I have founded or co-founded a number of startups, worked as a consultant for Fortune 100 companies, and been an executive in large corporations.  What I’ve come to hold true is that as a company grows it experiences what Dr. Larry E. Greiner calls “growth phases.”  Dr. Greiner postulated the existence of these phases in a 1972 paper titled “Evolutions and Revolutions as Organizations Grow.” These growth phases are characterized by certain periods of growth ending in a crisis.  The duration of the crisis period can lead to what I call “growth plateaus” resulting in stalled or declining revenues.  The phases and associated crisis are as follows:

Greiner Phase/Crisis	Behavior
P1. Creativity	Creative “start-up” atmosphere.  Everyone can where any hat.  Very agile and reactive to client demands. Co-founders motivated by partial ownership.
C1. Leadership Crisis	Managers need to begin specializing.  New employees not motivated by ownership.  Need for process and controls resisted.  Co-founders still want to do everything.
P2. Direction	Functional organization structure is established.  New employee incentives introduced.  More formalized communications. First step of separating strategic and functional specialists.
C2. Autonomy Crisis	Organizational structure inappropriate.  Lower level employees feel “disconnected” from senior management.  mid-level managers start taking initiative on their own instead of following the process. Senior managers feel that they are losing power.
P3. Delegation	Concept of more autonomous business units.  Senior leadership more vision based.  Profit centers, bonuses and incentive programs used to stimulate motivation.
C3. Control Crisis	Senior management seeks to regain control of autonomous business units.  Possible attempts to centralize control.
P4. Coordination	Autonomous business units merged into groups. ROI becomes an important metric in measuring a units success. Redundant cost centers centralized. (IT, accounting, etc.)
C4. Red Tape Crisis	Programs and process begin to limit business unit’s ability to generate revenue. Innovation is dampened. Organization is now to large for formal programs and rigid systems.
P5. Collaboration	More flexibility in management.  Skilled managers effective at intrapersonal management.  Teams exhibit more self-discipline.  Focus on problem solving.  Rewards are team based instead of individual based.
C5. Internal Growth Crisis	Problem solvers exhausted from intensity of the work.  Effectiveness becomes unsustainable and cyclic.
P6. Extra-Organizational	Use of mergers, holding companies, networks of companies to sustain growth.

 

From the above, can you fit the company you are working for into any of the phases?  Are you in a crisis?  The funny thing is that employees usually seem to know if they are in a growth phase or experiencing a crisis.  Depending on the quality of the management team the crisis may be temporary or may last for years.  If you are stuck in a crisis for years, you will usually see a high volume of management turnover and hear phrases like “This has worked for us before.  It will work for us now!”  Then the revenue begins to slide. If senior management sticks to their guns, this is the beginning of the end.

What does the flipside look like?  Good leaders embrace the ability to change processes and practices if they are no longer working. (Agile Management)  Some, feeling they are only an effective as a Phase 2 manager, may choose to remove themselves from the organization completely.  According to Dr. Greiner, organizations should not attempt to bypass phases or their associated crises. Instead he recommends a few tools to managers to help them move to the next step.

 

1. Know where you are in the development sequence.
2. Recognize the limited range of solutions.
3. Realize that solutions breed new problems.

 

Here are a few good books that discuss Dr. Greiner’s concepts as well as strategies to deal with each crisis.

 

Managing Technology and Innovation: An Introduction

 

Dynamic Strategy-Making: A Real-Time Approach for the 21st Century Leader

 

Evolution and Revolution as Organizations Grow

I had a discussion with a colleague yesterday on how to determine the priority of features on a given service. We quickly arrived at the topic of assessing business need, i.e. value, of the features. This is a conversation I've had many times, with many clients and thought it might be worthwhile to document some of my thoughts on this.

If you are building "shrink-wrap" software you can estimate the number of units sold and multiply by the price to get annual revenue. From there you can work backwards to establish your financial metrics. (ROI, NPV, IRR, PV, EV, AC,T,I,OE, etc.) But what about when you are building Software as a Service? This is not a simple question to answer. Regardless of the level of difficulty, it is one that many of us will need to answer in order to effectively grow our organizations. While I don't have a one size fits all answer here, I would like to toss out some tools, ideas and links that may help each of us answer the question for ourselves.

Know Your Value

For starters we should have a good understanding of the value proposition(VP) for the service. The VP will speak to why clients will choose your service over the competition. The VP will look something like:

"For sales teams seeking to reduce time-on-sale by as much as 25% our CRM application will provide full sales process management at half the price of the competition"

Or

"Our internal CRM application will allow our sales team to reduce time- on-sale by 25% and cost only 50% of an off-the-shelf package".

Here is some additional reading:

Developing a Compelling Value Proposition

Stop Coding, Start Marketing! Getting Your Positioning Right

Powerful Value Propositions

Bringing the Value Back Into Value Propositions

In Search of a Value Proposition

Understand the Features That Support Your Value

We add features to attract new clients, keep existing ones, or generate new sources of revenue. We should be doing this in alignment with our VP. We should not be adding features simply because we've conceived of the idea. Given that, we should start by asking ourselves "How important is this feature relative to our VP?" Let's start by using the following 5-point scale for each feature:

1. Direct VP feature.
2. Component part of a VP feature.
3. Compliments a VP feature.
4. Nice to have.
5. Optional.

When analyzing the features that support your VP, remember that only 6% of the work on software projects is value added and 64% of all software features are rarely used. (Thanks for the numbers Ryan!)

Price your Value

After you have the VP and the features to support it, you will need to work with your sales and marketing organization to understand what they feel the market will bear, in terms of price, for each unique service. They should also have an estimate on the number of users that will subscribe to the service. Jason Rothbart talks more about this here. Combine this with an innovative monetization model and you have some annual revenue numbers you can work with.

You may also be in a project that has the role of supporting the business. If this is the case, an estimate of the value to the business should still be generated. You may choose to adopt the model that if the service saves the organization 1 hour during a 40 hour week then 2.5% of the annual revenue is attributable to the project. For a $40M company this is $1M annually!!!

If there are no answers to these questions, you may be in the "build it and they will come" mode which is very difficult to generate value metrics from. Try using one of the above models to create an estimate and see how it compares to reality when everything is said and done.

Finally, you should consider what monetization models will be used by your service. Will you only generate revenue from paid subscriptions or will you adopt a freemium model? Will there be paid advertising from within the UI of your service? Are there client stakeholders that are willing to help fund the service? All these are examples of monetization models that will have an impact on revenue and need to be considered as part of the analysis.

Market Lifetime

Given the speed of today's market, including the market lifetime in your analysis is also important. Every service has a limited lifetime due to advances in technology and usefulness to the client base. Typically the market lifetime curves are bell shaped (Figure 1) since full market adoption is not gained immediately and decays slowly due to technology and market pressures.

Figure 1 - Typical Revenue Cycle

How long will your service be able to generate revenue in its current state? 6 months, 1 year, 2 years? If you assume the lifetime to be 2 years and the revenue curve to be bell shaped with the max subscribers in the middle, you can make some fairly good estimates. The answer to this question will play an important part to developing the Value Schedule.

Bringing It All Together

Let's assume that we've determined we will generate $1M over the next 2 years on our service. In order to generate this revenue, we will need to add continuous value and bear continuous cost over the next 20 months. Let's further assume that we will be on 2 month release cycles over these 20 months giving us a total of 10 releases.

Using our 10 releases and our $1M in revenue we can simply calculate the value per release to be $100K. (Ignoring any discounting)

Now if we look at the first release and assume that we have 25 features all of which we have ranked using our 5-point scale from above we can estimate the dollar value per feature. The trick is to normalize the value based on the rank. The formula is shown in Equation 1.

Equation 1 - Feature Value Equation

Using Equation 1 in our example we can now generate a Value Schedule which will give us the dollar value of each feature.

Feature	Rank	Value
1	1	$ 4,902
2	1	$ 4,902
3	1	$ 4,902
4	1	$ 4,902
5	1	$ 4,902
6	1	$ 4,902
7	1	$ 4,902
8	1	$ 4,902
9	1	$ 4,902
10	1	$ 4,902
11	1	$ 4,902
12	1	$ 4,902
13	2	$ 3,922
14	2	$ 3,922
15	2	$ 3,922
16	2	$ 3,922
17	2	$ 3,922
18	3	$ 2,941
19	3	$ 2,941
20	3	$ 2,941
21	3	$ 2,941
22	3	$ 2,941
23	3	$ 2,941
24	4	$ 1,961
25	4	$ 1,961
		$ 100,000

Conclusion

While not the answer for everyone and realizing I've left out some detail, I hope the tools I've presented here will be useful to you while you are analyzing your next project. I would love to hear what you think!

According to Technology Review, startup Avanti Metal, using technology developed at MIT, hopes to commercialize a process that drastically reduces the cost of producing titanium, making more of it available for large, lighter-weight airplanes.  I know this seems like a non-news issue, but I think it will change a lot of things.  Being as strong as steel but only 60% as dense it will now be used in situations where steel was to heavy and other solutions were cost prohibitive.  Can you imagine the kind of bridges that could be built using titanium?  It's corrosion-resistant and extremely strong.  Imagine the Golden Gate Bridge in stainless steel!  How about cars?  Fuel economy and no rust!  I hope Avanti Metal is able to commercialize the process quickly as I want my titanium Delorian!  ;)

I find it a bit ironic that the New York Times should release this only a few days after my DotCom Flops and eBay post.

Thanks to Steve Shu for pointing me to this article on the Top 10 dot-com flops. I'm glad we can look back at this and laugh. The funny thing is I thought that eBay was going to be on this list when I first heard about them back in 1996. The thought being, who's going to send a stranger money for something sold over the Internet? It's the stuff scams are made of. But as it turns out, services like PayPal gave people enough security that they took a risk. This coupled with the fact that people love a bargin has made eBay VERY successful. Q2 2005 revenues were reported at just over $1 BILLION with a consolidated net income of $291 million! Wow! Just goes to show that a solid leadership team, business model and an understanding of the market can lead to great things. Meg Whitman, eBay's President and CEO was brought on in 1998 by founder Pierre Omidyar. This was the move that changed everything. Meg quickly assembled a top-notch executive team, built the basis of the current eBay model and made Pierre's net worth somewhere in the $10 billion range. Not bad for a guy who "sat in his modest home office and spent 3 days cranking out the code for an Auction Website and then posted it under his existing URL..." So what's the moral of the story? You may have the next revolutionary idea that will make you a billionaire, but you're not going to do it by yourself.