Article | September 1, 2017

Software Strategic Inflection Points

By Rita Gunther McGrath, Associate Professor, Columbia Business School

Rita Gunther McGrath, Associate Professor, Columbia Business School

Rita Gunther McGrath is a globally recognized expert on strategy, innovation, and growth with an emphasis on corporate entrepreneurship. She is an associate professor at Columbia Business School, and was recognized as one of the top 10 management thinkers by global management award Thinkers50 in 2015 and 2013. McGrath will be speaking at the Business Of Software conference in Boston on September 18-20, where she’ll give a talk titled, “Alarming the Enterprise: Software-driven inflection points.” ISVinsights and Software Executive recently interviewed McGrath about her new research, including her advice to software companies on long-term strategy, selling products to enterprise users, failure analysis, and lessons learned from companies outside of the software world.

1. Define the idea of a “strategic inflection point” for our audience. What do these opportunities look like for software companies?

A strategic inflection point is a moment when the familiar rules that govern how your business runs change.This could be because of technology, of course, but also because of societal, regulatory, competitive or other actions. Get an inflection point right, and your business can enjoy a growth surge. Get it wrong, and it can lead to rapid decline.

A great example of a company that was courageous and very successful about a strategic inflection point in software is Adobe. Advances in cloud computing, customer expectations and the basic infrastructure supporting software led to what many have now recognized as a big inflection point – going from on-premises software of various kinds to software based in the cloud.

A few years back, they made the then-controversial decision to abandon their software in a box business model to convert to a model that customers would use as a service, paid for by subscription. While initially some customers howled and the company was criticized for moving away from the ‘ownership’ model for software, what Adobe was successful at doing was discovering that for many customers, the flexibility of subscription payments was convenient, rather than a large one-time up front payment. They also found that customers appreciated having a continuously updated product rather than dealing with versions and upgrades. Adobe’s significant growth since making the decision to change business models is an example of getting an inflection point right.

2. What misconceptions do software executives have about formulating long-term strategies? What are some common mistakes software companies make?

The most common mistake I see software companies make is believing that their assumptions about how the world works are facts. Not that this is unique to software firms, but there is an awful lot of “if we build this cool thing, customers will love it” sort of thinking and not enough customer-back thinking.

I think another big mistake that people in software companies make is projecting their own capabilities and priorities on to the user experience. I can’t tell you how many times I’ve been at a company which had purchased some highly touted cool new piece of software only to find that in actual use, the user community didn’t enjoy using it and it eventually ended up as shelfware. Unless software really does make people’s lives better or solve some major problem, it won’t get used. And usage, as Microsoft’s Nadella is fond of saying, is a leading indicator. Revenue is a lagging indicator.

3. What advice do you have for software companies related to selling products to enterprise users?

Enterprise-level sales, unlike sales to smaller entities or pieces of a company, typically involve multiple players and constituencies with their own objectives and goals. So to sell to the entire company, a firm needs to understand who must be behind the decision and who is going to metaphorically write the check. You need to have a story for each of these constituencies and overcome any objections they might have.

Next, you need to understand the perceived and real risks of doing business with you, particularly if you are a small firm with a limited track record of serving large enterprises. You need to have a good story to address each of these. For instance, a big firm may worry about what happens if your little company goes out of business or is acquired. They may be concerned that your product will make something obsolete that they have not depreciated yet, leading to write-offs. They may worry about security risks. You need to be able to answer these concerns.

Finally, I think you need to have an internal champion who is a true believer in what you’re doing. That’s essential before you even start to work on the rest of the matter.

4. What factors can cause a software company with a good product to fail?

  • Failing to anticipate operational problems which implementation will create for the customer. If you’re depending on people to go on a learning curve with your software who are already overloaded, all that is going to generate is resentment and even sabotage.
  • Forgetting that to a user, the data ARE the system. You can have the greatest software in the world, but if the information isn’t accurate, the users will dismiss it out of hand. I see a lot of cases with software in which the firm selling the software appropriately budgeted for dealing with the software issues, but didn’t budget for dealing with the data clean-up and conversion issues. Without that being managed, the software itself is pretty useless.
  • Sometimes aggressive action by a competitor can take a company out. Especially if they have a different business model in which they can afford to give away for free what you are trying to sell.

5. What lessons can software entrepreneurs learn from other innovative business leaders outside of the software/technology world?

  • How to be customer centric. I like to encourage people to think, as Clayton Christensen famously says, about the “jobs” customers want to get done in their lives and how you can help them accomplish these.
  • How to have the courage to make difficult decisions.If you leave a strategy session and everything feels really comfortable, it probably means you haven’t had the courage to make clear strategic choices.
  • When to disengage from a line of business, technology or other practice. I talk about living in a transient advantage context, in which you need to have a pipeline of new advantages to replace the ones that have gone into erosion, but that also means you need to pull resources out of advantages that have faded.
  • How to manage a portfolio of activities, so that you have a good balance between the core business you’re funding today and the options you need to invest in for the future. This is a hard balance to get right, and many companies have inadequate processes for achieving it.
  • How to motivate people.

And, lately, I think software companies would do well to learn the lessons from firms that have made diversity and inclusion a core part of their workforce strategy. There is a great deal of research that shows that firms that can capitalize on all the talent at their disposal, that create psychological safety in their working teams and that leverage diverse points of view in their deliberations outperform those that do no.