By Ian Miell, Container Solutions
It is folly for a company to attempt to scale without addressing their financial structures. To understand why finance is so crucial, let’s look at the typical evolution of a tech company.
Most start in what we might call the ‘Hero Hacking’ phase. A few talented programmers—the kinds of people who will accept lower pay and work late nights to perfect a product—build solutions for one or two key clients who bring in most of the money. The financial model is simple: keep the customers happy, and the money keeps flowing.
Image: Yay Images
As the company grows, it enters the ‘Pseudo Product’ phase. Multiple customer teams are created, each maintaining a slightly different version of the product for different clients. The company imagines it is selling its services as a product, but in reality, each installation is unique. This leads to slower integration times and increasing complexity.
Eventually, the company wants to scale without huge overheads while customers want faster implementation of features, not long integration timelines. Both the company and its customers get frustrated with a model that is unsustainable.
This is where many companies decide to transform into a true product company—the ‘Product Aspiration’ phase—and where many transformation-efforts stumble.
The mindset shift: From bespoke to product-based
Switching to a product mindset involves more than just technical changes. It requires a fundamental shift in how the company operates and thinks about value creation. This starts with finance.
The financial flow through a company dictates what it is able to do and what individuals are incentivized to do. Budget restrictions dictate who HR can hire and what teams can achieve. It is the source from which every river flows.
Yet, in a bespoke model, development is essentially directly funded by customers’ needs. If that is how the finance department plans and works, the flow will push against any transition towards a product model, where development is funded by the company as an investment.
In a bespoke model, developers are also incentivized to serve individual customers, and the sales team is incentivized to sell customized solutions. In contrast, a product model requires them to consider the needs of the entire market and to promote a standardized product with configurable options.
This can be a difficult mental shift, especially for long-time employees accustomed to close customer relationships. Success metrics and incentives need to shift from customer-specific satisfaction to broader measures like user adoption rates, churn, and product market fit.
To successfully transform into a product solution model requires a complete shift of financial flow to encourage the development of something completely new. The challenge is in creating this shift without completely undermining revenue, sales, and existing customer relationships.
Two strategies for scale-up transformation
To overcome the scale-up transformation challenge, there are two main strategies to choose from, each with its own financial implications:
Strategy One: Grow Something New
This approach involves building a small, product-minded team from scratch. This team, funded directly by the company, takes the existing product and delivers it to a small customer quickly and cheaply.
They use this customer relationship to learn and build, maintaining control over the product direction, and gradually expanding to more customers. The product cost is high enough to incentivize the partnership but low enough that the company can justify keeping control of the end product.
Financially, this strategy requires a significant shift in thinking. Instead of viewing each customer’s engagement as a direct revenue source, the company must be willing to invest in the long-term potential of the product.
This means redefining ROI, carefully managing cash flow, and balancing resources between the new product team and the existing business. For companies with external investors, clearly communicating this strategy and its long-term benefits is crucial to maintain support during the transition period.
Strategy Two: Transform What You Have
This strategy involves gradually transforming the existing business model. This starts with clearly communicating the future product vision to existing customers and securing their buy-in for a two to three-year transition period from bespoke development to a standardized product.
During this time, the company invests heavily in restructuring its development processes and product architecture.
This strategy presents its own set of financial challenges. As the company shifts away from bespoke solutions, it may experience a temporary decrease in revenue or even lose some old clients.
Significant investment may be required to refactor existing code, for example, retrain staff, and potentially reshape the organization. Existing customer contracts may need to be renegotiated to align with the new product-based model.
During the transition, the company may need to operate in two modes simultaneously – minimum servicing of existing bespoke contracts while developing the standardized product. This can strain resources and requires careful financial management.
Whichever strategy is used, it is essential that everyone is working towards the same goal. This means that the plan needs to be communicated both externally to customers and internally to teams, as well as facilitating improved internal communication.
External communication: Managing expectations and delivering value
For companies transforming existing products, clear and ongoing communication with customers about the changes, timeline, and benefits is crucial for maintaining relationships and securing buy-in.
Managing customer expectations becomes critical. Existing customers accustomed to bespoke solutions may resist the move to a standardized product. Balancing their needs with the broader market requirements in the product roadmap becomes a delicate dance.
It’s crucial to articulate the long-term benefits of the transformation to these external stakeholders. While there may be short-term disruptions, the end result should be a more scalable, efficient, and innovative product offering.
Regularly communicating and celebrating transformation milestones helps maintain momentum and demonstrates progress to all stakeholders, including customers, investors, and partners.
Internal communication: Breaking down silos
Effective internal communication is the cornerstone of successful scale-up transformation. It’s not merely about disseminating information; it’s about fostering understanding, alignment, and buy-in across the entire organization.
This is particularly crucial when transitioning from a bespoke to a product-based model as it requires a fundamental shift in how different departments operate and interact. Every team needs to understand the vision and their role in the transformation.
At the heart of this communication challenge is the need to break down silos. Transformation demands collaboration across departments that may not typically work closely together, such as development, finance, and sales. These departments often operate in their own bubbles, with their own financial priorities and languages.
Effective communication requires translation between these languages. This might mean explaining technical concepts in business terms for the finance team, or articulating market needs in ways that resonate with developers.
Regular cross-functional meetings and workshops can be invaluable, as well as getting teams to shadow one another to understand how ideas are put into practice.
Aligning your organization for transformation
Embedding the transformation mindset into your business starts with finance. To embed these changes in mindset, finance and culture into the very structure of the organization for long-lasting transformation, consider the following steps:
- Engage Finance Early: Bring your CFO and finance team into the transformation process from the start. Help them understand the long-term benefits of the product-based approach.
- Rethink Metrics: Develop new financial metrics that reflect the success of the product-based approach. These might include Customer Lifetime Value (CLV), churn rate, or ratio of customization revenue to product revenue.
- Adjust Incentives: Revise commission structures to reward sales of the standardized product rather than customizations.
- Invest in Training: Provide training to help teams adapt to the new model. This might include teaching sales teams how to sell a product rather than a service, or helping developers think in terms of scalable features rather than custom solutions.
- Restructure Teams: Consider reorganizing your teams to better support the product-based model. This might involve creating cross-functional product teams or establishing a dedicated product management function.
By aligning your financial structure with your new product-based mindset, you create an organizational structure, culture and environment where transformation can take root and flourish.
Remember, successful scaling isn’t just about adopting new technologies or methodologies. It’s about reshaping your entire business model to support a new way of creating and delivering value to customers. And at the heart of this reshaping is finance.
Ian Miell is a partner at Container Solutions, and has been helping companies, across industries, move to cloud native ways of working for over ten years. Container Solutions develops a strategy, a clear plan and step by step implementation helping companies achieve a smooth digital transformation. With services including Internal Developer Platform Enablement, Cloud Modernisation, DevOps/DevSecOps, Site Reliability Engineering (SRE) Consultancy, Cloud Optimisation and creating a full Cloud Native Strategy, companies get much more than just engineering know-how.
The views and opinions expressed in this blog post or content are those of the authors or the interviewees and do not necessarily reflect the official policy or position of any other agency, organization, employer, or company.