The Business of Software: What Every Manager, Programmer, and Entrepreneur Must Know to Thrive and Survive in Good Times and Bad (Hardcover)

by Michael A. Cusumano (Author) "If the software business were like other businesses, there would be no need for this book..." (more)
Key Phrases: software products companies, software product sales, software entrepreneurship, Business Objects, United States, New York (more...)

Editorial Reviews

From Publishers Weekly
Cusumano, a professor at MIT's Sloan School of Management and coauthor of Microsoft Secrets, offers a comprehensive overview of the software business and how the right approach is key to the success of technology companies. Cusumano first identifies the key distinction between software and other businesses. In fact, he believes it is unlike every other business because software doesn't have one purpose but becomes whatever function it is handling for a particular customer or company. As a result, software companies must sell both products and services, according to the author. The two typical ways software companies operate is by getting the lion's share of revenues from new product sales or via IT consulting. The third way is what the author calls "hybrid solutions companies—software firms that have some new product sales, but derive as much as 80% of their revenues from services and "maintenance." However, what's essential for company success in today's rapidly changing technological marketplace is having sufficient flexibility to change to meet customer needs. Citing both real companies including IBM, Netscape, etc., along with academic studies, Cusumano describes the changing face of the software industry over the past two decades. The writing is coherent and, given the somewhat technical subject matter, surprisingly graspable even for technophobes. Still, this is a niche book, apt to appeal to people involved in the world of software, rather than a general business audience.
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

Product Description

The world's leading expert on the global software industry and coauthor of the bestseller Microsoft Secrets reveals the inner workings of software giants like IBM, Microsoft, and Netscape and shows what it takes to create, develop, and manage a successful company -- in good times and bad -- in the most fiercely competitive business in the world.

In the $600 billion software industry it is the business, not the technology, that determines success or failure. This fact -- one that thousands of once glamorous start-ups have unhappily discovered for themselves -- is the well-documented conclusion of this enormously readable and revealing new book by Michael Cusumano, based on nearly twenty years of research and consulting with software producers around the world.

Cusumano builds on dozens of personal experiences and case studies to show how issues of strategy and organization are irrevocably linked with those of managing the technology and demonstrates that a thorough understanding of these issues is vital to success. At the heart of the book Cusumano poses seven questions that underpin a three-pronged management framework. He argues that companies must adopt one of three basic business models: become a products company at one end of the strategic spectrum, a services company at the other end, or a hybrid solutions company in between. The author describes the characteristics of the different models, evaluates their strengths and weaknesses, and shows how each is more or less appropriate for different stages in the evolution of a business as well as in good versus bad economic times. Readers will also find invaluable Cusumano's treatment of software development issues ranging from architecture and teams to project management and testing, as well as two chapters devoted to what it takes to create a successful software start-up. Highlights include eight fundamental guidelines for evaluating potential software winners and Cusumano's probing analysis, based on firsthand knowledge, of ten start-ups that have met with varying degrees of success.

The Business of Software is timely essential reading for managers, programmers, entrepreneurs, and others who follow the global software industry.

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Product Details

• Hardcover: 352 pages
• Publisher: Free Press (March 2, 2004)
• Language: English
• ISBN-10: 074321580X
• ISBN-13: 978-0743215800
• Product Dimensions: 9.1 x 6.3 x 1.1 inches
• Shipping Weight: 1.3 pounds (View shipping rates and policies)
• Average Customer Review: 4.3 out of 5 stars See all reviews (28 customer reviews)
• Amazon.com Sales Rank: #33,465 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

27 of 28 people found the following review helpful:

5.0 out of 5 stars Software Entrepreneurs - Don't reinvent the wheel., April 4, 2005

By	Michael Davis "www.byvation.com" (Arlington, TX) - See all my reviews (REAL NAME)

---> To swing for the fence, entrepreneurs must avoid the shark-infested red water and sail into the deep blue sea.

If you're even thinking of creating a software startup, I highly recommend you read The Business of Software as soon as possible. Doing so will save you much pain and suffering from senseless mistakes. When there is such a large body of existing knowledge, there is no cause for trial and error mentality. There's plenty of other opportunities for trailblazing. Read this book as a bare minimum before starting your venture.

Cusumano, offers an in depth study of what it takes to succeed in software. Of particular value are critical questions to contemplate:

1) Do you want to be mainly a Products company, or a Services company?
2) Do you want to sell to Individuals, or Enterprises | Mass market, or Niche market?
3) How horizontal (broad) or vertical (specialized)is your product or service?
4) Can you generate a recurring revenue stream that will endure both good and bad times?
5) Will you target mainstream customers, or do you have a plan to avoid the chasm?
6) Do you plan on being a Leader, Follower, or Complementor?
7) What kind of character do you want your company to have?

Cusumano also offers eight Critical Success Factors that are necessary for Software Start-ups to succeed as a business and raise investor money:

1) Strong Management Team
2) An Attractive Market
3) A Compelling New Product, Service, or Hybrid Solution
4) Strong evidence of Customer Interest
5) A Plan to Overcome the "Credibility Gap"
6) A Business Model Showing Early Growth and Profit Potential
7) Flexibility in Strategy and Product Offerings
8) The Potential for Large Payoff to Investors

Don't reinvent the wheel. Read this book as soon as possible, preferably "before" you create that software venture you so boldly dreamed.

Michael Davis, Byvation

31 of 34 people found the following review helpful:

4.0 out of 5 stars Solid Overview of the Software business, July 4, 2004

By	William McMichael (Audubon, NJ USA) - See all my reviews (REAL NAME)

Cusumano presents a solid overview of selected topics relevant to the software business. He focuses on the following topics: strategy for software companies, best practices in software development, and software entrepreneurship. He makes use of case studies and provides insight on the inner workings of Microsoft, IBM, Netscape, Business Objects, and i2. In the chapters discussing strategy, he analyzes product versus service focused organizations. He also discusses market segmentation and whole product solutions as described in Geoffrey Moore's "Crossing the Chasm." With regards to best practices in software development, much of the material is from "Microsoft's Secrets." Cusumano describes the pitfalls of waterfall development and describes the key concepts of Microsoft's synch and stabilize technique. A few pages are devoted to outsourcing and specifically the rise of the Indian software business. I would have expected more analysis on some of the newer agile development methods -- such as XP. Lastly , Cusumano covers software entrepreneurship. He provides an eight point framework to evaluate a software start up. Does it have the following characterisitcs ?
1. Strong management team
2. Compelling new product, service, or hybrid solution.
3. Strong evidence of customer interest
4. An attractive market
5. A plan to overcome the credibility gap.
6. Business model showing early growth and profit potential
7. Flexibility in strategy and product offerings
8. Potential for large payoff to investors.
The text also has a useful appendix with income statement analysis of Business Objects and i2 , and growth comparisons between various organizations. There is nothing in the text I would consider groundbreaking, but it is a solid overview of the software business appropriate for software managers and entrepreneurs.

16 of 18 people found the following review helpful:

2.0 out of 5 stars Software reality, April 12, 2005

By	Sabaziotatos (Silicon Valley) - See all my reviews

I found little original material in this book.

Chapters 1-3 cover many issues (products vs. services, horizontal vs. vertical markets, enterprise vs. consumer customers, platform vs. complementor, focus on customer solutions rather than focus on bleeding edge technology, commercial vs. open-source, too many software companies,) that are well known to industry insiders. Is it news that product-based software companies generate gross margins in excess of 90% or that many of these same companies (for example, those without defensible intellectual property or a dominant market share) eventually deteriorate into service companies with thinner margins? Is it news that some software companies sell software to consumers, whereas others sell software to enterprises? For such insights the good professor pulls down the big consulting bucks and is seated on Boards of Directors?

Also, in Chapter 3 Professor Cusumano implies that Microsoft makes a practice of building incompatibilities into new software releases for financial gain: "In some cases, software companies can practically force consumers and enterprises to upgrade their software ... as they build in incompatibilities with older file formats or at least make old software programs difficult to use with new versions of the same programs. Microsoft did this brilliantly ..." In my opinion, Microsoft has done a better job than just about any other software company at ensuring that new versions of software are compatible with old versions. Consider, as just one example, the PINVOKE interoperability mechanism found in .NET, which supports invocation of old unmanaged code from the .NET managed environment (backwards compatibility) as well as invocation of new managed .NET code from an unmanaged environment (forward compatibility).

Chapter 4 begins with the following sentence: "Software development is the core technical activity for all companies in the software products and services business." By the way, did you know that the core activity of GM and Ford is to make cars? The chapter then goes on to inform us that such Microsoft development practices as modular design, a deadline for daily code checkins, a nightly build, automated regression testing, immediate fixing of all changes that break the build, regular code freezes, and an iterative approach to design and implementation are all key parts of an advanced and sophisticated software development process. Many software companies besides Microsoft have had these practices in place for years. What is new here? The text of this chapter is also riddled with such useless advice as: the software development process should be structured, but not too structured.

Chapter 5 is titled "Software Entrepreneurship: Essential Elements of a Successful Start-up." What I came away with is that a mere 6 in 10000 business plans end up going public and when they do, over 95% of the equity is held by the VC's. The fact is: in these days of behemoths like Microsoft, Oracle, and IBM, a software startup has about as much of a chance of hitting it big as an oil refining startup had in the 1880's after John D. Rockefeller, the first incarnation of Bill Gates, "combined" the oil industry (see Daniel Yergin's "The Prize"). As Larry Ellison frequently reminds us, consolidation is the name of the game these days in the software industry. In Chapter 3, Professor Cusumano himself states: "It is also probably true that there are now too many software companies in the world by a factor of three or more, and far too many of them are public and have received venture capital funding." In light of this fact, Professor Cusumano perhaps should not have devoted an entire chapter to software entrepreneurship. A better use of his time might have been to devote a chapter to exploring how several companies of moderate size can be consolidated to form a software enterprise with enough heft to begin to compete with the behemoths. There are many interesting issues in this area, such as: how one can identify a constellation of companies that would make good candidates for such a consolidation; how one can resolve the inevitable control issues that arise between the respective BOD's; how one can address post-consolidation issues, such as the integration of software code bases or sales forces; how one can successfully manage the layoffs resulting from a consolidation. Given the pending merger of Symantec and Veritas, it seems the topic of consolidation and M&A should have been discussed in greater detail. For example, consolidation of most of the mid-sized companies in the business intelligence market (for example, HYSL, BOBJ, COGN, MSTR, INFA) or the application server/EAI market (for example, BEAS, TIBX, WEBM, VITR) would create leaner and more viable entities. The pending buyout of Sungard Data Systems by a group of private equity firms suggests one way in which this could happen: a consortium of private equity firms could assemble the considerable capital required to buy out a number of mid-sized firms in one market and then stitch them together. The sooner the software industry leaves behind bubble dreams of IPO's, consolidates, eliminates duplicate product offerings, and sheds the armies of redundant workers, the sooner the industry will return to profitability and healthy growth.

Chapter 6 consists of a set of case studies of software startups. This chapter reminded me that software professionals (even "industry and academic luminaries") almost always fail to understand that just supplying cool, flexible technology to their customers does not constitute a profitable business model. Take the case study of firstRain, whose products enable "real-time business activity monitoring" (a buzz phrase, BTW, that I have heard dozens of times in the last couple of years). Professor Cusumano comments: "I find their solution for creating applications for handheld devices compelling, but ... there is the issue of what to do with some interesting technology." The case study of H5 reveals the same problem: "[Like] firstRain, [H5] had developed a novel technology in search of an application." As an antidote to their fascination with interesting technology, software entrepreneurs should read Jim Collins' book "Good to Great:" "[Those executives who transformed their companies from good businesses into great businesses] displayed a remarkable discipline to unplug all sorts of extraneous junk ... Across eighty-four interviews with good-to-great executives, fully 80 percent didn't even mention technology as one of the top five factors in the transformation." Could the reason why enterprise software capex has plunged so precipitously over the last several years be that enterprises have been "unplugging extraneous junk" in the form of cool, but non-essential, software packages (AKA "shelfware")? The case study of NetNumina, on the other hand, reminds us of how terrible software professionals have been at valuing their companies realistically: barely profitable and with revenues of $14.4M in 2000, NetNumina was offered $50M by BEA to sell out; "But after experiencing a $200 million IPO with OEC, [management declined the offer. ... Now] the founders and holders of common stock and options will probably never see any money from this venture. ... The founders are now either gone or reduced to salaried executives." On second thought, part of BEA's $50M was probably to be paid in inflated BEA stock, so the deal might not have been so good after all. [BTW, my advice to H5 is that they should seek to be acquired by FIC, although recently they have found an excellent application for their technology in the automated review and characterization of corpora of legal documents.]