In-Depth

Taking the Plunge

Most service providers have no shortage of great product ideas. Here's how to make a big splash as a software vendor.

At some point in your career as a service provider, you're likely to come across an idea for a product that you suspect would really resonate with customers. The idea might come from a customer pain point that you hear about again and again, or it could spring from some new development that creates opportunity, such as the corporate reforms mandated by the Sarbanes-Oxley Act of 2002. It might even stem from a requirement that was there all along, but is suddenly getting more attention -- for instance, disaster recovery after Hurricane Katrina.

Whatever the genesis, if you're thinking of taking the leap from service provider to ISV, you'd be wise to heed the advice of those who have done so before you.

Before turning to their examples, though, you must assess whether your idea is a viable one, which is far from a scientific endeavor. Once you've determined that the idea will work, you'll need to decide whether it warrants establishing a new company. You'll also need to rethink your approach to software development (if you even have one). Count on giving sales and marketing a makeover as well, because relying on relationships and word of mouth will no longer cut it. And be prepared for a potentially lengthy period when you've got little to no revenue coming in -- perhaps the toughest hurdle of all.

However, the rewards of making the switch to products can be enormous. If your idea is a winner, you'll be looking at fatter profit margins than most service providers can ever hope for. Case in point: Bluespring Software Inc., a Gold Certified Partner based in Cincinnati, is on pace to grow revenue more than 400 percent this year, its fourth since making the transition from service provider to ISV, says Jeff Mills, vice president of channel development and partner enrichment for the provider of business process management software. With that revenue generated largely from software licenses rather than services, and most sales coming through partners, there's no need for Bluespring to maintain a large services organization -- and that translates to fatter margins. Jason Liu, CEO of Intrinsic Technologies LLC, a Gold Certified Partner based in Lisle, Ill., puts the margin figure at 80 percent to 100 percent for the software part of his business.

Assessing the Opportunity
Intrinsic was a regional systems integrator when Liu was hired in 2002 (for a company profile, see the May 2006 Partner Spotlight, "Attitude Is Intrinsic"). Over time, the company had created a number of tools that its employees used to deploy software more quickly. Liu saw an opportunity to turn those tools into products that other systems integrators and end users could employ. In the process, Intrinsic would get a more predictable revenue stream from software maintenance contracts and usage fees.

"One of the challenges in the services business is that you have to reset your revenues every year," Liu says. "I liken it to a treadmill." As of June 2006, about 18 months after Intrinsic began selling software, such sales accounted for about 15 percent of the company's revenue. Long-term, Liu wants the split to be 50/50 between software and services. "We want to continue our services business -- it's a strong business and we're good at it," he says.

Others cite epiphanies that led them down the product path. For Richard Schwartz, CEO of Technelogic Corp., a service provider and Gold Certified Partner based in San Antonio, Texas, that epiphany was the devastation that Hurricane Katrina wrought, particularly the destruction of the building housing his uncle's law firm in New Orleans, which scattered the staff to locations in eight states. Schwartz formed a new company to offer a software-based hosting service centered on virtual servers, along with virtual desktops, that enable employees to see all their applications from wherever they log in -- a capability that's especially crucial when employees are displaced from their offices and homes. Now he's targeting the service to financial, legal and other companies in southwest coastal regions, with plans to expand to California.

Kurt Reiter, president of Intellagent Solutions, a Leesburg, Va.-based service provider specializing in BPM and customer relationship management, had his flash of insight while attending a Microsoft "Go Vertical" workshop last year. Reiter, whose company is a Certified Partner, realized that nearly every BPM and CRM project involved document scanning. He figured that the simplified scanning software his company had developed for a couple of clients might have wide appeal. He has since launched the software as a product and is transitioning out of the service-provider business (see our June 2006 Partner Spotlight, "Market Shift").

To determine whether your idea will have enough widespread appeal to fly as a product, start with your own staff. "Make sure the folks in the field overwhelmingly see the problem among customers and agree that it's something you should build," says Andrew Levi, CEO of Aztec Systems Inc., a Gold Certified Partner in Carrollton, Texas, that focuses on infrastructure, Microsoft Business Solutions and custom development. In 2002, Levi created a new company, Boardroom Software, to sell financial software, with the initial product being a tool to help companies manage employee stock options. Before launching Boardroom, Levi also vetted the idea with other consultants in the Great Plains, Solomon and CRM business. And, of course, he also ran the idea by customers.

"The most important thing is to get a consistent, enthusiastic response from existing clients," he advises. "People vote with their money. If you hear, 'If you had that, I would buy it,' then it's probably a good idea."

Setting It Up
Levi says a couple of factors play into the decision of whether to launch a new company to market your product. First, is the product consistent with the market strategy for everything else you do? If it's part of a conversation you're going to have with most customers anyway, you may not need to create a separate entity. That's essentially the situation that Liu is in, given that his SWIMAGE product has become a differentiator for Intrinsic and is part of its marketing message.

If the marketing plan for the product is widely divergent from that of your existing company, it's best to create a new entity, Levi says. Similarly, if you need to raise money for the launch, as Levi did with Boardroom, you'll definitely want a separate company. "Investors don't like a muddy portfolio," he says.

Technelogic's Schwartz says his partner account manager (PAM) advised him to create a new company to sell his virtual hosting and backup service. Microsoft likes it when a company can define specifically what it does, and Schwartz agrees, noting that it took him time to refine Technelogic's market focus. "We didn't want to lose our identity," he says. The new company, called Catanae LLC, from the Latin root for "link," was scheduled for launch sometime this summer.

Bluespring and Intellagent, on the other hand, simply changed the focus of their existing companies. In Bluespring's case, its BPM solution was developed mainly to support a major telecommunications service provider. When that company was acquired in late 2002, the company decided to shift gears and become an ISV. Similarly, Reiter says, Intellagent is gradually ceasing its service provider business as it lines up partners to sell its scanning software.

Meeting the Development Challenges
Intellagent is also using the same software developers who worked for its services business to develop the product, Reiter says. While acknowledging that the ideal situation would be carving off some staff to focus solely on the new product -- which is, in fact, the long-term plan -- doing so just isn't feasible yet. So he's treating the product development as another project, noting that his developers are used to working on multiple projects at once. "For the most part, it's working out OK," he says.

When Liu was looking to turn his developers' collection of scripts into a product, he first hired some consultants with .NET experience and tried to do the job on a part-time basis. "But it became clear that we needed to split off the product business and hire dedicated software developers," he says.

Although still part of Intrinsic, the product group now has its own profit and loss (P&L) responsibility, he says. "To be really successful, we believe you have to treat it as a standalone business and commit development and product management resources." Schwartz opted for a combination of full-time and contract developers for Catanae. He researched development options in India, but couldn't get comfortable with the quality and logistical challenges, particularly the time difference. He wound up hiring two full-time developers, but the bulk of the work will be done by contractors in Mexico, where he found rates comparable to the Indian alternatives but with better-qualified developers. "We're talking Ph.D.s," he says.

Selling in New Ways
Two new sales people are also dedicated to Catanae and Schwartz says the requirements for hiring them were much different from those who work for his service company. Catanae is essentially selling software as a service, with well-defined functions and prices. He finds services more challenging to sell. "It has been easier to find sales people who can sell software than those who are good at selling intangible services."

Liu agrees that software requires a different sales approach, and different skills. But given that his software typically comes as part of a package with services, he calls it a solution, as opposed to a pure service. In a services scenario, the customer typically dictates what the project entails and the company offers a set of services and consultants to address that request. Solution selling, on the other hand, starts many steps earlier, he says: "Instead of assuming the answer, you start with questions like, 'What's your pain? What's your need?'"

Another difference is the amount of collateral that product vendors require, including data sheets, white papers, customer references, ROI models and competitive analyses. Looking back, Liu wishes he'd assembled all of that earlier in the process so that the effort would have more traction early on.

If you opt for a channel-sales model, that comes with its own learning curve as well as benefits. For instance, Bluespring's BPM software is highly flexible, which is both good and bad news. It's hard to build a sales strategy around the broad idea that "you can do anything with this technology," Mills notes. A better approach: Apply expertise and use the tool to solve specific business problems, such as a claim adjudication process or loan processing. "We could either build staff with a bunch of subject matter experts, or partner with people who have that expertise," he says.

Bluespring chose the partner model and now has six employees dedicated to managing its channel program. Mills notes that it's tough to find the right people for those jobs because they must be technically proficient with project management experience and business acumen. Levi agrees, and adds that it's not good enough to hire someone with channel expertise; you need expertise in the particular segment that your company is attacking. "They need the right Rolodex," he says.

Surprise, Surprise

We asked service providers to describe the most pleasant surprise they experienced after making the switch to an ISV:

"Getting checks in the mail. That, and the satisfaction of seeing the excitement that other people have when they see our product."
-- Kurt Reiter, President, Intellagent Solutions LLC

"We're finding that there is a real need for [our product] in the market. It's nice to know you haven't gone down a dead end road.... And the sales cycles tend to be shorter than they are on the services side."
-- Richard Schwartz, CEO, Technelogic Corp.

"The strategic choice we made [in late 2002] to build on .NET, to build on a services-oriented architecture when people were just starting to talk about that. We were either really smart or lucky, but that has really panned out."
-- Karl Treier, CTO, Bluespring Software Inc.

"The demand, with some household, name-brand accounts saying, 'You guys really have something special.'"
-- Andrew Levi, CEO, Aztec Systems Inc.

Intellagent's Reiter notes that going the partner route adds another layer to the sales process: First, you have to sell the partner on your product, then the partner has to sell the customer. "They're not terribly high hurdles, but it's just a different experience and there's a lot to learn as you go along,"
he says.

But overall, the partner model allows a company to stay lean in terms of support staff. In fact, Bluespring has roughly the same number of employees now -- 25 to 30 -- as it did when it was a service provider. That approach can also dramatically expand a company's reach, as Reiter is finding out -- he's had partners sign up from Greece and Australia. Of course, that global reach creates its own challenge in terms of delivering products and customer support logistics across dramatically different time zones.

Massaging the Marketing
Marketing presents yet another challenge for the service provider-turned-ISV, both in terms of reach and messaging. "When you're selling purely services, it's word of mouth and direct sales," says Intrinsic's Liu. "Increasingly, we're getting leads from trade shows and from the channel," he adds, noting that the company has formal strategic relationships with five of the top 20 global integrators.

Reiter, too, has turned to trade shows such as the annual Microsoft Convergence event and the Microsoft Worldwide Partner Conference, along with direct mail and advertisements in magazines (including, in the interests of full disclosure, Redmond Channel Partner) and on the Web. "The No. 1 hurdle for us going forward is really awareness," he says. "Once people see the software, it sells itself."

To determine what message would best resonate with prospects, Aztec's Levi had lots of conversations with customers in his existing client base about their problems with managing employee stock options. "So we built a series of videos [based on] those conversations." He also determined that the primary target for the Boardroom product was a customer company's CFO. Borrowing a page from the AOL playbook, the company sent those prospective customers CDs offering a free, 14-day test drive of the software. The plan worked and delivered a "very high close rate," he says.

Lessons Learned the Hard Way

Partners who have made the switch from service provider to ISV offer advice to others who are considering the move.

"Make sure that what you're going to convert from a solution to a product has a large enough market and the product is differentiated within the market."
-- Karl Treier, CTO, Bluespring Software Inc.

"Have a well-thought-out revenue transition plan and employee-retention plan."
-- Jeff Mills, vice president of channel development and partner enrichment, Bluespring Software Inc.

"Don't go at it blind. Make sure you have friends or confidantes you can bounce ideas off of."
-- Richard Schwartz, CEO, Technelogic Corp.

"Plan on the product taking two to three times longer than you thought it would to really take off and build momentum."
-- Kurt Reiter, President, Intellagent Solutions

"Be prepared for the distraction that the transition can take and the amount of financial investment it takes to be successful."
-- Andrew Levi, CEO, Aztec Systems Inc.

"Don't try to straddle [the service provider and
software businesses]. If you are going to sell software, you have to make a real serious financial and
organizational commitment."
-- Jason Liu, CEO, Intrinsic Technologies LLC

Hurdling the Biggest Barriers
Asked to pinpoint the toughest part of the transition from service provider to software sales, Mills and Liu both cited lack of revenue during the startup phase. "The first 18 months is pure investment in building out the software. You have to take the profit from your services business and use it to fund the software business," Liu says. "That's tough to do. Service providers aren't used to operating like that."

Levi says his greatest struggle, once the new company started gaining traction, is keeping up with and prioritizing feature requests. The temptation is to load up the product with lots of features, but the trick is to hone in on the ones that people genuinely need. "What's 'gee whiz' and what are we losing business over?" he says in summing up the dilemma. "You have to remind yourself not to get too crazy."

Meanwhile, for Reiter, the greatest difficulty is waiting. "It's certainly taking far longer for the product to really take off than I originally anticipated," he says. "You need patience, which I've never had. I'm not sure I have it yet."

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