Month: March 2008

Why is innovation hard for large organizations?

I came across an interesting post on this topic, and I have to say, that I really agree with what the author, Kareem wrote. In it he mentions three key reasons for the general failure of large companies to innovate:

  1. They must protect their current business
  2. Too much bureaucracy or too many stakeholders in the process
  3. They don’t provide the proper financial incentives for innovation.

I’m sure most of us who have worked in larger companies have experienced the first two. I’ve also seen a lot written about the first two points related to big company culture, management practices etc. People today cite Apple as a great example of a company that has figured out how to deal with those two points.

I want to spend the rest of this post talking about point 3, which I think is critically important and of which I have not seen as much writing.

In any general cross-section of employees, there will be a small subset who can be deemed as truly entrepreneurial and innovative. A lot of them probably come from the Product Management and Engineering teams! And most of those people are smart enough to understand the value they can bring to a company as well as to themselves if they can deliver a successful product to market.

The problem is, in a typical large company, the ROI proposition for bringing an idea to market is completely skewed in favour of the company. Kareem says it really well in his article:

People are incredibly quick to learn which behavior is rewarded in any system. If you want to innovate, there are two options: remain in a system that pays out an annual salary and a relatively meager bonus for your awesome product. Or, strike out on your own, and build a product that might have a significant pay off, while living off savings or investment.

Now imagine a large technology company that has set aside a large pool of money for acquisitions. That number could be in the hundreds of millions of dollars or even higher. The company wants to make acquisitions that help bolster it’s current market position as well as take it into new (likely adjacent) markets.

There are probably lots of innovative startups out there, working on new products that are potential acquisition targets. Now as the company is out there evaluating the market and potential targets, and then spending big bucks to acquire those companies (likely making the founders of those companies wealthy), what are the innovators inside that company thinking?

They are thinking:

“Hey, how do I get me some of that?”

Now imagine if the company took, say, 5%-10% of that acquisition pool and used it to create a fund that would invest AND if successful reward new innovative products by employees. The structure of how this would be done would have to be worked out carefully so as to ensure transparency in the process of who got funded, and clarity in how success was measured and rewarded, but in theory it is possible.

I can think of at least one model, where an quasi-independent group would review the ideas and decide how to provide an internal equivalent to angel/seed funding to get the project to a stage where it could be evaluated in detail. This model would be no different than what one would face if they took their idea to an Angel or VC for funding.

Regardless of how it is done, there could be significant advantages for the parent company by doing this.

  • It sends a very clear message that existing employees can see significant upside if they are major contributors to success in the company
  • It significantly reduces the potential for “brain-drain” in the company, by stopping some of the best innovators from leaving to form new companies outside
  • It provides a lower cost option for the company to “acquire” new innovative products than going out to market and paying a premium for “hot” acquisitions.

The return for the employees who go this route would be lower than what they might get if they were to strike out on their own, but then again, the risks they would face would also be lower. They could leverage many of the large company’s resources as well as the large customer base of the company. While some hardcore innovators may not like this situation, I’m pretty sure many others would.

Imagine an incubator, funded by the large company (and possibly by other external investors as well) that would provide the environment for these ventures to develop, grow and ideally graduate and become successful. If the venture is one that the large company wants to acquire, they can do so relatively easily given their stake in the company. If they don’t want to acquire the company, the market can decide the value of the company and like any other VC, they can regain their investment (and much more) by some kind of liquidity event.

What do you think of this? Is it possible for large companies to develop incubators for their own employee’s to create innovative products and companies? Or are there other issues and complexities that would make this concept more likely to fail than succeed?

Saeed

Facebook Developer Terms: Is there a lawyer in the house?

If I asked you whether you were concerned about privacy on facebook, what would come into your mind? Many people are thinking about personal information, and how that information will be collected and used. I won’t wade too deeply into personal information privacy, but I would like to examine another aspect of facebook: Intellectual property protection for application developers.

About a year ago, Facebook released F8, which in many ways is a brilliant step forward: an open, easily accesible platform, with access to 75 million users and growing every month. While ad revenue has not met with high expectations (econ, wsj), Facebook has done a good job of the revenue sharing concept, whereby you can essentially keep most if not all of the ad revenue generated by impressions and clicks on a Facebook app that you build and host. If they wanted an ecosystem, they got it. Hats off to them for this.

What’s troubling me though are a few paragraphs in the Developer Terms of Service:

Section 4. Ownership and Licenses
As between you and Facebook: (a) you retain all right, title and interest in and to, and Facebook obtains no rights of any kind (other than the rights and licenses expressly granted in this Agreement) in, Facebook Platform Applications you create and in the Facebook Platform Application Content, and all associated Intellectual Property Rights (subject to Facebook’s underlying rights in Facebook Platform and Facebook Site);

(emphasis is mine)

This all makes sense so far. So if I write an app, I own the app. But then a couple of phrases in the next paragraph are a little harder to interpret:

By accessing Facebook Platform, or submitting any Facebook Platform Application to us to be hosted by us, you are directing us to store copies of that Facebook Platform Application (if applicable) and any and all Facebook Platform Application Content provided through any Facebook Platform Application on our servers. You hereby grant us a worldwide, perpetual, irrevocable, non-exclusive right and license, with the right to sublicense, to: (a) access, reproduce, display, distribute, perform, and store on our servers your Facebook Platform Application and any Facebook Platform Application Content, and to create derivative works of Facebook Platform Application Content, as may be necessary or desirable to make such Facebook Platform Application and Facebook Platform Application Content available to Facebook Users in accordance with the terms of this Agreement and the Facebook Platform Documentation and the Facebook Platform Application Guidelines; and (b) otherwise access, use and analyze any Facebook Platform Application Content for our internal business purposes (e.g., for the purposes of targeting delivery of advertisements or other content to persons who have viewed particular types of Facebook Platform Application Content). You understand and agree that Facebook Platform Application Content that is displayed on the Facebook Site may continue to appear on the Facebook Site, even after you have terminated access to your Facebook Platform Application or terminated this Agreement, as such Facebook Platform Application Content may have been incorporated into user profiles, news feeds or other features, and that such usage may continue indefinitely.

So let’s see… if iLike, an app that allows me to share my favorite music and artists with my friends, collects a whole bunch of data about what music is enjoyed by which friends, who owns the data (Facebook Application Content)? By the first paragraph, the iLike publishers should own the data, but later on, Facebook retains the right to use such content for its purposes, including targeted advertisements or other content.

So, dear reader, what is the real incentive to iLike, or Slide and RockYou, to collect this data, only for it to be used by Facebook? I will be investigating this issue more closely, but I would welcome your input! Am I reading this right? What am I missing? How would you feel about Facebook grabbing your data?

And more to the point, are investors concerned? You know, the ones who put up $50M for a company that writes an application that, um, is a better, um, , no, more fun, or super, yes, a more super wall than the um, plain old regular wall in facebook?

Alan (alan AT eigenpartners DOT com) 

GeneTree … are you serious?

A couple of things up front:

  • I’m not a privacy bigot. You can find me on facebook, LinkedIn, Plaxo, multiple blogs, flickr, my own personal website, and my corporate bio page. I post fairly liberally about myself online.
  • I probably have the best existing genealogical records for my family. I’ve spend HOURS formally interviewing my oldest living relatives, writing down their thoughts, touring grave yards, going to family farm land that my family lost during the great depression. I’m fairly interested in the topic.

So as I’ve started to think more about social networking, I became interested in the possibility of social networks to make genealogy work in the large. It makes intuitive sense to me that social networking is an ideal way to build a genealogical graph. The information is distributed and hard for one person to collect, but not so hard when each person contributes a node and a few branches.

Then I stumbled on Genetree. This company uses genetic testing to automatically build family trees, or at least to connect distant relatives.

OK, sorry, you lost me there. I have to submit my genetic material to a testing lab, have it encoded and stored in your data center, so that you can broker connections between me and my long-lost relatives in Scotland and Alsace-Lorraine?

Yeah, no. No thanks. Let me know how that goes for you. By the way, congratulations on getting funded. Can I speak with your investors?

What's the opposite of "analysis paralysis"?

I was discussing something with Alan today and during the conversation he said something like:

Well, you don’t want to get stuck in analysis paralysis but you don’t want to go to the other extreme either.

So, I though to myself, “What is the other extreme? Does it have a name?”

We all know that “analysis paralysis” is the state where one cannot make a decision because they get stuck trying to figure out all the possibilities. I’ve seen it happen in people a few times, and it can be painful to watch, as they hum and ha and try to figure out what is the right decision.

On the other end of the scale are those situations where a decision is made by someone with little or no debate, research or analysis, and the person is convinced this is the only, or possibly the best of all options. This to me is the opposite of analysis paralysis.

I call this state “utopia myopia“.

Essentially, a very limited perspective is used to achieve a theoretically ideal outcome, ignoring other perspectives or outcomes. This is very common when discussing new product ideas or solutions to problems. There is always a small number of people or sometimes a sole individual in the group who has a very strong opinion of what to build and why, and will not change their view, nor will they agree that additional research or investigation is needed before a final decision is made.

I once worked for a company where the CEO had a real disdain for market research and said at a planning meeting:

There’s no value in doing research. By the time you do your research, you could already have finished building the product.

Needless to say, that company was not very successful at all.

So, that’s my contribution to the English language this week. Use the phrase if it applies. For example, if someone is stuck on some idea and won’t budge. say:

You know what, you’re suffering from utopia myopia, and you really need to broaden your perspecitves.

Watch how they react, and drop me a line and let me know what kind of response you are getting when using this phrase.

Saeed

Subscription Pricing vs. Enterprise Pricing

A question was recently posted in a number of Product Management discussion groups. It read (in part):

…I am working on adding a subscription based pricing model for our product. I have read articles that talk about the “rule of 17″ that suggest a monthly payment should be 1/17th of a perpetual license fee.

I have structured the models so that the “crossover” between the License fee model (including maintenance streams) and the subscription model was sometime in the first half of year 2. I have seen 3 year models as well.

What do you use or what have you seen? Have you offered both model for a time and if so what are the conflicts (if any) that arise?

subscription-pricing.jpgIt can sound very tempting to provide a subscription alternative to your own enterprise software, but you need to think beyond simply price, and think through the evaluation model, the sales model, the expense model (you’re now taking on the cost of hosting/operations), and how you go to market, convert leads etc. I’m assuming here that the subscription pricing is for a hosted or SaaS version of you current on premise software?

The approach to take is to start from first principles, and define the value proposition for the end user or customer.

There is a real tendency if you already have an on premise solution to:

  1. ensure you don’t cannibalize the revenue coming in from that solution
  2. use the pricing of the existing solution to determine the price of the SaaS version

If you go down either path, the subscription solution is likely to fail.

The first one will always put the existing product ahead of the subscription based product. This is what happened with Siebel on Demand. The existing business had to be protected from encroachment or cannibalization by the on demand business and it hampered the on demand business significantly. Your company will really need to shift it’s thinking to manage this well.

The second is tied to the first, but also ignores a really great opportunity you have to define a true value-based and scalable pricing model that could generate more revenue and have significantly higher customer retention than the current pricing model.

Spend some time with the target customers and understand the value proposition from subscription based pricing, and do some price sensitivity testing with them. This should really help you understand how the pricing can provide value. It may also show that there is no appetite for subscription based pricing, but I’m assuming that is not the situation in your case.

One of the interesting things about subscription pricing is that the money will often come out of OpEx budgets in companies whereas for traditional enterprise pricing, it will come from CapEx budgets. Now a dollar is a dollar, usually, but whose budget it comes out of make s a big difference in how people perceive price.

Additionally the pricing model has to take into account the true value delivered by the software. It is very easy to think of per seat per month or per user per month pricing. It certainly worked for SalesForce.com. But the beauty of subscription pricing is that you are not tied into that model or one model for that matter. But whatever you do, keep it simple! Enterprise pricing is ridiculously over complicated. Use the subscription pricing exercise to address that problem.

Figure out what the key units of value are from a customer perspective and use those for the pricing. There may be multiple models based on user scenario. While you don’t want to force existing customers to move to subscription pricing, you’ll have to figure out a transition pricing model to move them over (and possibly back) if needed.

Think of it this way. If one of your competitors came out with a competitive subscription based offering to your current product, would they simply take your pricing and apply the “rule of 17″? No, they’d figure out a compelling value proposition and pricing model and use that as a weapon against you. Get one up on your competition and do it before they do.

Saeed

P.S. Here’s an article on subscription based pricing that may be helpful.

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