I’m going to let you in on a secret of custom software product development. Most vendors either don’t give this subject much thought or they don’t like to talk about it. Here’s the secret: building custom software is risky, expensive, and sometimes extremely valuable. As part of my work with Atomic, I engage with potential clients early in their decision-making process about whether to build custom software. I often find myself helping business leaders think comprehensively about whether they should invest strategically in proprietary digital products. And more often than you’d think, I find myself recommending they don’t invest in software. The risk is too great, and the return on investment is too murky.
So why does anyone engage in building custom digital products? It’s expensive, it’s risky, and there are plenty of marketplace stories about how software projects don’t deliver. Who is crazy enough to build custom software? Those who understand how to build custom software that gives them a strategic market advantage. Digital products can change the destiny of entire firms or business units. They can give a company a strategic advantage that its competitors can’t easily overcome. Seriously, I’m not using hyperbole. That’s the kind of extreme value I’m referring to. If done right, software can truly change your world.
Example: Microsoft Word
Take Microsoft Word, for example. The development of Word started in 1981. Although Word was first released two years later (it was terrible, and no one used it), it wouldn’t gain broad use until 1993. That’s 12 years of investment in the product before it really started to show a return. How frustrated must Bill Gates and Paul Allen have been in 1987? Six years into building this product, defending it to the board, and continuing to spend… and there were still another six years to go! They must have seen the value that a premier word processing application would bring to their small firm.
Fast forward to today and 98% of the Fortune 500 have a contract in place with Microsoft. It might be for a myriad of the services they offer, but the foot in the door in every case: Microsoft Word. Word is now ubiquitous with word processing—something we all have to do every day. I’d hypothesize that Microsoft might not exist today as a company if it weren’t for MS Word. Instead, they have a market cap of 2.15 trillion dollars.
So how does one know where to find the kind of value? The kind of value that will help dominate a market vertical? The answer has to do with weight and variance.
Understanding Weight and Variance Starts in School
(Hat tip to Prof Sonia Marciano who formalized these concepts for me recently.)
I’ve got a 15-year-old at home, and she struggled at school this year. She’d never struggled like this in school before. Part of it had to do with remote learning, but part of it had to do with understanding weight and variance. She failed to understand which assignments were heavily weighted as part of her final grade and which assignments could be dropped without really affecting her grade at all. So she’d spend all night spending an excruciating amount of time on an assignment that didn’t even count toward 1% of her final grade while leaving herself drained for a test the next day that represented 25% of her grade in the class! She poured time, energy, and focus into things that didn’t move the needle while ignoring parts that were crucial to success.
In business, we operate much the same way. We don’t understand that different parts of our business offering are important, while others are practically irrelevant. Do you know which parts of your business are weighted? Which ones are crucial to the success of your firm? How are your clients and providers thinking about those same parts?
Find the important parts of the business and build software in those areas to increase efficiency and velocity to add significant value. When it comes to software, if it isn’t important — don’t build it. Software should never be built for convenience. It should be built because your company can’t survive without it. Basically, if it doesn’t count for at least 25% of the final grade, find another way!
Another thing that I myself failed to understand in school was the concept of variance. At my high school, final exams were always graded on a curve. But I didn’t understand the value of the curve. One of my good friends (who would turn out to be our class salutatorian) once saw that I was sweating bullets on a chemistry final and asked me why I was so worried. “No one is going to do well on this final. Don’t worry about it. You should just stay focused on the final project,” he said.
That was when I realized we were all going to get Bs on this final, and, therefore, we’d all get As. The real point of variance, which was not graded on a curve, was the final project. I stopped studying for the final immediately and turned my focus to the final project. I outscored my classmates and ended up with one of the highest grades in the class. If I hadn’t focused on an area of high variance, I would have deployed my time and energy in the wrong place. There’s a reason my friend ended up the salutatorian and I didn’t!
Let’s apply this to the business world and talk about MS Word again. From 1981 to 1991, Word was not a market leader in the word processing market. It was a distant third to market leaders Lotus 1-2-3 and WordPerfect. With the release of Windows 3, MS Office team leader Jeff Raikes identified a graphical user interface as a key market area of variance. His team worked hot and heavy for two years to add a point-and-click interface to Word, while both Lotus and WordPerfect focused on the diversification of niche features their customers didn’t end up using.
Raikes found an area of difference and executed on it. It made all the difference for Microsoft. By 1991, Office had 90% of the Office Productivity market with an 85% operating margin. In 1995, Lotus was acquired by IBM for a paltry sum and has since withered out of existence. The WordPerfect Corporation was acquired in 1994. MS Office continues to be a profit center for Microsoft.
Mitigating the Risks of Building Custom Software
The best software partner will help mitigate some of the risks of building custom software. At Atomic, we take the stupid risk off the table. Your project isn’t going to fail because of the technology we work to build together. But even the best partner can’t help you determine if your custom software product has strategic market value. For this reason, business leaders must exhibit good decision-making about where and when to deploy a software product within the value chain their business represents.
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