How does a software business resemble an oil delivery business?
Not all software companies are successful. Yes, Microsoft has done well selling software for $799 that cost them $10 to manufacture after their original development cost. However, many companies fail to recognize customer value beyond that initial revenue hit. There is plenty of opportunity to make money marketing and distributing software products. I will grant you that, but most of us don't work for Microsoft, nor have an army of developers and deep pockets to create new products. So, how does someone with a good business sense and a skill for listening to the customer make a living in the software industry? The simplest path to success is to learn a common software platform and become a specialist in a market niche. By listening to customers, you will identify service needs based on their feedback and your observations. By leveraging your knowledge of an evolving technology, you will provide your customer base with insights for tool utilization which can increase their business performance. By taking these steps, you will become a sought after consultant and will develop a reputation as providing value-add solutions to your market niche.
What are these mysterious services that can be provided? I managed a software business for several years prior to their successful public offering (IPO) in 1999. We would sell 3 times (3X) the original software sale in services over a 2-year period following a client's initial software purchase. I headed the service group and, by focusing on customer feedback, developed a variety of service packages. These service packages included pre-sale systems engineering services, installation services, integration services to their legacy systems, migration services to new platforms, training services, custom products, and software maintenance services. How did I define these services? By listening to the most important advocate a business has, its customers. I would travel to customer sites to meet with managers, observe how they utilize our products, and ask them how we could have made their implementation of the solution simpler. I would travel on sales calls and ask the sales reps what they hear on "the streets" about our competition. I would travel to a customer site prior after they signed an agreement, but prior to installation, to provide an executive confidence that they had a "non-sales" person to speak with and would provide them my direct phone number if they had any questions. They rarely called. When they did, they normally told us how pleased they were with their service and to provide us the name of other site managers who could benefit from the technology. I created a User Advisor Group that met quarterly to discuss our service products and ask their thoughts. These outside resources were talented executives who would provide not only feedback on our service products, but would also provide suggestions on how to improve our internal operating practices. Our customers became our advocates for new service development and a knowledge base for best practices.
Why was service so important to our software business? In the first 2 years of operation, our customer service group generated 3% of our business revenues and was poorly managed as a loss center. In the following 5 years I headed the group, it became 42% of our business revenues and generated over 70% of our company's profits. Keep in mind we paid our employees $20-$35 per hour while billing them at $75-$95 per hour at client sites. Software maintenance created a snowball effect of cash flow as the customer base expanded. At the time we went public, the company had $750,000 of software maintenance sold on the books but yet to be recognized as income. GAP requires that a paid annual software maintenance agreement only recognize 1/12th of the funds per month it is in force. This build up of cash was funds we had received, but we had to wait to recognize the revenue and leave it on the books officially as deposits. This "problem", as we will call it, was fruit (a cash crop) ready to harvested the 1st of each month and provided a steady cash flow for us as we accelerated our growth with confidence. Yes, the CEO liked what we were doing, but the CFO sent the chocolates for his monthly cash forecasting was greatly simplified with no receivables to content with.
Like the software industry, the typical person delivering oil does not have the slightest clue how to manufacture their product. Yes, they might use the product or appreciate that it originated from the demise of a dinosaur millions of years ago, but the chemical process of making it, not a clue. Delivering oil is not an extremely profitable venture. How do oil enterprises make a living distributing oil in New England? They make their profits on servicing the oil burners, replacing parts, and annual cleaning services. Similar to the software business, the residual income from their service lines generate a steady cash flow and most of their profits.
A software business and an oil delivery service have much in common with the service lines providing a steady source of revenues if properly managed.