Thursday, September 11, 2014

Legendary Product Development

“Brand will not save you, marketing will not save you, and account control will not save you. It’s the products.”
– Marc Andreessen


I believe there is a recipe for winning in product development. It requires a delicate balance between pragmatism in planning, efficient execution, and the ability to see around corners (into the future). I’ve written this post to share some ideas on how to become legendary in product development.

*****

Idea #1: Usage First

Products must be built with a ‘usage first’ mindset. Clients need to be attracted to products by their experience with the product. Clients should be begging for more, because they are so delighted with the experience and outcomes. If you build great products, clients will tell each other. The best way to make a product available for usage is through demos, freemium versions, downloads, and easy access via the cloud.

“The people with really great products never say they're great. They don't have to. Show, don't tell..” – Unknown

“In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts. If I build a great product or service, my customers will tell each other.” – Jeff Bezos



Idea #2: Simplicity and Design

Although this is related to Idea #1 and is in fact a pre-requisite to #1, it has some subtle differences. This is about tapping into how a client feels when they use your product. Do they find it shockingly simple, yet highly functional, leading to an ‘ah-hah’ moment? They should.

I read once that people don’t buy products; they buy better versions of themselves. When you’re trying to win customers, are you listing the attributes of a product or can you vividly describe how it will improve their lives? Clients will be attracted to the latter.

“Taking a design-centric approach to product development is becoming the default. Designers, at last, have their seat at the table.”- Unknown


Idea #3 Speed, Accountability, And Relentless Execution

Speed drives exponential improvements and outcomes in any organization. If you complete a task in 1 hour, instead of 1 day, your mean time to a positive outcome is 500% faster. In product development, accelerating cycle times is an under-estimated force in determining winners and losers.

Pixar has a company principle that states, “We start from the presumption that our people are talented and want to contribute. We accept that, without meaning to, our company is stifling that talent in myriad unseen ways. Finally, we try to identify those impediments and fix them. “

That principle really resonates with me. A product organization has to break down its own barriers, to achieve its potential.

“Life is like a ten speed bicycle. Most of us have gears we never use.” – Charles Schulz


Idea #4: Open Source

Open source is one the most important phenomena in enterprise software. Legendary product teams will shift their approach to an overt embrace and incorporation of open source into their product development processes. The best business model in software today is utilizing open source and effectively surrounding it with proprietary solutions and features. This drives the cycle time improvements alluded to above.

“There are no silver bullets for this, only lead bullets.” – Ben Horowitz


Idea #5: Product Management

Product management, and its interplay with development, is a critical function in a product organization. Development must work with product management to develop forward-looking, client-based insights, and use that insight to push clients faster than they may normally want to move. If you want to learn about product management and how product development should play a role, I recommend 2 things: 1) read every Amazon.com Annual Report and 2) read “Good Product Manager, Bad Product Manager” (you can find it on the web).

Great product organizations obsess over feedback and ideas from all constituents. They prefer feedback that challenges their views, instead of reinforcing their views. That enables you to reach the best answer as an organization.

“If you’re doing things right, something will always be a little bit broken.” - Unknown


Idea #6: D-Teams

I believe legendary product development teams need D-teams in the organization. The D stands for Disruption. The role of the D-teams is to disrupt from within. D-teams assess what the organization is working on, identify opportunities, rapidly assemble a team and disrupt. This type of competitive fire will makes the whole team better.


Idea #7: Resources
One of the most common refrains in every organization today is, “We don’t have enough resources.” Or, “We know what to do, but don’t have the time or money.” This is a choice, not an issue. If something does not have the right resourcing, it is because the organization is choosing that. If you are asking for resources and not getting them, its because you have not prepared a convincing argument. Sometimes, this means you have to “Take the Horse off The Chart”.

“Deciding what not to do, is as important as deciding what to do.” – Steve Jobs


Idea #8: Client Satisfaction

Quality is the taste you leave in a client’s mouth. Most organizations underestimate the negative impact of quality on their business. Its underestimated because it’s hard to quantify. Clients no longer have to buy inferior goods and services since information and alternatives are so easy to obtain. It’s that simple.

“What can a sales person say to somebody to get them to buy a product that they already use every day if they don’t like it? Nothing.” -Larry Ellison


Idea #9: Clients, Developers, and Users

Some product development organizations spend most of their time focused internally. Some take a reprieve from that and think about clients (which is great). But clients are only one of the three constituents that should drive thinking and behavior. Product development organizations will live and die by how they treat, communicate with, and interact with their constituents. They are:

1) Clients
2) Developers
3) Users

They are all equally important.

How do you make it easy for each of them to work with your products and with you? The organization should obsess over answering that question. With each new product idea, you must be able to articulate the “must have” experience and the target of that experience (clients, users, or developers), before debating how and why a product or feature would be useful. This requires a rigorous process for identifying the most passionate stakeholders and getting their unstructured feedback.


Idea #10: At the Service of the Sales Team

If a product development team spends all their time in the field, then they lose focus on developing outstanding products. On the other hand, a product development team cannot build outstanding products without an intimate understanding of clients, developers, and users. This is the paradox that every product development team faces. It is incumbent upon each team to figure out how to balance this, with a priority placed on being at the service of sales and constituents.

“The key is not spending time, but in investing it.’ –Stephen Covey


Idea #11: Innovation on the Edge

You cannot be a leader in innovation without dedicating resources to explore and try things that, by definition, are likely to fail. In strategy speak; this would be a Horizon 3 project.

There are many other areas to explore. Identifying the important waves to ride is important. It’s equally important to actually ride the wave (i.e. execute on it).

“If you only do things where you know the answer in advance, your company goes away.” –Jeff Bezos


Idea #12: Product Releases

Per Benedict Evans, there is a distinct pattern in Apple’s product releases and announcements. In almost every case, they are sure to have:

a) Cool, incremental improvements, which cater to existing users
b) ‘Tent-pole’ features, which become focus points for marketing campaigns
c) Fundamental strategic moves that widen the moat around their competitive advantage

This is a very thoughtful approach to product releases. Every organization can learn something from this.

*****

Leading in product development is much more about culture, than it is about management and hierarchy. At times, management and hierarchy encumber product development teams. Sometimes the best way to understand how you need to change is by looking at companies or organizations on the other end of the spectrum. GitHub is one of those companies. GitHub has no managers. The sole focus of the organizational design is on developer productivity.

Steve Jobs once said, ‘you have to be run by ideas, not hierarchy.” There is latent talent and creativity in every development organization. Being Legendary is about finding a way to unleash that talent.

Wednesday, July 23, 2014

The Complete Product

William Davidow wrote Marketing High Technology in 1986. While we have seen many phases in technology since then, its a timeless piece of work on how to think about building great products. The fundamental message of the book is that a product development organization has to think about building a 'complete product', not a product. A product is something that a client can buy. Whereas, a 'complete product' addresses all the things around and related to the product: market fit, distribution channels, sales, service, marketing, and positioning.

His wisdom includes things like:

-Marketing must invent complete products and drive them to commanding positions in defensible market segments.
-The cost of creating a complete product is often many times the cost of developing the product.
-Serviceability must be designed into a product
-Great products make great salespeople.
-It's not a product without a distribution channel.
-Great products need a soul.
-Companies fail because they are incapable of delivering total customer satisfaction.

I believe in timeless advice. Davidow's work on a complete product certainly is.

Wednesday, July 16, 2014

Leadership in the Era of Distraction

Herman Melville wrote Moby Dick in 1851. It's a story about the whaling industry in the 19th century, capturing the intricacies of a life at sea. In one part of the book, Melville describes a lantern that hangs from the ceiling in the Captain's quarter. No matter how rough the seas are, that lantern stays perpendicular to the center of the earth. The lantern and it's inherent stability, reveals the faults of everything around it. It is the lone symbol of stability, always perpendicular to the earth. Leadership has to provide stability, in the current era of distraction.

***

Danny Meyer, the increasingly well known restaurateur (Gramercy Tavern, Union Square Cafe, and others), addresses the challenge with communicating consistent messages to his staff members, about his expectations for standards of excellence. He mentions that many of the waiters and managers in his restaurants are constantly testing him, as they push the limits of the standards he believes in. An excerpt from Meyer's book, 'Setting the Table':

"If you choose to get upset about this, you are missing the boat", Pat Cetta (Meyer's friend) noted. Pat pointed to the set table next to us. "First," he said, "I want you to take everything off that table except for the saltshaker. Go ahead! Get rid of the plates, the silverware, the napkins, even the pepper mill. I just want you to leave the saltshaker by itself in the middle." I did as he said, and he asked, "Where is the saltshaker now?"

"Right where you told me, in the center of the table."

"Are you sure that's where you want it?" I looked closely. The shaker was actually about a quarter inch off of center. "Go ahead. Put it where you really want it," he said. I moved it very slightly to what looked to be smack-dab in the center. As soon as I removed my hand, Pat pushed the saltshaker three inches off center.

"Now put it back where you want it," he said. I returned it to dead center. This time he moved the shaker another six inches off center, asking again, "Now where do you want it?"

I slid it back. Then he explained his point. 'Listen. Your staff and your guests are always moving your saltshaker off center. That's their job. It is the job of life. It's the law of entropy! Until you understand that, you're going to get pissed off every time someone moves the saltshaker off center. It is not your job to get upset. You just need to understand: that's what they do. Your job is just to move the shaker back each time and let them know exactly what you stand for. Let them know what excellence looks like to you.

Cetta is encouraging Meyer to provide the constant stability of the lantern on Melville's ship. And, he is suggesting that he accept the fact that there will always be instability around his attempts to do so.

***

A leader has to know where their center lies. They have to know it, talk about it, and never lose sight of it.

In our current era of distraction, where everyone is moving the saltshaker or being coaxed to do so, the only constant is the leader and their knowledge of what is important. The great leaders in this era, like the lantern in Melville's book, are stubbornly consistent, adhering to their center, despite the storms around them.

Wednesday, June 25, 2014

Acquisitions in Enterprise Technology

I've spent enough of my career in Mergers & Acquisitions in technology to have a sense for why companies, particularly in enterprise software, acquire (or choose not to). There are a variety of reasons that tend to have much more to do with the acquirer than the acquired company. (Note: most acquisition targets misunderstand this point)

There are typically 3 drivers of an acquisition in enterprise technology:

1) Revenue growth. Typically, a company will not acquire with this as a sole purpose. Because if the strategic fit is lacking, then the revenue will soon dissipate.

2) New Customers. An acquisition target could bring new clients to the acquirer, either in terms of the geography or buyer (think Chief Marketing Officer vs. Chief Information Officer)or industry.

3) Synergy with existing products. This means that the acquirer will have a broader opportunity to sell their existing products, due to the customers, footprint, or route to market from the acquired company. Note: this factor alone is typically most important in justifying an acquisition.

In my view, all three of these drives must exist for an acquisition to make sense. Number three is probably most important, followed by number two. The two of those together ensures that number one (revenue growth) can sustain itself. I rarely see enterprise acquisitions for the purpose of talent alone (i.e. acqui-hires).

***

This brings us to Oracle's recently announced acquisition of Micros Systems (MCRS). In their 10-K filing, Micros describes themselves as:

MICROS Systems, Inc. is a leading worldwide designer, manufacturer, marketer, and servicer of enterprise applications solutions for the global food and beverage, hotel and retail industries...Our enterprise application information solutions comprise three major areas: (1) food and beverage information systems, (2) hotel information systems, and (3) retail information systems. The food and beverage information systems consist of hardware and software for point-of-sale and operational applications, ecommerce, back office applications, including inventory, labor and financial management, gift cards, and certain centrally hosted enterprise applications.

Simplified, Micros is a combination of hardware and software, servicing the hospitality industry. Let's look at this versus the acquisition criteria I cited above:

1) Revenue growth. At $1.3B in revenue, Micros will increase Oracle's top line from $38B to $39.3B (~3%), even if Micros does not grow organically. So, it hits that check box.

2) New Customers. I'm skeptical this brings Oracle any new customers. The hospitality industry as typically used alot of Oracle database, and their acquisition of ATG awhile back filled out their retail penetration.

3) Synergy with existing products. I don't see any obvious synergy here, for the reasons I alluded to in #2.

It would appear that Oracle is buying Micros, simply for the top-line revenue growth. They only had to pay 4x revenue for Micros due to its poor relative profitability (50% gross margins vs. the 90% that Oracle is accustomed to on software).

***

I believe Oracle is trying to solve the revenue problem that is created by the opex vs. capex problem that I alluded to here. But, this is short sighted. To go back to where I started, I don't believe that an acquisition creates shareholder value, unless it checks the box on revenue growth, new customers, and product synergy. Then again, has Oracle every really cared?

It is interesting to note that what IBM is divesting (commodity hardware and retail store systems), Oracle is acquiring.

Monday, June 16, 2014

Career Decisions

The Village Vanguard is one of the oldest jazz clubs in New York. A beat writer wandered into the Vanguard one afternoon in the middle of the week, to sample some of the local sounds. Surprisingly, coming out of a break, Wynton Marsalis walks out on stage and starts to play “I don’t stand a ghost of a chance with you”. At the climactic moment of the song, someones cell phone goes off. The patron with the ringing phone, very embarrassed by the episode, quickly runs out of the place. However, Wynton, ever the professional, immediately launches into an improv riff, based on that cell phone ring.

It was an interruption in a moment of glory, but the improvisation was even more special. Nothing was going to stand between Wynton and success, in that moment.


There are three traits of resilient people:

1) They confront staunch reality
2) They find meaning in what they do
3) They have the ability to improvise

Each of those were present at The Village Vanguard that day. This is the type of resiliency and flexibility that it takes to build a meaningful career.

***

I've had a number of discussions with people that are pondering a change in their career. While I appreciate the opportunity to share my thoughts and advice, I often find that I learn as much, if not more, from the discussions. Here is a framework for career decisions, that I have developed through these discussions:



a) Understand and write down your career goals. A 5-year and 10-year view are helpful as a guide. If you don't know where you are going, it is impossible to chart a course. That doesn't mean that the goals won't change/evolve, but all career decision points can use the written goals as a guidepost.

b) Never CHOOSE to take a lateral move. A lateral move is anything that does not change the scope or level of responsibility that you have. When you change roles for an increase in responsibility/scope, your career moves forward. When you take a lateral, I'd argue that you move backwards. There are situations where a lateral move is wise, because it is part of a larger career plan (i.e. skill and experience building). However, that being said, I still don't think people should CHOOSE a lateral move.

c) Careers advance when a person distinguishes themselves. Unique contributions, recognized and rewarded by an internal support group, create moments of distinction. You must decide where you have the best opportunity to distinguish yourself. Note: the environments with the most challenges often present the best opportunity to distinguish oneself.

d) Career growth in most mature companies is a product of i) your performance appraisals, ii) your executive support (i.e. are those that can promote you, personally invested in your success?) and iii) the opportunities available to you (largely dictated by a and b). You must consider where you have the best support and how confident you are in that support. To some extent, this is about managing career risk.

e) In a career, you will largely get whatever they ask for, assuming letters (c) and (d) above. This puts the responsibility on the individual to have clarity of their goals/desires and to share them...and to then be reasonably patient. This then puts the responsibility on their bosses to keep them challenged.

f) All risks that you choose to take must have clear and meaningful upside. If you can capture upside opportunity, without taking risk, even better. Don't ever let risk/reward get out of balance.

g) Don't ever make a career move for the 'promise' of a job. If you are being told to take 'job A' for now, and then you'll get 'job B' in 6-12 months, then you should assume that 'job B' will never materialize. I see many people consider this, even when they know that 'job B' is the only reason they would take the role. Yet, they don't realize that the promise of 'job B' is very different from 'job B' itself. It comes back to managing career risk. As the saying goes, 'Good judgement comes from experience, which comes from bad judgement.' Use good judgement and please don't ever take the 'promise' of a job.

***

Career success is all about careful planning, unvarnished commitment, having a positive attitude and resiliency. The better you are, the more times you will face a decision point. Hopefully, this framework helps you through the decision process.

Friday, May 30, 2014

Reversion to the Mean

I believe in timeless advice. Whether we admit it or not, there are some things that we learn through the years (typically from a parent or grandparent) which stand the test of time. The power of compound interest comes to mind. So does the suggestion of buying a home, rather than renting. As we all know, when you are done renting, you have nothing. Whereas, if you buy a house with a mortgage, then all those payments create equity/ownership over time. Why then, are so many companies deciding to pay rent for their enterprise software? Are they defying timeless advice?

***

Jeremy Grantham is one of the greatest investors in modern times. He is the cofounder and chief investment officer at Grantham Mayo van Otterloo (GMO), which has over $100 billion in assets under management. His investing philosophy is based on a simple truth that he has observed: markets always revert to their long term averages. Grantham calls this phenomenon Reversion to the Mean, and GMO will often take positions betting on this phenomenon, when asset prices deviate from their historical ranges.

We sit in the midst of the largest debt driven credit bubble in the history of finance. As the Federal Reserve has aggressively expanded the money supply, there is an unprecedented amount of cash sloshing around the system.



David Einhorn, in his oft quoted talk at the Buttonwood Gathering, described it as follows:


"My point is that if one jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have, and it gets to a point where it's not a question of diminishing returns but it actually turns out to be a drag. I think we have passed the point where incremental easing of Federal policy actually acts as a headwind to the economy and is actually slowing down our recovery, and I am alarmed by the reflexive groupthink of the leaders which is if we want a stronger economy, we need lower rates, we need more QE and other such measures."


Quick translation: too much of anything can become a bad thing, and right now, there is too much cash, too little interest earned on cash, and that is creating a cascading set of events.

Jamie Dimon, in his annual letter to shareholders, appropriately pointed out that all of this cash in the system has resulted in corporate cash balances increasing to 11.4% of assets, up from 5.2% in 2000. In a cash rich world, everyone is hoarding cash.

***

So, what does this mean for corporations? As any economist will tell you, the problem with too much cash, is finding a way to put it to productive use. And, ironically, despite the large amounts of cash in the system, every company that I visit has no or limited money for new projects. It's survival of the fittest, fighting for the few precious dollars available. But, how can this cash scarcity co-exist with the macro data? Well, the fact is that the cash is in the companies, but it's tucked away on the balance sheet (see Dimon comment above). When a company wants to avoid spending cash in the short term, this is when you see a shift from Capital Expense (capex) to Operating Expense (opex). Said another way, there is a decision to rent instead of buy. Let's check the definitions that I recall from my days of studying finance and economics:


Capital Expense
These are large projects requiring significant investment of cash. They are expected to help generate revenue or reduce costs for more than a year. Assessing capex is a matter of a) assessing the initial outlay, b) projecting future cash flows, and c) evaluating the future cash flows to assess ROI.

Operating Expense
These are costs not directly related to making the core product or delivering the core service of the enterprise. Opex is NOT variable (like materials) and instead, they tend to be fixed in the short-to-mid term.

So, why are companies trying to move everything from Capex to Opex?

***

Corporations have decided that they have something better to do with their cash than invest in new projects: they want to buy back stock. Some recent testaments to this fact:

Darden Restaurants sells Red Lobster to Golden Gate Capital for $1.6 billion, promising to use $700 million to buy back stock.

Cisco Borrows $8 Billion in Bond Sale to Help Finance Buybacks

Microsoft Plans $40 Billion Buyback

Oracle Approves $12 Billion Buyback

And, IBM, has done a fair share of buybacks

In aggregate, in the first quarter alone, companies spent a record $160 billion on stock buybacks. Best viewed in a chart:


Companies have spoken. This is how they want to use their cash for now. Is this a new normal or will there be a Reversion to the Mean?

***

Clay Christensen interviewed Morris Chang, the founder of TSMC, awhile back, asking about companies that refuse to spend capital. Clay said to Chang, “Every time a new customer outsources to you, he peels assets off of his balance sheet, and in one way or another puts those assets on your balance sheet. You both can’t be making the right decision.”

“Yes, if you measure different things, both can be right,” Chang replied. “The Americans like ratios, like RONA, EVA, ROCE, and so on. Driving assets off the balance sheets drives the ratios up. I keep looking. But so far I have not found a single bank that accepts deposits denominated in ratios. Banks only take currency. There is capital everywhere,” Chang continued. “And it is cheap. So why are the Americans so afraid of using capital?”

The answer to Chang's question is that companies are choosing to spend it another way. But, lets look at a simple example of what happens, when a company makes this decision. Here is a simple example (based on real events) of a company that needs to acquire $5 million of supply chain software to run their business. Option 1 is when the company rents the software (an Opex model), while Option 2 is when the company uses Capex to fund the project.


This company chose Option 1. Option 1 is a poor financial decision for the company, granted it may be good from the narrower view of the purchaser. But, what happens when this cumulates across a company? If this same decision was made 10 times in a company, suddenly they have boat anchor of $30M/year of Opex. And, as mentioned above, this is fixed in the mid-to-short term.

***

The obsession with Opex is not sustainable. This is not a viable way for companies to grow their cost base. That being said, it's happening due to the cash excess driving stock buybacks and other uses of money. A recent JP Morgan Chase report stated, "the other side effect of elevated dividends and share buybacks is that these distributions to shareholders may reduce the long term potential of the company to grow relative to the alternative of capital spending."

As Grantham would do, I'm betting on a Reversion to the Mean. At least, that's what timeless advice would tell me to do.