Are You a Product Company or a Services Company?
By Hillel Glazer, TCV Growth Partner-
That was the first question I asked the CTO of a client company about 10 minutes into the overview presentation of their company.
“WHAT?! We’ve been trying to answer that for 15 years, and you come in here and ask it after 10 minutes?!”
The CTO wasn’t upset. They were incredulous.
“Yes, it’s pretty obvious,” I answered. “And,” I continued, “the performance and delivery issues you asked me to come in to help you address won’t get resolved until you make a decision on that.”
Apparently, the connection wasn’t so obvious.
Before getting into the how-s and whys of this connection let’s come clean about something. My educational and professional background is deeply technical. And, as many of my fellow geeks can relate, finance and accounting aren’t exactly our thing. On a good day we see the benefits, but if we’re being honest, more likely we see them as just getting in the way. (Sorry, not sorry.) But the fact is that it wasn’t until every last thing I did in my technical world got connected to the financial world that I truly became an effective technologist.
At the risk of all the “I told you so’-s” I deserve, making this connection opened up an entire universe of possibilities for me. And while I’m confessing, I’ll share that it caused me to become obsessed with all angles of operational performance and not just technical prowess or product excellence. I dove into the connection between value-delivery (“operations”) and finance, beyond merely what it takes to build desired products efficiently.
So our CTO above could be excused for not seeing the “obvious.” But what was the COO’s excuse? The COO was a sales and finance person. I asked them the same thing that I asked the CTO. Their answer was less a nuanced, “we’re not going to pin ourselves to one or the other, and that’s that!”
(Well, this engagement is over. I might as well enjoy the food while I’m here.)
I felt bad for the CTO. They were being tasked with solving delivery and performance issues that their executives were proactively causing.
The connection has to do with business performance objectives, scaling, and operating model cost and investment. A services company makes money and scales by selling time. Typically, services companies have no trouble knowing they’re a service company and how to make money doing it. They intrinsically understand that more time and more people equals more money.
The key for service company success is learning to leverage capabilities to maximize what’s sold at the lowest cost per unit sold. This is also true for non-customer-facing services such as internal IT departments. Keeping costs down is critical to profitability. Internal IT departments are accounted for as “cost centers” and as such keeping costs down directly translates into business performance. This is often done with standardizing processes, bringing in tools and automation for efficiencies, and deploying systems internally and for users to minimize the need for real-time interactions.
On the other hand, product companies need to invest in their product research, plus, all the people, systems, and processes necessary to build and sell something at a pricing point commensurate with the expected sales volume and market value. Saving money plays less of a role. The point of money in a product company is to invest the money and recover the investment by selling the product. In other words, where services are “cost centers”, and ought to use accounting, processes, and policies appropriate for keeping costs down, product companies are supposed to be “profit centers” and use accounting, processes, and policies appropriate for maximizing money made through sales.
Juxtaposing or mixing the two creates the performance and delivery issues experienced by
the hapless CTO’s company such as, but in no way limited to:
Using the same people needed for product innovation and new product development on providing services.
Short-changing non-recurring engineering time (leveraged time) to make time for real-time services (linear time).
Constantly changing product requirements based on service requests, thereby constantly forcing the product to be delayed and slowing deliveries of products to all customers and slowing new customer acquisition.
Creating more product versions (too many customer-specific installations) than the company can support. This problem alone spawns too many additional problems to list here.
Using product development metrics to measure service delivery performance and vice-versa (assuming any useful measures are used at all, of course).
Let’s not interpret this cautionary tale to suggest that a company can’t be building and selling products as well as providing services. It’s OK to be both a product company and a services company. However, the two must have sufficient separation to be able to clearly avoid crossing wires and monies. It helps to understand how accounting, processes, and policies are different between them.
If you’re thinking your performance might be suffering from a blurring of the product vs. services line, TCV Growth Partners can help. Together, we can look into it and straighten it out and set you up for faster sales, better growth, increased cash flow, improved customer relations, and more innovative products delivered more frequently. I’m always happy to talk about these sorts of things. Like I said, I’m a geek for it. Email me at email@example.com.