Being a Salesforce fan for many years, having worked for an Independent Software Vendor (ISV) to build a product on the Salesforce AppExchange and now as a Systems Integrator (SI) and Product Development Outsourcer (PDO) to help design, build and accelerate product roadmaps for ISVs on the Salesforce AppExchange we often come across the topic whether you should build a product company or a service company. In this blog I want to explore the difference between product and services companies and share my thoughts on how the Salesforce platform and the Salesforce partner ecosystem can potentially offer the best of both worlds.
Difference 1 – Scale
The single biggest difference between building a services business and a product business is scale. A product-based business invents the wheel once. This means if the experiment is successful, the company can sell the same product multiple times until the market requires something else that is (hopefully) anticipated in the ISV’s product strategy. On the other hand, a service-based business delivers one-off solutions that are highly personalized to each client and as a result not reusable for the next customer. Scaling a products business is a factor of how fast it acquires customers. Scaling a services business is all about how fast it acquires employees whose time can be billed. Products can create barriers to entry against competition. Services depend on relationships which can change as people change. The essential difference in revenue is that with services, today’s work does not lead to future revenue, whereas with products, future revenue from today’s work is the aim.
So there are two ways of making money – you either bill your services or you develop a product and fuel its uptake. The obvious upside of selling services is that you can make money from day 1. New ISV’s on the Salesforce AppExchange often consider selling professional and customization services as a good way to create income to invest in the build of their product idea. If you’re great at execution and delivery, your reputation should flourish as a customer-centric vendor and you’ll be able to sell those services at an increased rate to the clients you sold to before and new ones as they arise. The downside is that you will reach a ceiling of how many hours you have in a day to deliver on customer projects, customers will require different services and so you will quickly come to a point where you need to hire more specialized delivery people. Hiring specialized delivery teams (solution engineers, implementation consultants, project managers, engagement managers) means that you need to continue to get work to keep them busy and you will run the risk that you will defocus from your product idea and get scaling issues down the road. It’s a fine balance and one that is difficult to maintain.
Difference 2 – Speed of Innovation
Both services and product companies thrive on innovation, but they are different kinds of innovation. Services are driven by innovation in implementation and service quality, while in product companies, more innovation is required in ideation and scaling. In services companies there is a mindset of defining projects (output) rather than products that are measured by business results (outcome). The problem with defining projects rather than products is that it generates all kinds of bad behavior within the ISV as the delivery teams try to work around the constraints of the initial build-out product. This approach has the risk of a poor ROI over time for the customer because of the high cost of finding out which ideas work and which don’t. It will potentially block the required speed of innovation for a product-centric organization as too much service orientation makes ISV’s slower to deliver upon customer-specific requirements due to the typical waterfall delivery required (design, spec, sign, build, show, adapt, … ). Requirements are “gathered” from stakeholders, prioritized in the form of roadmaps, and implemented. In a product organization, we must discover the necessary product to be built. Most ideas will not work with customers the way we might hope, and we also know that those that do work will require several iterations to achieve the necessary business results.
True product organizations simply must move much faster, and work differently, in order to deliver the necessary solutions and innovation for customers to deliver business outcomes and stay ahead of their competition. They must resist the temptation for short term financial gains over long term product leadership.
Difference 3 – Growth and value drivers
Services offer you a linear revenue growth path. The growth is depended on the number of customers, number of employees and number of locations you operate in. Product companies however follow in most cases a non-linear growth path. Growth really depends on the value created by your product for the consumer. There is no direct relationship between growth and number of employees or locations you operate in. Scaling a product company is therefore much more difficult. In services companies, the teams and customer-base are its real assets. If employees are leaving, new customers are not joining and/or existing customers go to the competition, the value of the company is zero. For product companies, the product itself is an asset, with a good customer-base increasing the valuation of the product.
Difference 4 – People Culture
In a services company the team services the perceived technology needs of one customer. In a product organization, the staff exists to service the needs of all your existing and future customers, within the constraints of the product and the business. This is a profound and far-reaching difference, meaning that in a services organization there far less product passion. The teams are there to build whatever the customer requires. In a product organization, the product, technology and the objective to scale are the drivers. People join a product organization because they care about the mission and helping customers solve real problems. People join a product organization because it has a purpose.
How the Salesforce Platform can make a difference for ISV’s
You have a great idea and have decided to execute your idea on the Salesforce AppExchange as an ISV. Good choice. The amount of time it takes to convert a good idea into something sellable and marketable differs dramatically depending on which route you take. Building a true product start up requires time and resources upfront for conceptualizing, creating and testing the product, requires resources to launch the product on the market and requires resources to implement the product. Working with the Salesforce IVS teams and Salesforce PDO partners will offer you a strategic partnership that allows you to accelerate your product development and go to market through the in-depth experience and best practices these teams can offer.
More than 3600 apps have launched on the AppExchange since 2006 with the help of the partner ecosystem and the number of new apps continues to accelerate. The Salesforce platform offers a risk-free environment that allows you to deliver in a fast, secure and agile way. Working with the Salesforce customer base can get your business off the ground quickly. Salesforce customers act as lighthouses that believe in you and your idea and are willing to help. The platform allows rapid development of an MVP product that can be discussed with customers and will drive the future product roadmap in a direction that customers really want and value.
Implementation best practice
Bearing in mind the different dynamics within product and services companies, the best practice to run implementation for product-focused ISV’s is to keep small teams of senior solution consultants and engagement managers in-house and then outsource delivery of configuration, development and integration to a qualified Salesforce SI partner. At VRP we see this first hand and have grown mutually beneficial partnerships with leading ISVs some of which extend into wider support and managed services. We are one of a few SI partners with the combination of local presence and near-shore scale to enable ISVs to deliver true excellence to their end customers.
Raymond van der Wal
Managing Director – EMEA
VRP Consulting