20/20 Hindsight – Transitioning a Services Company to a Product Company
This is my site Written by Alora on April 27, 2009 – 1:09 pm

TransformationsThis is something I’ve been thinking about more and more recently. The fact that we started off as a services company is what allowed us to get started and to avoid having to rely on outside funding. But it was transitioning to a product company that allowed us to grow and scale, and to ultimately attract funding. However, the transition from one to the other was brutal. And looking back, I can see a thousand opportunities where we could have done a better job.

When the bubble burst back in 2000 it was because speculation had driven realistic performance expectations, sanity and reason out the window (keep throwing endless piles of money at most people, and eventually most of us will get stupid). The industry itself, as well as those watching and investing in it, had bought into its own hype, and then it was crushed under the weight of it’s own hubris and lunacy. (Not unlike what is currently happening to the financial services industry.) Critical lesson: watch the hype and don’t drink the KoolAid. (A caution I would also issue to the current level of hysteria going on in the social media space.)

What this meant, of course, was that companies that had not yet become profitable or did not yet have a self-sustaining business model were S.O.L. VC money evaporated over night. Gone were the massages and catered lunches and lavish holiday parties. Suddenly we were awash in pay cuts, layoffs and absorbing the workloads of people who’d left because we couldn’t afford to replace them.

We were lucky. At that point, we were still a services company (though we were working on our product; it just wasn’t done yet), and that bought us a little bit of time. Not a lot, but — as it turned out — enough. And we sold our asses off. Everything we did for clients was billable. Everything was custom. Everything was a one-off.

Naturally, this presented problems in the scheme of things, because while this was providing us with live-saving revenue, this was not at all scalable. And our leadership knew it. So we continued to push forward with our plans to transition into being a product-based business that offered additional, ancillary services.

The troubles here were strategy, communications, education and execution. For those of us who were living on the services side, we had a culture that was services-centric — not product-centric, and there is a huge difference. In a services-centric culture, your answer to clients is always “yes.” And clients expect your answer to always be “yes.” It never occurs to either of you that the answer could or should be anything else. There is a culture of expectation that must be transitioned, and it must be done thoughtfully and carefully in order to avoid alienating the very people who are keeping you in business.

Now, to be sure, you aren’t going to have a business if you get in the habit of saying “no” to your customers, but there is a big difference between being an order-taking organization whose response to “Jump!” is always, “How high?” and an organization that provides expertise and consultation to customers, as suppliments to a core product offering. The culture, the relationship, the value brought to the table are all very different. And shifting from one to the other is a significant change that needs to be managed carefully in order to keep both your staff and your clients onboard.

Furthermore, our problem was compounded by the fact that the product team was very insulated from the rest of the business. That include socially. They literally sat in a different building. The two groups barely knew each other, so not only did both sides feel misunderstood and taken for granted, but we did not have the opportunity to really find any solid common ground. The services teams thought the product teams were snobs; and the product teams thought the services teams were cowboys. And we were probably all at least a little bit right. But what we weren’t seeing is that each group had a different mission, and that we were each very much in-line with what we needed to be doing at that time.

What we didn’t do was actively execute against a long-term strategy to bring both teams in-line with each other. To whatever degree that did ultimately happen, it was more by brute force of circumstance than by much in the way of active planning or cultivation. Looking back now, so many of the conflicts, headaches, and missteps are painfully clear. And, since hindsight is 20/20, I see so many opportunities that were missed, that would have made all the difference — both when it came to the internal culture, as well as in our relationships with clients.

Of course, looking back, I also now realize that this was one of the early seeds that sparked my interest in change management. This was a big change that had do-or-die implications for the business. The sense of urgency and relevance needed to be truly understood by the services team to get their buy-in, and it simply wasn’t. Without that comprehension, managing client expectations was an endless series of bungled missteps that were constantly needing to be corrected. The services teams needed a roadmap; and we didn’t even have a compass.

Another reason that I love startups is that, given enough time, I know that I’ll have the opportunity to tackle this type of problem again, and be able to apply some of the hard-won lessons from last time to doing it better.