From services to product
Over the years, I have worked with several web and new media services shops. The common complaint is “life would be great if it weren’t for these darn clients”. It’s true that clients can be frustrating, especially when your work is creative. Maybe they don’t get your vision. And they likely cannot make informed choices about their web infrastructure, architecture, etc.
For these and other reasons many web design shops dream of some day selling products instead of services. 37 Signals has become the poster child for this transition, even writing a book about it.
I recently had a chat with Mike McDerment, CEO of Freshbooks, a company that has successfully made this transition from services to product and asked him what advice he would give others who want to go down this path. In no particular order, here was Mike’s advice:
Discipline: You need to be very disciplined, saying “no” to services work so you can dedicate resources to developing a product and getting it out in the market. Don’t take on new clients. Start making transitional arrangements so that you don’t leave clients high and dry.
People: Not everyone can make the transition. People who might excel in a services agency might not be right for a software shop. You need to decide who should stay and who should go. This can be a painful process. But make the tough calls early on.
Commit: To make this transition, you need to cannibalize your services business – stealing people and cashflow to get this new product side up and running. As the founder or leader, you need to commit yourself fully to this new direction. That means you need a trusted team member to keep the services side running until you’re ready to shut it down.
Take your time: For those people who you think can stay, bring them over one at a time to make sure it works, that they can adapt to the new role and excel in it.
Mike and I both see several benefits of starting a product shop when you have an existing services business:
Cashflow: You have a profitable source of money to fund this. One that doesn’t require you to sell part of your company.
Talent: Ideally, many of your existing team members can make the transition. So, you start off with people whom you know and trust. You know what they can and cannot do.
Customers: Ideally, some of your existing services clients can become customers for your products – giving you early sales $ and feedback.
Experience: In stark contrast to the developer in his basement, someone starting a software shop from an existing business already knows how to sell and satisfy customers, recruit talent, manage projects and deal with all the back office hassles that go into running your own business.
The current economic climate might actually be a great time to make this transition. Companies may be trimming their budgets for discretionary new media projects. But, they are always looking for software that offers tangible, quantifiable benefits.
One word of advice though – if you’re doing this because you want to get away from demanding clients – I’ve got news for you: software customers are every bit as demanding.
Hey Allan. That was a good conversation with Kevin from Sigma. In this post, the focus was mainly on web services shops becoming software companies, though the takeaways can be applied more broadly. I have a follow up post written on the train back from your dinner expanding on the conversation with Kevin about services and the positive role they can play for a tech business. I'll post that one shortly.
This is a great follow up to the discussion we had at the Founders and Funders table with the VC from Boston who was surprisingly positive on services oriented companies. I think a hybrid approach can provide a perfect balance but it is important to lead with the product and provide professional services on top of that. The professional services can often account for 50% of the revenues for a young company and that is nothing to sneeze at. Our Boston VC colleague had another interesting angle on this. He suggested that providing services to the large customer is an opportunity for them to tell you exactly what they want. It is therefore a great way to get to know your customer better and build a strong relationship. Of course, this guy knew this because he had done it himself as an entrepreneur before he started with the VC. Up until this point, I had not boiled in the possible professional services revenues but I'm about to rectify that.