Cannibalism and Creative Destruction

A few years back I was approached by a large software firm.  As usual on this blog, a no-naming and shaming policy applies. 

The software firm supplied technology in the form of three main business lines:

• Software

• Managed service implementation of their own software (bureau, ASP, SaaS depending on your age and preferences...)

• Professional services for implementation of their software

So, a pretty standard kind of firm.  Why call me?  They wanted some independent views on their business model and some ideas.  I spent some time with clients of the firm and their own staff and put together a presentation for their board.

 

Without going into the details, I suggested that the firm had a fundamental problem at the core of every other issue that the firm faced.  The issue was that the firm was unwilling to innovate in a meaningful way.  Why is that a problem?  The firm faced a demoralised workforce who joined the business and by the time they were experts they looked to move on.  The technology was outdated and clients were unhappy and looking to "rip-and-replace".

But - as we all know - the cost of "rip-and-replace" is prohibitive and at CTO level the decision to "rip-and-replace" tends to be career limiting if you implemented the system to be ripped in the first place.

So the firm managed to stay alive as a zombie - generating minimal recurrent revenue but with no future growth potential.

My suggestion to the board was that the firm needed to cannibalise it's revenue stream.  By this I mean - go ahead and build a modern replacement for their legacy technology platform.  This would cause existing clients to rip out the old product and replace with the new product.  So no net gain for the firm.  But it would mean that clients would not have to move to a new vendor.

 

Creative destruction is a term coined by the Austrian Economist Joseph Schumpeter.  He used the term to describe the essence of the capitalist process - that innovation drives destruction of old industries and their replacement with new innovative methods of production.

 

One of the challenges that the financial software industry faces is that most firms individually lack the fundamental scale to unleash creative destruction and cannibalise their own revenue stream with the goal of capturing incremental revenue as the waves of creative destruction subside.  This is why so many financial software firms end up being acquired by what I term "graveyard owners".  I am pretty sure any reader can think of software firms where good ideas go to be squeezed dry and operated as cash cows until the last drop of milch is gone...

So - what's the punchline here?  Creative destruction is can only be unleashed within financial software by disruptive outsiders.  And how do those outsiders get started?

To be continued...