Customer Reviews

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

5 star:		(15)
4 star:		(9)
3 star:		(4)
2 star:		(3)
1 star:		(1)

 

 

---> 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

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.

Cusumano's book is a clear and straighforward read into the basic issues that any software company should consider at their inception and as they mature.

Cusumano lays out the basic relationships between products and service very clearly - and he explores the pitfalls involved with good detail from the companies that he has advised. In this early portion of the book he also offers some very useful metrics to help provide financial sanity checks. There's an interesting "historical" chapter that follows the development of the industry, and then he delves into SW development best practices - which appears to be his particular forte. There's also a good chapter on the start-up phase sprinkled with sage advise.

My copy is full of margin notes and has already been transformed into a powerpoint presentation to share with our team.

All in all I found the book gave me a solid foundation from which to consider the SW biz. It's too easy to lose your sense of direction in this industry. Cusumano's book is like a glowing compass that illuminates the common sense dynamics driving this business. Enlightening, useful, well grounded in examples - and well written.

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.]

This review is also available on my blog: <a href="http://dlsthoughts.blogspot.com/2005/07/business-of-software.html">DLS Thoughts</a>.

I just finished reading "The Business of Software" from Michael Cusumano. Overall a well written book on the fundamentals of the software industry. The book focuses essentially on the analysis of the business model for a software company. There isn't really anything striking new in Cusumano's analysis of software companies' business model, but the author does a good job in outlining the choices offered to software companies and how their business model will have to mature as companies and technologies mature.

Essentially, there are 3 choices for a software company:

* A pure product play (Some would argue that with the advance of open source and the broad adoption that it has been getting lately, that pure plays are getting much more difficult).
* A mix of products and services.
* A pure service play.

I found very interesting Cusumano's analysis of a typical enterprise software company revenue over the course of a five year business lifecycle. For every 1 dollar of product license fees, $2.15 dollars can be derived from services and maintenance. That's more than 70% of the cumulated company revenue. In many cases, services on sold products end up being a life insurance against bad economic times. This brings some prospective to the Professional Open Source buzz. After all, a typical software company already ends up generating 70% of revenues from maintenance and services over a 5 year lifecycle. When put in this context, the changes of business model though important, appear less radical that one may have initially perceived. For those doubtful of the viability of the open source business model, I think we get some empirical data making the case for it right there.

Cusumano goes on with his analysis and show how as companies mature, they tend to move towards more of a services model and provides excellent data to illustrate his argument. As we look at the growth of companies like IBM and Oracle, more and more of their revenues are coming from services. This clearly justifies their strategy behind open source where they can capitalize on their strength in services while maximizing the use of their R&D resources.

Finally, I particularly enjoyed Cusumamo's analysis of the factors that make software startup companies successful, with great examples to illustrate his point. Cusumano basically identifies 8 key criteria for assessing software start ups:

1. The quality of the management team.
2. Whether the market is attractive and has strong potential.
3. How compelling is the offering?
4. How much interest is the offering getting from customers?
5. Is the company credible?
6. What is the business model?
7. How flexible is the management team?
8. What is the payoff potential?

A great list that applies to most business activity.

In many ways this is the book I had been trying to find for years. There are many good books on starting up companies, and high-tech companies in particular but not much good literature specifically about the software industry as a whole. This books focuses on software as a business and how the industry really works.

I am managing a start-up software business and the information in this book is invaluable as it really changed my thinking about what the company is, how it operates, and what it takes to become a success.

If you come from a technical background, and starting or thinking of starting a business, then this book is a must-read.

I read Cusumano's book recently and was underwhelmed. It's an OK overview of the software business, but I certainly wouldn't put it ahead of a book like, "Four Steps to the Epiphany" by Steven Gary Blank. My sense is that if you are motivated sufficiently to buy a book like this, you proably already know this stuff.

Even after the dot-com boom and bust, software remains the business world's glamour industry. In this insightful study, professor and industry expert Michael A. Cusumano skips the glitz and goes straight for the nuts and bolts. The result is a clear rendering of exactly what makes one software firm hit it big while dozens of others go broke. Despite a slight, occasional tendency to sound academic, Cusumano really explains why a well-run software company can be a gold mine. He carefully covers the best practices in the software development industry in depth and offers plenty of real-world case histories to add juice to what could have been a dry recitation. He even explains why you have to hold on so long when you call a mass-market software firm's toll-free number. We recommend this detailed book to software pros seeking insight into their industry, as well as to investors and to those who like inside stories about entrepreneurial adventures.

The Business of Software is an excellent read and growth tool for seasoned practitioners. Organized in three major sections it explores:

(1) Product vs. services vs. hybrid software organizations' strengths and weaknesses, and how they can change over time (think about your company...!).

(2) Software development strategies and outcomes. At first glance, this section seems less relevant - until you find yourself defending why your latest release is waaaaay late... There are some excellent ideas here that can apply to the creation and roll-out of "core" demos.

(3) Entrepreneurship - successes, failures, and ongoing question marks - the author explores what key factors contribute to the end result. The case studies at the end of this section can serve as virtual mirrors onto one's own organization.

This is good and useful reading, particularly for those who seek to move upwards in their organizations or are contemplating joining a new or emerging company.

Cusumano keeps surprising me with the timeliness of the books that he has published during the years. Back in 1995 I was head of development for a software company and once I got hold of his book "Microsoft Secrets: How the world's most powerful software company creates technology, shapes markets, and manages people" I became a believer in Cusumano's work. The follow-up work from Cusumano and co-writers have become part of my software engineering and software business library. The last work from Cusumano "The Business of Software: ..." is very timely as software market is evolving rapidly towards commodity business where end user organizations expect to buy and pay for software based on different grounds and premises than before.

Cusumano's book reflects on many hot topics that EVERY software executive should be aware of like different software business models with corresponding economic metrics, setting up market segmentation with predictable revenue models, best practices in software development, outsourcing to low-cost countries like India and China etc. Also, Cusumano discusses thoroughly about software entrepreneurship and issues when setting business strategy and what impact venture capitalists could have for a software vendor. I believe that many software organizations do not understand what it really means to be run by venture capital driven Board of Directors. According to the ten case studies outlined in his work, some healthy software companies were pretty much destroyed by VC's and this is certainly not something that one should want to happen. Cusumano lists eight points that one should look at when evaluating software businesses. This was very helpful for me to reflect on and see how my company rates when evaluated against these eight points.

This book should be read by EVERY software executive that wants to be updated of what is going on in the software business. This is one of the very few available books that specifically address the needs of a software businesses and this makes this book even more valuable. Cusumano outlines ten different case studies in his book, some complete failures and some successful and each and every one of these case studies have a lesson that we should learn from. We seem to think that we have seen it all, but the best way to learn is to learn from mistakes and never repeat these mistakes. Unfortunately we tend to forget this rule and I have decided long time ago to learn from others and then apply this knowledge in my own software business. I have introduced several successful products by remembering this rule. I also recommend you to read other books from Cusumano and the experiences that he shares from tens of different businesses.