Where the Rubber Meets the Road: the Business Model
‘Business Model’ was such a popular word in the mad, wild days of the Internet boom, that it seems to have gone down into obscurity along with its many exponents of those heady days. Unfortunate. Because a ‘business model’ is really something worth understanding
In the B-schools I am familiar with, they teach strategy, they teach operations, and marketing, and every function useful and not useful, but they don’t teach business models. On the principle that if it is not taught in B-schools it must be containing some rare gem of truth (like TQM, Kaizen, BPR, ToC.. none of which were taught in B schools until the revolution had come and gone..), let us give this ‘business model’ the benefit of the doubt and try to see what it means for us.
Conceptually, the business model fits between strategy and execution. It answers the most basic and most important of all questions: how will we make money doing this (whatever your service or product offering is). An example will make it more clear. Take a company in the pure software services business. Its business model is:
- win business by persuading large companies (mostly abroad) to outsource their software development and/or maintenance to you
- by offering significant cost savings
- while assuring the customer that the quality of the service will be much better than if he had done it in-house
- run large software factories back in India where your basic cost saving comes from paying Indian salaries
- keep the costs down by steadily building economies of scale, and recruiting more and more fresh people to keep the base of the people pyramid broad.
This business model is a familiar one. Now consider another one: Product development outsourcing, (perhaps the next wave of outsourcing to India).
The elements of this business model are:
- persuade software product companies abroad that it makes more sense to get the development done in India (by you).
- Because you can scale up faster than your customer can, and can manage the software development world, especially people, better than he can.
- Set up teams in India who can understand product specifications and, more important, the lifecycle and cadence of a product development cycle
- Focus on rapid release cycles, version control, protection of your customer’s IPR
Observe how different these are from the traditional software services model. In the traditional model, it was cost, large factories, economies of scale, and large-scale recruitment of cheap fresh talent, that mattered. Here it is speed, understanding of the product world, security.
Of course there are common features as well – managing people is a challenge in both worlds, though the specific challenges are different.
Ok, so they are different. So what?
If a company tries to do both businesses with the same people, same organization same management and business processes, it will fail. Because the rhythms of the two businesses are different. If your recruitment engine gears up to raid every college campus to suck up every fresher in sight, it cannot at the same time do a good job of recruiting people who understand what a product is. If your sales engine is busy selling ‘cost arbitrage’ to a customer, it cannot turn around and sell ‘speed, time to market’ etc. in the same breath. No man can serve two masters; no organization can serve two business models.
Well, you will say, are you telling me Wipro, for instance, doesn’t do product outsourcing and conventional services at the same time? My answer is – being big and successful can cover a multitude of inefficiencies. It doesn’t mean it is not an inefficiency.
Isn’t it possible to do them in two different business units? Of course it is, as long as you remember they are two different business units and don’t try to run them the same way (which is what usually happens!).
Most software companies I know are choking as they grow. They are choking on their own complexity. Their complexity comes from the fact that they are trying to execute too many business models at the same time: fixed price and T&M, maintenance services and outsourced product development, body-shopping and high-end consulting, all together. As each begins to make some headway, they demand more and more tradeoffs, until the organization brings itself to a standstill if the current spectacular run of the Indian software industry eventually grinds to a halt, it will be because of complexity, not because of Chinese competition!
Sunday, August 5, 2007
what constrains your growth?
What is Constraining Your Growth?
What does it take to grow from mid-size company to large? From bit player to serious contender? From commuter plane to jet plane? From a 50 crore company to a 500 crore company? What are really the constraints to growth?
The Usual Excuses Won’t Do!
We can’t blame the government any more, not in these days of liberalization – no government stopped Tata from buying Corus, and becoming a global player. No government even stopped Kingfisher from buying into Air Deccan and becoming one of the 3 largest airlines in India.
Can it be the market, then? Even less credible. Unless your company has 50% market share, you can’t claim market size is a constraint. If you are a 50 crore company, it is unlikely that your market is only 100 crore, unless you are in agarbattis or fireworks or some such very specialized industry.
Finding the Constraint
Finding the constraint should be the first task of any CEO who wants to grow beyond the 100 crore barrier. Once you have found the constraint, it miraculously becomes a lever – you can move the earth!
Were should one look for constraints? Ideally, one should look inside one’s own organization, and even inside one’s own mind A few illustrations, from my experience with Indian companies over the past few year:
Constraint type 1: Obsession with short-term goals
If you are in the software services industry, everyone around you is growing at 40% a year. That convinces you, as CEO, that you need to grow at 10% a quarter, or 3% a month. The math may be right (actually it isn’t quite right, as my sharp-eyed readers will no doubt observe!) but what happens once you follow it? Come April, if all your management attention is focused on growing 3% over March what will you naturally focus on? Actually, there is only one sure-fire way – to place some bodies. There is no other business action that can actually deliver any incremental revenue within the same month. Anything else will take months – whether it is projects, or products, or solutions – there is no realistic way to accelerate a product sale by several months, for instance, just as there is no realistic way to accelerate delivery of a baby in less than 9 months. Some things take time, and that is all there is to it
So, once our CEO is intent on selling bodies, imagine what will happen to his sales force. They will be forced to turn away from relationship-building, from trying to figure out their customers’ real needs, anything that can lead to significant long run growth. Net result – total paralysis and atrophy of the sales engine, and of the delivery engine for projects, solutions, products. Result: tension, struggle. Month after month. In extreme cases, as we saw with Computer Associates under a previous CEO, it can even lead to ‘creative accounting’. Certainly not to long term growth. Who is the culprit in this case?
Constraint Type 2: Inertia in the management team
If a certain set of senior managers have become comfortable running a 50 crore company, at least some of them may not be too excited about becoming 10 times bigger. They realize, only too well, that things will not remain the same – their safe feudal territories, their respect in the organization, all may change if the company is much bigger. Even if they are not insecure, they may fall prey to ‘group think’ or ‘the prisoner’s dilemma’..” if I change as an individual, and nobody else does, what good will it do? And I know the rest of these chaps, they will never change.”. Net result: stagnation even in the face of very real growth opportunities
Constraint Type 3: Weak front engine pulling a long train
Companies that have grown rapidly from nothing to 50 crore, are often scarred by the growing pains they went through, the struggles to set up a factory, to build up the delivery team, to ensure quality. All their management attention has been devoted to the ‘back end’, to the neglect of the customer-facing front end. The CEO usually is the front-end, but around this time, he finds himself running out of hours in the day and getting increasingly consumed by issues in the delivery or manufacturing side.
The bottleneck therefore becomes the sales engine, but it takes time to realize this, especially as delivery and manufacturing problems rage unabated and it is hard to look beyond them.
Constraint Type 4: Bandwidth of the Top Management (read CEO)
If the CEO has to make every decision himself, compose every mail to customers himself, decide on every new hire himself.. at this point in the company’s life, he simply runs out of hours in the day. The CEO’s bandwidth becomes the constraint.
Bandwidth can mean time, but it can also be simply the scope of the CEO’s vision. Coupled with constraint 2 above, it can really chain the company down.
What is the lesson in all this? We have not even mentioned any number of very real constraints here – supply chain, lack of good people, lack of funds. Whatever it is, the first task of a CEO in this stage of the company’s growth journey should be to step back and figure out, dispassionately, what the constraint is. Once you know what it is, the rest is easy. The jet plane can now take off!
What does it take to grow from mid-size company to large? From bit player to serious contender? From commuter plane to jet plane? From a 50 crore company to a 500 crore company? What are really the constraints to growth?
The Usual Excuses Won’t Do!
We can’t blame the government any more, not in these days of liberalization – no government stopped Tata from buying Corus, and becoming a global player. No government even stopped Kingfisher from buying into Air Deccan and becoming one of the 3 largest airlines in India.
Can it be the market, then? Even less credible. Unless your company has 50% market share, you can’t claim market size is a constraint. If you are a 50 crore company, it is unlikely that your market is only 100 crore, unless you are in agarbattis or fireworks or some such very specialized industry.
Finding the Constraint
Finding the constraint should be the first task of any CEO who wants to grow beyond the 100 crore barrier. Once you have found the constraint, it miraculously becomes a lever – you can move the earth!
Were should one look for constraints? Ideally, one should look inside one’s own organization, and even inside one’s own mind A few illustrations, from my experience with Indian companies over the past few year:
Constraint type 1: Obsession with short-term goals
If you are in the software services industry, everyone around you is growing at 40% a year. That convinces you, as CEO, that you need to grow at 10% a quarter, or 3% a month. The math may be right (actually it isn’t quite right, as my sharp-eyed readers will no doubt observe!) but what happens once you follow it? Come April, if all your management attention is focused on growing 3% over March what will you naturally focus on? Actually, there is only one sure-fire way – to place some bodies. There is no other business action that can actually deliver any incremental revenue within the same month. Anything else will take months – whether it is projects, or products, or solutions – there is no realistic way to accelerate a product sale by several months, for instance, just as there is no realistic way to accelerate delivery of a baby in less than 9 months. Some things take time, and that is all there is to it
So, once our CEO is intent on selling bodies, imagine what will happen to his sales force. They will be forced to turn away from relationship-building, from trying to figure out their customers’ real needs, anything that can lead to significant long run growth. Net result – total paralysis and atrophy of the sales engine, and of the delivery engine for projects, solutions, products. Result: tension, struggle. Month after month. In extreme cases, as we saw with Computer Associates under a previous CEO, it can even lead to ‘creative accounting’. Certainly not to long term growth. Who is the culprit in this case?
Constraint Type 2: Inertia in the management team
If a certain set of senior managers have become comfortable running a 50 crore company, at least some of them may not be too excited about becoming 10 times bigger. They realize, only too well, that things will not remain the same – their safe feudal territories, their respect in the organization, all may change if the company is much bigger. Even if they are not insecure, they may fall prey to ‘group think’ or ‘the prisoner’s dilemma’..” if I change as an individual, and nobody else does, what good will it do? And I know the rest of these chaps, they will never change.”. Net result: stagnation even in the face of very real growth opportunities
Constraint Type 3: Weak front engine pulling a long train
Companies that have grown rapidly from nothing to 50 crore, are often scarred by the growing pains they went through, the struggles to set up a factory, to build up the delivery team, to ensure quality. All their management attention has been devoted to the ‘back end’, to the neglect of the customer-facing front end. The CEO usually is the front-end, but around this time, he finds himself running out of hours in the day and getting increasingly consumed by issues in the delivery or manufacturing side.
The bottleneck therefore becomes the sales engine, but it takes time to realize this, especially as delivery and manufacturing problems rage unabated and it is hard to look beyond them.
Constraint Type 4: Bandwidth of the Top Management (read CEO)
If the CEO has to make every decision himself, compose every mail to customers himself, decide on every new hire himself.. at this point in the company’s life, he simply runs out of hours in the day. The CEO’s bandwidth becomes the constraint.
Bandwidth can mean time, but it can also be simply the scope of the CEO’s vision. Coupled with constraint 2 above, it can really chain the company down.
What is the lesson in all this? We have not even mentioned any number of very real constraints here – supply chain, lack of good people, lack of funds. Whatever it is, the first task of a CEO in this stage of the company’s growth journey should be to step back and figure out, dispassionately, what the constraint is. Once you know what it is, the rest is easy. The jet plane can now take off!
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