By Matthew Healey
This issue of Software Magazine is focused on the Software 500, a rank of the 500 software vendors—mostly public but some private—with the highest revenue growth for both software and services revenue. These vendors tend to be smaller companies that are growing quickly because they have disrupted a specific industry. This has a tendency to happen more frequently in software than in other industries. The main reason is the barriers to entry are generally lower for software than hardware, and software scales faster than services. Therefore, you have an industry ripe for potential disruption.
The rise of mobile devices and the lightweight applications (apps) designed for them only require server capability to increase the number of individuals and organizations trying to disrupt an industry and reap the healthy rewards of doing so.
The problem is that while it may seem easy, disrupting an industry is remarkably hard—even in software. As an industry analyst, I have seen too many companies that thought they had a solution that could disrupt an industry and grow to become the next Microsoft or Google, only to be left for dead a few years later. Most of them fell into one of three common traps.
Pick the Right Market
This may seem obvious, but too many would-be disruptors do not pick the right market. They have a tendency to look for the fast growing markets. The thought is that if the solution is getting all of the hype, then gaining market share should be easy. After all, if the market is growing at a very high rate, then clearly there is an unmet need. This is true. There is an unmet need. There are also hundreds of companies trying to meet that need. The market in question will be highly competitive and a lot of effort is required for differentiation. Also, factor in that the large incumbents—the current Microsoft and Googles of the world—are not likely to remain stagnant in the face of an accelerating market. They are going to invest by building or buying capabilities and then scale them by feeding the capabilities into their global installed base, partner channels, and sales force.
From all of the disruptors that I have seen, the most successful were not in small, fast-growing markets, but they were in big, slow-growing markets with an underserved customer base. ServiceNow is one example. They are in the IT services management market. This is not a fast growing or sexy market. It is, however, very large and the current incumbents were busy keeping up with the innovations that were happening elsewhere in IT. ServiceNow recognized this and developed a platform that could provide customers with a cloud-based solution for IT service management. They focused not on a fast growing market, but rather an underserved and ignored market.
The Technology is Not All You Need
The second trap is thinking that since this is software, all you need to do is build better software and the customer will beat down the bushes to buy your product. This is simply not true. There is a tremendous amount of inertia even in fast moving technology markets. Customers are content to continue buying from an established provider or doing things the same way that they have in the past because, while not optimal, they are good enough. Successful companies need to go beyond simply developing software or an app. They need to put in the work to build sales channels, partners, and convince customers to try a new approach.
It is the follow up work and persistence that often makes or breaks a software or app disruptor. Uber provides the best example of this post-technology effort. While I have not been briefed by Uber directly, the technology required to develop their app is not that significant. They built an exchange that matches buyers and sellers. While the app is good and functional, it is not what makes Uber successful. What makes them successful is the network of car services and end users on its platform. Building the sales staff and the network of providers was the challenge. Aggregating that many suppliers onto its platform is the competitive advantage, not the technology.
Stay Focused on Your Market
By now you have selected an underserved market and developed the beta of your software. You have done the work, or are doing the work required to build your ecosystem. It is at this point that the final problems tend to appear. This is distraction. In the rush for growth, too many disruptors stray form their core market too soon to try and expand into adjacent markets. After all, we are growing in our core, so let’s diversify into other markets as soon as we can. Diversification is not a bad thing. However, diversifying too soon is a bad thing because it takes management focus away from the core before it achieves a dominate position in the core market. In many cases it takes longer to truly achieve that position than the founder or investors think it will.
Bomgar provides an excellent example of staying focused. In a previous job I covered the software and hardware support services market. At this time I worked with Bomgar on several occasions. What struck me was the management team’s commitment to the remote support services tools market. While many of its competitors were taking similar technology into the collaboration market, the Webcast market, etc., Bomgar remained focused on remote technical support services. They built the product to provide help desk personnel with the tools that focused on their problems, rather than a collection of tools that try to be all things to all people. By not becoming distracted, Bomgar was able to continue to grow in this market. This focus gave them the number 389 spot on last year’s Software 500 ranking. This year, they move up to 343.
In my role as an industry analyst, I enjoy working with the smaller disruptor. They generally bring such energy and passion to the market. If properly directed, that energy and passion can help transform an established market. SW
Matthew Healey, principal analyst for Technology Business Research, Inc.’s (TBR) software practice, leads the firm’s SourceIT program, a research initiative that analyzes customer buying behavior by vertical industry.
Dec2014, Software Magazine