellectual companies.

If your business is the intellectual property creator, then you will need to manage people and make sure they are producing software with a different set of characteristics. Distribution technology is important because in software business you must distribute inexpensively and in a guaranteed installation process to realize the main benefit for being a software distributor. That benefit is that each additional unit sold is near zero cost to distribute. Producing the software is the main cost and selling/distributing it to just one more customer is near $0 cost. That means software gets cheaper the more customers you sell to.


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