Startup

"Killzone" Economics. Why You Should Care.

Decreasing interaction costs and sublinear enterprise productivity could create market volatility that can be your friend, or your enemy, when building and managing your enterprise. Are they your friends?

Let’s start with some definitions.

Killzone is a military term, or at the very least a gamer term (from Urban Dictionary):


“A military term describing an area of ground that is well defended, possibly including pre-sighted machine guns, mortars, artillery, as well as a variety of obstacles such as razor wire and tripflares. (Weapons will be pre-sighted to these obstacles, as approaching troops will get caught in them, making them ideal targets.) This creates a literal "killing zone," hence the name.”


Clearly from that definition, this is not somewhere you want to end up as a company. Your odds of surviving a trip to the Killzone are low.

To understand interaction costs, you need first to understand transaction costs. Transaction costs, which were the focus of Ronald Coase’s Nobel Prize winning work in the 1930’s, include the costs related to the formal exchange of goods and services between companies, or between companies and customers (ie. How much does it cost me as a company to sell you, the customer, my goods or services?).

These costs play a critical role in determining how large your firm can grow. Coase’s work included a linkage between transaction costs and the size of a firm. Simply put, Coase’s Nature of the Firm suggested that a firm will continue to grow to the point where an internal transaction can be outsourced more cheaply than if executed within a company. When a transaction can be accomplished more cheaply outside of the firm, there is no incentive to continue growing.

Interaction costs are now more widely used than transaction costs as they include transaction costs, but also add the costs of exchanging ideas and information. Thus they cover a more full picture of economic interactions between companies and their customers. Interaction costs are comprised of search, information, bargaining, decision, policing and enforcement costs. As more and more work is information related in our economy, interaction costs can be incredibly important to watch and manage.

Most importantly perhaps, interaction costs are exactly the kinds of costs that are rapidly decreasing due to the ubiquity of connected devices and the growing power of functionality facilitated by this connectivity.

Now for sublinear enterprise productivity. Wha? Yes, sublinear enterprise productivity. In short, this refers to some interesting work done by Geoffrey West and his collaborator Luis Bettencourt recently where they discovered when studying 23,000 publicly traded companies, that as the number of employees grows, the amount of profit per employee shrinks. Corporate productivity then, was shown to be entirely sublinear. This should not be taken as the last word on the topic, but they are interesting results. In particular their assertion that, “the bleak reality of corporate growth, in which efficiencies of scale are almost always outweighed by the burdens of bureaucracy.” Furthermore, they go on to state that, “the inevitable decline in profit per employee makes large companies increasingly vulnerable to market volatility.”

So what if your firm is experiencing both decreasing profit per employee from the growth dynamic described by West and Bettencourt, and is also seeing interaction costs drop as value chain activities migrate more to information-driven interactions so as to be more exposed to interaction cost decreases? Wouldn’t that lead to even more volatility? Wouldn’t that that promote unequal rates of change inside and outside of companies?

It’s a hypothesis at this point. And it’s probably not original. I’m inclined to invoke Bob Sutton’s law in this regard, “If you think you have a new idea, you are wrong. Somebody else probably already had it. This idea isn't original either; I stole it from someone else."



 

If there is any validity to the hypothesis, it might suggest there is a systemic way to identify which markets and companies are ripe for disruption. If interaction costs are dropping around you in your market, and your profit per employee is declining, perhaps it’s time to think about disrupting yourself before someone else does? At the very least, you’d better get a grip on your interaction costs so they are in line with the market.

If you’re an insurgent, this seems to be a particularly good time. Dropping external interaction costs and decreasing profit per employee might suggest a market which is stumbling into your Killzone.

 

[Author’s note: I am not an economist. The post above is based on a hypothesis only. The underlying science surrounding transaction and interaction costs and sublinear enterprise productivity are well-known and evidence-based to the best of my knowledge. However, my leap to a meaningful connection between the two is only hypothetical at this time. Contributions and refutations are welcomed. My goal is to explore some of the possible underlying reasons (outside of the current political and monetary policy upheaval, of course) for what I perceive to be the current economic conditions for enterprises: characterized by hypercompetitiveness and increasingly volatile markets.]

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The Enterprise Software Sh*t Show

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Happy New Year.

I'm getting all the same "really excited it's 2011" tweets, blog posts and emails you are. I'm really pleased that so many people are looking forward to the new year. It's also cool to see others being zen and thankful as well for what 2010 brought them...we all have a lot to be thankful for.

I'm an optimist at heart...really...I don't think you can be a true entrepreneur if you're not an optimist. Sometimes, you have to smoke your own rope just to keep going. But after 20+ years of doing this, I have also developed a fair degree of "cautious optimism" and a healthy degree of paranoia (see Andy Grove). My personality definitely consists of large doses of both Grumpy Old Men and the Dude (minus the drug abuse, "man").

So, it strikes me as somewhat lighthearted, and perhaps a bit foolish that I see signs of bubble-like frothiness in the software business again. I'm no Noriel Roubini, but things feel a little wonky to me.

Here's why my knickers are bunching-up:

The Consumerization of Enterprise Software
It used to be that the software we employed for work was dictated by our organization, and the procurement process was somewhat orderly (read slow and cumbersome) and predictable. Selling into these organizations required skill, patience and experience (and the resulting bag-carrying, highly-commissioned salesperson).

Just like other industries that are being upended (music, publishing, television, advertising, etc.), enterprise software is changing due to software now being pulled into the organization by end-users and adopted at work because of the ease of acquisition/adoption/use and the low (if any) cost.

This represents a complete 180 from the "olden days" (as my 9 year-old likes to say). Or, as I've heard a little too much in the past year a "total 360." [Never quite understood how people miss the fact that a doing a 360 represents landing where you started...oh well, another blog post perhaps.]

Generational Differences within the Enterprise
The web has been around long enough now that you can see clear differences between people in their 40's and 50's and the next youngest cohorts. Growing up with the personal computer (Jesus, does anyone call it that anymore?), the web, mobile phones, Skype, and the like have created different expectations of autonomy, privacy, engagement, leadership...you name it. And settling for the previous era's enterprise software tools doesn't sit very well.

Minimum Viable Products for the Enterprise
While there is a huge opportunity to revisit mature enterprise software segments to gut them of their feature-fat and value-lacking complexities, there still needs to be enough thought and base-level of feature functionality so as to actually deliver meaningful value for the organization. I love the simplicity of many of the mobile and web apps I'm seeing out there today, but if I have to cobble 10 of them together to actually get something useful done at work, then I think we might be trending a little too far toward the Minimum part of Minimum Viable Products.

Importance and Influence of Mobile and Tablet Software
I think I read somewhere that 50% of Fortune 500 companies had purchased iPads for piloting enterprise implementations in 2010. Not sure of the source, or even if that's true. But if it is remotely correct...holy flying pails of cow dung.

Regardless of the veracity of those figures, there's no doubt the take-up of mobile applications has been huge, and the influence and importance of that movement has huge implications for enterprise developers like us.

The Insignificant (and continuously falling) Barriers to Market Entry
Given the global level of connectivity and the (seemingly) zero cost of the tools of production it doesn't take much for someone to launch themselves into the software business. Any barrier to entry that used to exist 10 years ago (other than market knowledge/subject matter expertise) should probably be seen as zero.

The Instability of the Global Economic Recovery
Okay, I'll admit it. Sheepishly. I have some post secondary education in Economics. Fairly useless mind you, but some theoretical understanding (hence useless) of how economic systems are supposed to work. And this makes me very nervous about our current global situation. I just don't see how societies around the world can amass such huge levels of personal and government debt without long-term implications. I guess I skipped that part of my undergrad classes.

Despite the above, there are many reasons to be optimistic about opportunities in the Enterprise Software market. But I think you'd be equally daft to ignore the signs that it isn't all rosy and there are significant challenges to succeeding in these turbulent times.

So, a cautiously optimistic Happy New Year to my Enterprise Software brethren.

(Wow, that was a crazy stream of consciousness post....I'll have to elaborate on each of these items in future posts as I've just skimmed the surface).

 

 

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"Social Business?" WTF?

This one cracks me up. Yes, I'm aware that "marketing" types love to attach themselves to catchy, hip phrases to get attention for the products they work on and companies they work for, but this one is pee-inducing. "Social" business. ROFL.

Are these people 10-years old? Actually, my 10 year-old daughter wouldn't even use such a phrase. She knows better. When exactly did business stop being a social enterprise and start being a "Social Enterprise?"

This will have to be put right up there with other idiotic marketing references like "viral videos." This reeks of a trend of glossing-over the fact that your cutting-edge technology solution isn't really a solution to any real problem, it's just technology looking for a buyer who is a sheep. Hate to break it to you technology developers and marketers...that's not a good strategy. If I need to explain why...well, then you're pooched.

Probably just me though...haven't had my second coffee yet.

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Did We "Launch" Yesterday?

Nope. We didn't "launch" yesterday.

We only have one excuse. We're not going to "launch" at all. We've decided to do our best to keep to the best practices espoused in the Lean Startup/Customer Development frameworks and start rolling-out the application first to a private beta group.

There was an excellent presentation I read the other day by one of the founders of Xobni, Matt Brezina. It is aptly entitled, No One Cares About Your Stupid Little Startup. In the presentation, Matt explains that Xobni (inbox spelled backwards), went through the following stages over a 3.5  year period:

Stealth - 1.5 years
Private Beta - 2 months
Nerd Scarcity - 3 months
Invite Beta - 3 months
Iteration - 3 months
Public Beta - 1 year
Exit Beta/GA (General Availability) - 3 months
Paid Drivers (Growth to Profitability) - 6 months

Could this be right? 3.5 years? Oh god, say it isn't so? So far, we're tracking exactly to their timing with our Stealth operation being 1.5 years old. Eeesh.

One step at a time, I guess. On to the Private Beta.

 

 

 

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I Suck at MVP

[WARNING: Stream of consciousness blog post. Reader discretion is advised.]

I'm pretty sure I understand the concepts and frameworks; both Customer Development and Lean Startup. And we try to incorporate their ideas (in our own way - for our business/market/product). But I'm left feeling like we're completely missing the boat. Feeling guilty because we're not following the "canonical" examples.

It would be nice if I could pass it off as my innate Catholic (or insert other more suitable religious reference) guilt. But I'm not Catholic. Just can't seem to shake the feeling that we're not doing it "right" way.

I've read the books and keep up with the blogs:

Four Steps to the Epiphany
Steve Blank
Startup Lessons Learned
Certain to Win
The Toyota Production System
Agile Development
500 Hats

I'm part of the right group (Lean Startup Circle) and I try to post something of value so I don't end up just being a lurker and leeching ideas from everyone else. I've watched all of Steve Blank's, Eric Ries' and Dave McClure's presentations on the web. I've watched them so many times, I could probably tell you what version of the presentation they are presenting and in roughly what time period they've made adjustments and refinements.

I try to follow the right people on Twitter:

Sean Ellis @seanellis
Dave McClure @davemcclure
Hiten Shah @hnshah
Andrew Chen @andrew_chen
Sean Murphy @skmurphy
Venture Hacks @venturehacks

And I know there are exceptions to when you need an MVP and when you don't. I think I understand that an MVP isn't a minimal product. I get that people use the MVP idea to help build a great product, increase the chances of success or launch, and maximize the information about customers per dollar spent...but I still feel like I'm building too much when I hear countless stories about "we just put up a web page with some prototype screen shots and then ran AdWords campaigns...split test this and that...built three features, yada yada...success!

Seriously? And people paid you for that?

Crap. It all just feels cheap to me. In a good way.

Believe me, I want to be cheap. I don't like spending more than 12 months on a beta and leveraging my family's financial well-being to build too much of a product when less would do...but I just can't do it. Damn.

I get that it's potentially misguided of me to assume I know what customers want. But we did "get out of the building" to test our hypotheses. We did over 100 interviews, presentations, demos...and the ideas that underpin the feature set aren't even ours! We've co-opted them from what we feel is the best research available on high performance enterprises.

Doesn't help. I still feel like we're building too much.

But I can't stop.

It's definitely more difficult because we are utilizing a foundation of code we have built in the past and invested more than 5M in. But maybe that's wrong too? Maybe we should have just built a few screens and forgotten about the industrial-strength code base we'd built. Maybe we got stuck in the Sunk Cost decision trap?

Minimum feature set...that's the goal...so you can iterate once the
minimum feature set is released...problem is I can't seem to cut any
further and we have a pretty huge feature set...am I weak, deluded, or
just obsessed about delivering exactly what I think is required?

But we haven't heard anything that tells us we're way off the map...but maybe
we're not really hearing what people are saying?...are they just being
polite because they are in my network or friends of friends....?

Perhaps it's because we're building it to scratch our own itch, and as
we use it we think "oh man, you know what we HAVE to include..."

Maybe it's because we're getting responses that range from "it's really cool, but I don't think we'd use it at our size" right up to "It's fantastic, when can I have it?"

Some people definitely already want this...the question is how many others will
feel the same? Is it tens, hundreds, or maybe even thousands? Mother...it's a leap of faith. A sphincter-puckering sized leap of
faith, actually.

Then I hear myself (in my head only fortunately) say, "stick to your vision, don't compromise, don't dilute what you think is right...did I have lunch?...jeez, that's a nice car outside my office...oh crap, where was I?"

Is it an MVP if we still have a list of 50 things we can think of that we'd like to add, but haven't?

Yeah, didn't think so.

Perhaps it's because we are good at building things and it makes us feel good...so we  just keep building instead of launching...maybe we're afraid of launching? Maybe, but we've got little choice now as we need to see if we're going to get any return on our sizable investment...there just isn't any more strap left on this boot.

My stomach is in knots...maybe I didn't have lunch.

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Forgive Me Father, It's Been 10 Years...

..since my last startup. 

Well, if you want to be precise, mercanix (mur-can-iks) is over a year old, so in truth it was 9 years between startups (and no, I haven't been lazing about - my 3rd startup is still active - so I've got a day job too). 

But now that we're almost ready to emerge from stealth mode, I must admit to some level of trepidation. Will all that Customer Development stuff we've worked through in the past year really pay off? Have we really learned the lessons from Lessons Learned? Will the "throng" of people who said they'd buy our application really plunk-down their hard-earned money (however nominal the price may be)? Can a killer dev team lead by a 40-something guy with heavy-duty enterprise experience adapt to the web 2.0 world, and all these crazy new channels?

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We're going to find out very soon. We're down to the short-strokes...December 15th is fast approaching.

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