Business of Software Blog

What the recession means for the software business: five things to think about

Today's guest post is from Dan Nunan. Dan is Chief Marketing Officer at Red Gate, an advisor to several UK government bodies on marketing and a visiting lecturer at Cranfield university. He also spoke at Business of Software 2007. This is a re-post: unfortunately I had to pull the original.

Did you hear the one about the French guy who bet $73billion on the stock market and lost? You have? Of course. Financial doom and gloom has, primaries aside, been front page news for weeks. The general consensus is that a recession is inevitable in North America, and very likely in Europe. So let us assume that the economic pundits break a habit of a lifetime, and actually get this one right. What might it mean for folks in the software business? Here are five things to think about.

1. Overall, recessions aren’t good news
Let’s start by being pessimistic, and look at what happened to the software business in previous downturns. In 2000/2001 firms that got into trouble lacked a viable business model, weren’t able to generate cash, and relied on too much external funding. In short, the sort of things that will drive businesses to the wall even in good economic times. So, let's go back to the last ‘proper’ recession in the early 1990’s. The software business was much smaller then, but in his book ‘The Business of Software’ Michael Cusumano describes at length how in the early 1990’s recession companies reliant on product revenue were harder hit than those who had substantial services revenue, such as renewals on support contracts or consultancy agreements.

The bulk of software spend comes from business rather than consumer markets, and Gartner is already advising CIOs to have a plan ready for making cuts in 2008. But the CTO/CIO can only cut what s/he knows about. So if you sell at the enterprise level, and require senior management sign-off, then expect a harder sell and longer sales cycles over the next year. If your sales are ‘under the radar’, such as on corporate credit cards, then things might not be so bad. However, companies are increasingly aware of their expenses bills. Management consultants will point to personal expenses as an easy target for cuts, as it has the smallest impact on customers or staff.  It's expenses like 1st class flights, not to mention the all-important team building events in luxury hotels, that the bean counters are after but software purchases will inevitably be caught in the crossfire.

2. Get some perspective
When economic pundits talk about recessions they are talking about a whole economy. Unless you are responsible for a whole economy – and I’m guessing you aren’t – then you should be more interested in your own business. Say the economy shrinks by 3%. This would be bad, although hardly Armageddon. Does that mean that your business will shrink by 3%? No. The macro economic climate is just one of the factors that decide how well your business does, and it’s probably not even the most important factor. If you write software, the provision, or lack of, high quality snacks and caffeinated beverages for developers will probably have more than a 3% impact on the bottom line. Great software, produced for the right market is still going to count for a lot. Looking at the current forecasts from big software firms, a software recession might just mean that things don’t grow as quickly as they have done over the last few years.

3. Don’t panic
Douglas Adams was right. If you walk around the office constantly reminding people of how bad the economy is and how uncertain their jobs are, don’t be surprised if your best people start to have other ideas. The last time a recession loomed in the US applications for business schools went up 70%. Talk about ‘battening down the hatches’ and even the best employees are going to start revisiting those alternative career plans that sit at the back of everyone’s mind. Whether it’s doing an MBA, setting up a Web 2.0 organic chicken farm, or fulfilling that life long dream of starting a brewery, good people always have options. So stay focused on your business.

4. Less is more
Research shows that in smaller companies innovation is more likely to happen in an environment of limited resources. As companies grow, inefficiency creeps in. It becomes about “what’s the easiest way to spend” rather than “how do we get the most out of this money”. As more technical employees become available, miraculously the number of resources required for projects goes up. Marketing starts talking about superbowl ads, and you notice a drastic reduction in the golf handicap of your best salespeople. Having to make do with more limited resources means that your people are more likely to find those innovative solutions to problems that require persuasion rather than just checkbooks.

5. Think ahead
Conventional wisdom says that a recession is a terrible time for business, but economic downturns don’t last forever. But, assuming you are in the right market, a recession is a great time to grow market share. Some of the most successful businesses ignored the news and kept investing through a recession, whilst their competitors were busy scaling back. If you have a strong balance sheet, and your competitors are short of funding, then they are likely to become increasingly short-term in their outlook. It’s also a great time to think about opportunities and attack the new markets that your competitors are scared of.  Build a reputation as a company that’s ambitious and growing and you’ll find also find that recessions are a great time to hire.

Meanwhile, make the most of the $1 coffee at Starbucks whilst it lasts...

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Business of Software 2008 - a quick update

Here's a quick update on Business of Software 2008. In case you weren't aware, Joel Spolsky and I are running this conference in Boston, September 3rd - 4th. We've got some great speakers lined up including Seth Godin, Eric Sink, Jason Fried and Joel himself. You can find out more at www.businessofsoftware.org.

Since I last blogged about the conference, I've signed up one more speaker. Tom Jennings is a Managing Director at Summit Partners. It's odd how we've all got a lazy stereotype of the venture capitalist as the sharp-suited, good-haired, smooth-talking, count-your-fingers-after-shaking-hands, wheeler-dealer vulture out to shaft the entrepreneur and make a quick buck, yet I've never actually met any who fit that description (although, without fail, they do have great hair). All the venture capitalists I've met have been urbane, smart, articulate, thoughtful people doing their best to help entrepreneurs build successful businesses. It's not a route I agree with, but I understand why people take it. That's why I've asked Tom to speak on "Why everything you've ever heard about venture capital is wrong". It'll be a good talk.

In case you've missed it, we're running a Pecha Kucha competition. If you want the chance to present 20 slides in 6 minutes 40 seconds, a rigorous and hopefully vigorous 20 seconds per slide, or even just find out what Pecha Kucha is then visit www.businessofsoftware.org/pechakucha.asp

Registrations are going well. The early signs are that we're going to fill the 392 seat auditorium that we've got available to us, so if you want to book then don't hang about. So far, we've got people from some 20 US states, from Alaska to Florida, and eight countries (Australia, Poland, Ireland, USA, Canada, Belgium, Sweden and the UK). It'll be a good, international mix of people with plenty in common but enough to set them apart for things to be interesting. Judging by people's job titles the attendees include software developers, CTOs, founders, CEOs, consultants, VPs and product managers so that's good too.

I've got a couple more speakers I'd like to invite, so if you want to keep up to date then use the link below to subscribe to the RSS feed.

See you in Boston!

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It was a dark and stormy night

Elmore Leonard once wrote that the key to great writing is to leave out the boring bits that people skip.

Hemingway wrote that "The first draft of anything is shit."

Robert McKee: "No one has to see your failures unless you add vanity to folly and exhibit them."

Hawthorne: "Easy reading is damn hard writing."

I think there are obvious parallels in software development, which I won't spell out. Leonard also said never to start a book with a description of the weather. If I could shoe-horn that into a software development analogy then I would.

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The short and the long of it - why locking in your customers can be bad for you

A couple of weeks ago I blogged about some brilliant advertising I saw at a petrol station. The increasing petrol (gas) prices are an interesting illustration of how pricing changes people's behaviour. Here in the UK, petrol is about £1.20 a litre. That works out at around $9 for a US gallon. How will people react? And what has that got to do with software? I'll try to explain.

To understand people's behaviour, it's useful to differentiate between the short and the long term. In the short term, we'll cycle more, drive less and share cars. There's not much more we can do about the money we spend on fuel while we're stuck with our current cars. In the long term, however, we have other options. If fuel prices remain high then, as we replace our cars, we'll ditch our SUVs and buy hybrids, or more fuel efficient cars.

If you're Shell, or Exxon, or the UK government (more than 60% of the price of petrol is tax in the UK) then these are heady days. In the short term, your customers have no choice but to buy your product. For now, we're locked in to petrol. The costs of switching (to a cheaper car, or to alternate fuels) are too high to be feasible, in the short term. In the long term, that changes.

Locking in your customers muffles an important signal. As I've blogged about before, getting negative feedback is hard. If your customers are locked in then you can maltreat them and not notice their squeals. Prod them with pointy sticks and they might rattle the bars of their cages but they're safely locked in and cannot leave. One day they'll break the lock and escape and then you'll have a horde of unhappy ex-customers on the loose. It's much better to have willing customers than hostages.

I write from personal experience. A few years ago, I chose InstallShield as the installer for Red Gate's products. Bad decision. It became apparent, quickly, that it's a shoddy product. Each heftily priced new version introduced unwanted new features while old features remained untested and buggy. Always one to make the same mistake twice, I signed up to their hosted update 'service' (I use the word loosely) and had the same experience. By the time I realised I'd made a dumb decision I was locked in. Our installers all used InstallShield, and the switching costs were high. But I was only locked in for the short term: in the long term - and it was too long - we switched to Wix. Because I was locked in, it was easy for InstallShield to ignore my feedback, and they ignored it impressively actively. Presumably, sales were up and life was good. But only in the short term.

If your customers are locked in then be careful. Look after them, and keep an ear out for the rattling of cages.

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Solving yesterday's problems

I've just come back from a short trip to Paris. Although I enjoy Paris, the Champs-Élysées, Montmartre and the Marais are stifling on a weekend. So on Sunday morning I headed over to Bercy, crossed the Simone de Beauvoir passerelle over to the New Bibliothèque Nationale and watched Blade Runner at the MK2 cinema.

The New Bibliothèque Nationale is an impressive, but odd beast. It's the largest of François Mitterand's grands projets. Its four book-shaped, letter Ls, made of glass and 25 storeys high, surround a sunken garden of trees transported fully-grown from Normandy. Its 400km of shelves provide space for up to 20 million books. It cost 8 billion francs ($1.5 billion) to build. It was completed in 1997.

It's impressive in another way too. It's an impressive example of our tendency to solve yesterday's problems. In this case, yesterday's problem was how to house tens of millions of printed books, and how to store, index and access the hundreds of thousands of new books being published worldwide every year. With Google, and its ambition of organizing the world's information, I'd call that problem solved. Or, perhaps more accurately, side-stepped. Scanning the 10 million books in the current library, and persuading publishers to release digital versions of their new books are just logistical details and utterly tractable.

Here are some more examples, from the business of software:

Windows Vista - solving yesterday's problem of trying to improve the desktop operation system.

Sarbanes Oxley - targetted at yesterday's corporate misdemeanours, it missed today's.

Digital Rights Managements - yesterday, people sharing music was a problem; today it's an opportunity.

I'm sure you can think of more examples, and better ones than I have. Post here ...

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Chicken tikka carbonara - how to elicit negative feedback

I tried out a new Indian restaurant last week. The experience wasn't terrible, but it wasn't great either. It was, well, mediocre. The waiter brought out the wrong food. My butter chicken turned out as a chicken tikka carbonara, and a poor one at that, with chunks of roasted chicken floating in a custard sauce. The naan bread was cold. When I ordered a pudding the waiter giggled and wrestled the menu out of my hands. They were good enough to bring out, unprompted, a glass of scotch at the end of the meal. Nice gesture, but I don't like whisky. Horrible stuff.

At the end of the meal, the waiter asked how I'd enjoyed the meal. Fine, I mumbled, and smiled.

Maybe it's a British thing, but I just don't like giving feedback. Negative feedback, anyway. That's a shame for me, but also a shame for the restaurant. This was a great opportunity for them to learn, to hear how poor their food was, and how much they could improve. But they missed it, because they had no way of gathering true feedback; no way of hearing anything other than what they wanted to hear.

The same is probably true of you. You've probably got no way of getting true feedback. If your product stank, if your management sucked or your service was lousy, would people tell you, or would they just mumble that it was fine, and smile?

There are things you can do though. As Bill Buxton points out, and as I've blogged about before, if you frame the question as a choice then it's easier for people to give feedback. If I show you a single product design, you might shy away from telling me your true opinion. If I show you two or three options, you'll be more open. It's hard for you to tell me that widget A sucks, but you'll tell me that you prefer widget B, and why.

You can apply this technique to other areas of your business too. Rather than ask your customers if they're happy with your customer service, or to score it out of ten, you could ask them how it compares to other, concrete examples. How does it compare with their experiences with dealing with Microsoft, or Symantec? With their insurance company, or their bank?

Another trick is watch what people do and not what they say. I said that my meal was fine, but what I didn't do was eat it. People might say that your product is great, but if they don't buy it that tells you more. They might say that the design is fine, but you need to watch them to see if they can use it. They might say they're happy with your customer service, but what do they do during those interactions?

There are plenty of chicken tikka carbonaras in the world of software. Sometimes they're obvious and there's no lack of honest feedback (Vista and Office 2007 are the most egregious examples), but quiet mediocrity is more dangerous. How would you know if you're serving up chicken tikka carbonaras? And how do you give, and elicit, honest feedback? Post here ...

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Business of Software 2008 - registration open

I'm pleased to announce that registration for Business of Software 2008 - A Joel on Software Conference is now open.

This is the second year I've run this event. Last year's event went down very well (Joel Spolsky said it was the best conference he went to last year and 94% of attendees gave it four or five stars; you can check out some videos and read testimonials on the conference web site).

This year is going to be even better.

If you're not familiar with the conference, then here's a brief summary.

It's being held in the Seaport hotel on the Boston waterfront. The dates are September 3rd - 4th. The confirmed speakers include:

• Joel Spolsky, founder of Fog Creek software, author of several books and the man behind the joelonsoftware blog
• Seth Godin, Business Week's "Ultimate Entrepreneur for the Information Age", is the best-selling author of 7 books (including Permission Marketing and Purple Cow) as well as the most popular eBook of all time.
• Eric Sink, founder of SourceGear, author of "Eric Sink on the Business of Software" and the person who coined the term "Micro ISV"
• Steve Johnson of Pragmatic Marketing and winner of last year's Software Idol competition
• Richard Stallman launched the development of the GNU operating system, now used on tens of millions of computers today. Stallman has received the ACM Grace Hopper Award, a MacArthur Foundation fellowship, the Electronic Frontier Foundation's Pioneer award, and the the Takeda Award for Social/Economic Betterment
• Paul Kenny is one of the UK's top sales trainers, consultants and speakers. He has worked with many customers in three continents, including IBM, Perot Systems, The Guardian and tens of others.
• Dharmesh Shah is a geek, serial entrepreneur, founder of HubSpot and blogger at OnStartups.com
• Jessica Livingston is author of Founders at Work: Stories of Startups' Early Days and a founder of Y Combinator
• Jason Fried is founder of 37signals (developers of Basecamp and Ruby on Rails) and Signal vs Noise blogger

That isn't the full line-up: I've got some other speakers I'd like to invite too.

The early bird price of $1,395 is available if you book before June 7th. You can find more details about booking on the registration page. I don't know how quickly tickets are going to sell, but I'd encourage you to book early to guarantee a place.

The best way to stay up to date with the conference news is to subscribe to the RSS feed. Alternatively, sign up for the conference newsletter and get a free eBook.

If you've got any questions about the conference, then post them here or e-mail me at neil.davidson@businessofsoftware.org

See you in Boston!

P.S. I'd really appreciate your help spreading the word about the conference. If you could blog about it and tell your friends and colleagues than that would be great.

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Advertising that sticks

Last week I was filling my wife's car up with petrol (gas). It's a big car, with a big tank. Here in the UK, petrol costs about £1.10 for a litre. That's about $9 for a US gallon. $200 for a full tank. There's not much to do as the fuel gauge scrolls relentlessly upwards. Not much but stare at the nozzle in my hand:

I think that's a great advert. It's an example of how interrupting people to tell them something can work. It fulfils most of Dan and Chip Heath's criteria for stickiness:

• It's simple - anybody can understand it
• It's unexpected - I wasn't expecting to be marketed to
• It's concrete - no intangibles here, just some solid facts
• It's credible - do I believe it? Yes.
• It's emotional - it made me smile, and caught me at a moment of panic
• It doesn't tell a story, which is the last criterion, though

It's also got a lot in common with Google adwords: it's relevant, targeted and interrupts its audience at a point when we're interruptable.

But is it effective? Probably. At any one time, roughly 5%-10% of us are thinking about buying a new car. That means that about one million interested, persuadable, interruptable people would see this advert a week (in the UK), assuming a decent campaign roll-out, at a cost of about 5p a hit. I'd like to see a TV ad that can do that.

Another reason that I like this advert is that it goes against the conventional wisdom. Well, the new conventional wisdom anyway, which claims that we are so bombarded with information and marketing - billboards, television, t-shirts, pop-ups and so on - that there is no point in trying to interrupt us to sell us something. We just won't notice, and if we do notice then we won't care.

If the conventional wisdom about interruption is wrong here, I wonder if it is wrong elsewhere too; or at least that there are striking exceptions which skilled marketeers can discover. Perhaps the right print ad, or the right banner ad, or the right superbowl ad can still work.

There are some other interesting parallels between petrol pumps and software. I'll blog about them next week. Subscribe to the RSS feed to keep up to date.

 

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The paradox of the middle man

Over a million people downloaded Radiohead's In Rainbows album in the two months it was on their web site. In 2000, when Stephen King put Riding the Bullet on his web site, the servers crashed under the load. Seth Godin estimates that over 2 million people downloaded Unleashing the Ideavirus when he released it as a free eBook. These examples demonstrate how the internet is killing the middle man. Disintermediation is the (ugly) name of the game. That's how the conventional wisdom goes, anyway. I'm not so sure. I think there will always be middle men: better, smarter, different middle men. Sure, traditional travel agents, book stores and music companies will vanish, but this is the first stage in a cycle of creative destruction.

Here's an example of how the slayer of the old middle man is the midwife of the new. Say you're buying a car. A second hand car. You can buy from a dealer, or you can buy from an individual. In the past, if you bought from a dealer then you had the advantage of choice. There were a lot of cars in the same place. Similarly, selling to a dealer was easier than selling to an individual. eBay has changed this: you can bypass the middle man and buy direct from the seller, and with more choice than a dealer could ever provide.

There is, however, a need for a new type of middle man. The used car market is famously dogged by the lemon problem. The buyer has less information than the seller, and doesn't know if the car he is buying is a lemon. Therefore, he will assume that it is indeed a lemon, and will only pay the price of a lemon. If the price of used cars is determined by the lemons in the market, then sellers have no incentive to sell good cars (since buyers will assume they are lemons, and only pay the lemon price). Hence the bad cars drive out the good ones. This, however, relies on the asymmetry of information available to the buyer and the seller. If the buyer knows what the seller knows then this problem vanishes. This is an ideal role for a middle man. Not an Arthur Daley who trades on quantity and dishonesty, but somebody who trades on information and whose goods are expertise and trust. Would you pay a middle man to seek out a used car, verify its quality and then guarantee it? I would.

Recruitment is another example. In their attempt to cut out the middle man, sites like Monster have evolved into heaving meat markets of employers and employees. Unfortunately, Sturgeon's law - that 90% of everything is crap - applies. This cuts both ways: 90% of candidates are crap, and 90% of positions are crap. On Monster alone, that's something like 100 million crap applicants, and 50 million crap jobs. But there are gems buried deep in the crap, and sifting the crap is a precious skill. In other words, good middle men - recruitment agents - are now more valuable than ever.

It's not just physical goods where middle men are becoming more important, it's virtual ones too. The Internet provides an easy way for writers to connect with readers, musicians with listeners and artists with viewers, bypassing the traditional middle men such as newspapers, books and magazines. But the infinitely increased available data clashes with our finite capacity to absorb it. We don't have the time to filter the infinite down to the finite, so people - middle men - who can do this are increasingly prized. The quirky, human, personal editorial judgement that the BBC, Slashdot or Boing Boing apply to the morass of information out there is more valuable, to me at least, than the lowest-common-denominator mob 'wisdom' of digg, or the cold logic of Google's algorithm.

I don't think these examples are isolated. As the Internet removes the need for dumb middle men, it creates the need for smart middle men. The producers have removed links in the chains separating them from consumers, but consumers are slotting new links back in. As we get swamped by more and more information, and more and more choices, we're going to need more and more help filtering the data and making our choices: which cars should we buy, which holidays we should go on, which people we should hire and which news stories we should read. It's a paradox: the more we can remove middle men, the more we need them.

The middle man is dead. Long live the middle man!

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New software products - how open should you be?

My day job is at Red Gate. Although we focus on tools for SQL Server and .NET, I'm currently concentrating on making a fledgling Microsoft Exchange tool we're working on a commercial success. Here's a bit of background on what we're doing.

I think most business software sucks. It's buggy, poorly designed, unusable and expensive. It's sold by complacent companies who do not care about their customers. If you've got an iMac at home, and use Google, Flickr and iPhoto recreationally, why should you put up with crap at work?

I think we've found a potential niche for a tool for Microsoft Exchange. I can't tell you much about it, but if you're an Exchange admin then your life is going to get better. This tool will you make you smile.

This creates a dilemma, and I'd like your advice:

How much should we tell people about what we're doing? On the one hand, the more we talk about it, the more likely it is to succeed. On the other hand, we're months away from even a beta and we don't want to tip off the competition.

So what would you do? Post here.

Also, we're looking for people to join the beta program and participate in user research. If you're an Exchange admin and are interested then drop me a line. If you've never taken part in a usability trial then it's an experience worth having. Plus we pay $100 (amazon vouchers) for an hour of your time. My e-mail address is neil.davidson@red-gate.com.

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