Originally published on the Versett blog
How do you make the leap and become a technology company? Last time, we talked about the evolving nature of a technology company, why you should embrace technology and the impacts of your perception of technology. What differentiates these two is rarely the use of technology, but a differentiated approach and mindset. In the following essay, I want to examine what sets these companies apart and how you can start to mimic them.
While there are many defining attributes of a technology company, I want to focus on a few that can make the most impact. I am not going to talk about things like running a hackathon at your organization or “failing faster.” To be competitive in the modern economy, you need to fundamentally change how you think about technology across your organization. This is about technology strategy, not technology as a “strategy.”
Technology companies, by their very nature, are better suited to leverage technology as a core competency of their organization. This is their domain. So while it is also an end-product for them, technology is an embedded part of each of their processes. They recognize the value of using digital tools to work faster, gain a deeper understanding of their customers, work more effectively, and grow their company.
Our goal is to find ways to become more like them.
What does it mean to “be” a technology company?
Technology companies, specifically software companies (a subset of the broader category), have a few interesting characteristics thanks to their bit-based nature. In What is a Tech Company, Ben Thompson covers some of these:
- Software creates ecosystems.
- Software has zero marginal costs.
- Software improves over time.
- Software offers infinite leverage.
- Software enables zero transaction costs.
Software inherently has these properties. These factors allow us to distill the label ‘software company’ into a more measurable framework for achieving the same benefits. How can we create an ecosystem, lower marginal costs, improve our products over time, increase our leverage, and lower transaction costs? Unless you are planning to sell software, it can be hard to get these benefits. However, building software enables you to realize them within your existing business, without necessarily selling software as a product. The question then becomes, for example, how can we create an ecosystem around our products?
- Ecosystems—Creating an ecosystem requires a portfolio approach to your products: you leverage each new release to augment your existing products. How is the customer’s experience better now that you have a new product? By creating an integrated experience across all digital product channels, each touchpoint can provide additional value to the customer. Software can be one of the core products in the ecosystem, or it can act as the connecting matter between your experiences, such as a shared digital customer profile. There are a variety of ways technology can enable new touchpoints within a customer’s journey; it’s up to you to design them.
- Marginal Costs—While marginal costs on physical goods or services may never reach zero, additional data allows you to make more informed decisions, hopefully lowering incremental costs over time. By introducing software to provide enhanced analytics, you will have a more transparent view of your cost profile. Each new product produced, or customer served, presents a learning opportunity for you to lower marginal costs.
- Software improves over time —Digital products should be improving over time, though your physical products may not. Most traditional business owners don’t think like this. They build it once, leave it, and go back to “running their business.” This is your business. Start thinking about how you are creating more value for each new customer. What makes software unique is not that the company makes improvements; many companies improve their products with each release. The difference is that the product someone bought two years ago is now better. The challenge most companies face is how do you capture value here? How will you structure your business model to capture this value? This is why the SaaS model is so popular: a recurring subscription allows you to capture value as you continue to create it.
- Leverage—Digital products allow you to reach markets you traditionally couldn’t serve with a more standard salesforce. This could be marketing through new channels or serving an entirely new audience. Depending on the goals for the company, you can scale more cheaply through technology, even in your existing market.
- Transaction Costs—Transaction costs can reach zero for customers served through self-serve channels: where customers buy directly from you without human intervention. Sometimes you are lowering costs by providing customer support through technology such as documentation, chatbots, or even pre-recorded videos. Not all solutions need to be high tech. There are multiple ways to lower the cost of customer transactions, but each removes human contact from the experience. Does this align with your brand and strategy?
How you choose to invest in and nurture technology at your organization will have a substantial impact on your future in the marketplace.
The Seeds of a Tech Company
While the benefits become more evident with this framework, how do you begin to capture them with your organization? We work closely with clients making a transition, evolving into a modern competitor. The companies we see making this transition typically adopt three attributes of tech companies:
- They try to become Data-Native Organizations,
- They apply a Product-First Mentality, and
- They set up Digital Operations
These are some of the hardest factors for companies to wrap their heads around. This is also where we see the most friction.
1. Data-Native Organizations
Tech companies have an inherent advantage when it comes to data: Software inherently creates data through usage, providing companies with greater insight into customer behaviour. Having a product that creates data is only the first step of this process; the company needs to have a plan for collecting data and analyzing it, as well as a willingness to make changes in light of the results. These companies use data as core inputs in their decision-making process, measuring and analyzing behaviour from their customers. This capability is not limited to software products; hundreds of new products have launched over the past decade that allow you to collect data from products and customers in all manners of ways.
This ubiquity of data has allowed our customer thinking to mature, moving beyond simple demographic segmentation into behavioural analysis. Customer behaviour acts as a more reliable leading indicator for understanding customers than a customer’s demographic. Data allow us to start to investigate our customers more deeply, ultimately leading us to make better decisions. Treat this as a quick litmus test for you: are you still thinking about your customer segments based on demographic profiles?
If you work in a tech company, it’s strange to imagine a world where data is not top of mind. As data has proliferated through the tech zeitgeist, it has enabled the vocabulary of businesses and products to expand, bringing terms like CAC (Customer Acquisition Cost) and LTV (Lifetime Value) into common parlance in certain sectors. But ask the average company about these two metrics and most won’t even know how to calculate them. How are you able to make informed decisions without them? It’s not just about having data; it’s about making better decisions as a result.
2. Product-First Mentality
Winning companies understand the value of each touchpoint with a customer. Each step within the value chain presents an opportunity for improvement. They are willing to invest in quality products for both their team, as well as their customers. They see internal software as products to be continually developed, not tools to be maintained.
What differentiates these companies is their value-oriented mindset towards software, considering them it an asset instead of a cost. By reframing products as value-creating assets and not a part of Operating Expenses, you become more willing to invest in them. Where a tool-first mindset considers “will this get the job done?” a product-first mindset asks, “how can we make this better for our customers?” or “how can this improve our end product?”.
This does not mean you need to build tools for everything. Identify the touchpoints and opportunities that present a competitive advantage; which of these will allow you to better serve customers? How might you use existing tools to move faster? If you do plan to build your own, how will it exceed what’s on the market? Find ways to create or adopt a product that complements your existing service offering. As with other areas, understand where to invest. Where will it make the most significant difference?
This shift is more than a simple mind trick. Companies like Amazon have found ways to spin out some of these internal products into brand new lines of business. As Zack Kanter writes of Amazon and their Web Services (AWS) business:
“With AWS, the risk was that Amazon would become a captive customer to its own technology services group. Amazon eventually arrived at an elegant solution: instead of just building an internal platform through which its software engineers could requisition resources on demand, it would open the platform to outside customers as well. Amazon had already established a strong culture of customer obsession; in any customer-facing product, AWS was virtually guaranteed to show continuous improvement and innovation. Amazon would simply use the exact same tools and products that its customers used, and would thereby get the exact same benefits that its customers enjoyed. In other words, Amazon would become just one of many AWS customers – solving its own technological bottleneck once and for all – without creating the typical trap caused by vertical integration. The addition of a massive, high-margin revenue stream would be a nice $30 billion side benefit to boot.”
3. Digital Operations
Lastly, a company must change its mindset from adding a new “channel” for customers to thinking about technology as core to the organization. Ask, “how does your digital infrastructure support analog interactions and channels? How does technology raise the tide of all ships?” Empower your team with the same (if not better) tools and technologies you gave to your customers. One modern manifestation of this is introducing self-checkout for customers. This simple tool puts the power of technology into the customer’s hand, enabling them to act as an employee and self-serve their transaction. Additionally, an organization can choose to see this improvement as a way to simply cut their costs, or an opportunity to improve their service offering with their freed up capacity. This decision comes down to the strategic priorities of the organization.
We have a few clients where their e-commerce platform is not just a purchasing channel for customers, but an effective sales tool for staff in the field to reference and show to customers. They have realized that technology is a powerful tool for the entire organization, not a single silo or channel. One of the biggest challenges is avoiding the internal threat that comes with introducing digital in your organization. People tend to see technology as an antagonist instead of a subservient tool: technology is a powerful platform that benefits all channels, freeing you up to add value in new spots.
Staying Competitive in a Changing World
If you consider yourself a technology company and you’re making technology decisions in order to minimize cost instead of maximizing velocity, you’re going to lose. If you don’t consider yourself a technology company, you have even bigger problems.” @zackkanter
Technology companies are more resilient and proactive. They continuously seek to improve and iterate, while being flexible in the face of failure and change. To succeed, technology needs to become part of the cultural fabric of your organization. So much so that becomes invisible. There is a well-known parable about fish in water:
There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, “What the hell is water?”
Like the story about the young fish who don’t know what water is, the state we are after is one where technology is inseparable from what you do. Consider everything you do as technology.
At Versett, we believe this is how you stay competitive as a non-technical incumbent in the face of startup competition. If you can find ways to shift your organization and culture—no easy task—you have advantages over startups that you need to recognize, such as pre-existing reputation, resources, relationships, and revenue. These elements give you a greater runway and foundation to make a substantial transition. Don’t squander what you have; what the startups are seeking.
In this half-eaten world, your technology is your strategy. It is how you will survive. It is how you can win. Will you make the change or wait to be eaten?