Why Building a Software Company Within a Service Firm is a Recipe for Failure
5 Hard Truths About Why Most Businesses Will Fail
Having been around professional services for the better part of 3 decades now, I’ve seen enough to recognize repetitive patterns. Oftentimes, it’s like watching a train wreck happen over and over again.
While there are many patterns that I could touch on today, I’ll save most for another post (or many, many posts). Today, I want to talk about:
Discovering gaps in the market where your service firm competes. Namely, gaps that can be filled by creating new software solutions.
In my experience, I’ve worked in and around the enterprise software space with solutions for supply chain distribution. Think warehouse operations for companies doing at least $200m in annual revenue and many more that are doing well over $1bn across multiple countries.
It’s almost inevitable that you’ll discover gaps if you’re looking and interested in capitalizing on adjacent opportunities. I do this continuously — it’s how I am wired. Surely, many of you are the same.
Where this all falls down is how most service firms attempt to fill the gap. They start building. It starts without fully understanding the consequences. And that is what I want to help avoid here.
Choosing to build their own software to sell to companies is radically different from what most service firms are good at.
It’s software, you say. You build custom solutions every day — what could be so different? Let’s explore that thought process.
Where most firms go wrong
It’s easy to get started. Many people on your team are likely capable of building a proof of concept. Yet few know how to build a software product.
That’s where your issues begin — not fully appreciating how different building products are from building custom solutions.
1. Focus tends to follow revenue
I’ve seen it play out many times — focus always swings back to customers on the service side of the business. After all, they are paying the bills. They are your firm’s revenue. To ignore them would mean disaster.
This means while you’ll continue to spend money building your software, it will not get the traction it needs to become viable on its own. I won’t go so far as to say never because that would be untrue. Yet, for many, it is.
2. Solution selling is not software sales
Most service firms don’t know how to sell software. Brutal but not untrue. At best, most can sell custom solutions yet don’t have a process. It tends to be more haphazard — as word-of-mouth pays off from other customers.
The sales role is typically performed by the leaders of the firm — due to the need to wear many hats. It often resembles selling time to customers and haggling over hourly rates. A far cry from software sales with sophisticated packages and pricing models.
3. Products must serve many masters
When building solutions for customers, you create what the customer needs and nothing more. It will be used by them alone so anticipating every conceivable use case isn’t something often explored.
Yet with software products, polish and purpose are paramount. Trade-offs will be made to provide exceptional value to a specific audience at the expense of many others.
Some customers will demand you alter the software to fit their use cases. Some will even offer to pay for the alterations. While that worked for customer-specific solutions, that is not how you build software products.
4. Operating costs will bulk up
The talent that you hired to help your customers will not be the same ones that excel at building software products. The mindset is radically different. Product teams must be rigorous and thorough.
While not meant to be a jab at service teams, the priorities and skillsets are vastly different when consulting for customers. For many service firms, process often takes a back seat to deadlines and budget constraints.
This translates into hiring talent that excels at building products yet would likely perform poorly in consulting roles. In the end, your operating costs will grow, putting pressure on your profits.
5. Marketing grows multiple heads
For those firms that invest in marketing, now the teams must tell multiple stories. This dilutes your messaging and can confuse prospective customers. To add insult to injury, what is a customer to think when they realize you’re a small firm yet boast of many services as well as one or more software products?
What you should do instead
You need a separate company. One that is positioned to capitalize on the opportunity in every way that your service firm is not. It needs autonomy and its own priorities.
The software company will have the responsibility to fund its own existence. It won’t be able to siphon off profits from the service firm. Not unless you make that an explicit decision as a way to leverage your profits.
With all the shortcomings and pitfalls called out in the last section, you’ll be able to make explicit investments in those areas while no longer hindering your original business. The two can thrive independently.
And, if the software company doesn’t make it, your service firm is still safe.
Casey is the founder of Fullstride, an advisory firm for mid-sized businesses pursuing their first Warehouse Management System (WMS).
