Near Software Development

Can successful custom software development projects be developed outside the customer site? I not only think they can, I think they should always be developed outside the customer site.

The first reason I believe a custom software development should be done offsite is to control scope. A project developed on site is prone to constant scope changes due to the proximity of the software developers to the project stakeholders and end users. It is so easy for a customer to walk down the hall and have an informal meeting with one of the project’s developer. A lot of times these informal meetings trigger an informal scope change that bypasses the project change control structure and is noticed by the Project Manager when it is too late. Some may argue this is defective Project Management. I believe this is onsite software development reality. Customers commit to requirements better when the work is done offsite.

In my experience most offsite custom software developments are delivered on time. Again, it is so easy to simply tell a customer down the hall that the project is going to be late, “but you know we are working hard and we stay late everyday”. Offsite teams do not have the luxury of having the customer see how hard they work or how late they are staying or how complicate the logic really is. Consequently, offsite teams need to demonstrate the customer how hard they work by delivering quality software on time without excuses.

Usually, the offsite location is a more relax place for developers to work and a more relax software developer produces higher quality code. Software Developers have special needs. Software Development is as much art as science. Thus, to be more productive Software Developers need a working space that permits their creativity to flow in their own terms. This can be no dress code, flexible working hours, all you can drink coffee, or even a no questions ask thinking sofa. I have yet to see a customer site that offers contract software developers an office space where they can feel relax and not stress out that the customer is watching how they are working.

Sure there are downfalls to working offsite. For example, communication between the software development team and the customer can flow a little bit slower. The customer might think the work being performed is easier than what is the reality and thus, wants the project to be complete on a shorter time frame. But the truth is a good Project Manager can handle these “shortfalls” as normal project risks and deliver an improved customer experience with an offsite software development team.

I urge you to try out your next custom software development offsite. You will be impressed with your results.

Revenue Model Comparison: SaaS v. One-Time-Sales

Introduction

 

There are different software offerings in the market. While many solutions may try to tackle one problems, pricing may vary among providers. In the past, companies like Microsoft have been known for offering off-the-shelf solutions that are paid for only once. E.g. MS Office for $200. You buy it once, and as long as your computer is alive and kicking, you get to use it. Other companies like Google offer a service that is invoiced on monthly basis. E.g. Google Apps for $5 per month per user. While both of these products address the similar user needs, they have very different cash flow streams. One is the one-time sale (“OTS”), while the other is known as Software-as-a-Service (“SaaS”). Both have advantages and disadvantages. In this post, we are going to identify and compare the basics of cash flow behavior for the One-Time Sale and the Software-as-a-Service models. Hopefully after this post, entrepreneurs exploring revenue models for their project will have a starting point.

 

We start by identifying development costs and expenses. Both models must incur in development costs and this is not particularly affected by the sales model selected. The product must be coded and these costs are normally paid up front, as you will need to hire developers to start coding your product before its ready for the market. In this example, we are assuming our product development will cost $500,000.

 

                Five Examples – Total Cash Flow + Break-even point

 

Example #1

 

In our base case, we assume the follow:

 

Assumptions – Ex. 1 Software-as-a-Service One-time Sale
Development costs $500,000 $500,000
Sales price $25 / month $300
Sales & Marketing expenses 15% of sales 15% of sales
Customer service & warranty 15% of sales 15% of sales
New clients per month 1,000 1,000
Churn rate (clients cancellations) 0% 0%

 

Our development costs are the same, the sales price is $25.00 a month for the SaaS and $300.00 (12 months at $25.00). Our marketing, customer service and warranty expense adds up to 30% of our monthly sales and we manage to get 1,000 new clients per month, without losing any clients (“churn”).

 

Figure 1

 

As you can see, there is a big difference between the two models. While the variables are quite similar, the fact is One-time Sales generates 12 times more cash flow due to the upfront payments. Total net cash flow generation at December is $2,020,000. Which is $1,155,000 more than the SaaS model would generate ($855,000). Total cash flow generation is one of the most important factors when analyzing the different models.

 

This is true because the 1,000 clients acquired in December through the SaaS model still need to pay for 11 months, in order to generate the total cash flows that the OTS would generate. The 1,000 clients acquired in November still need to pay for 10 months, in order to generate the total cash flows that the OTS would generate… and so forth.

 

Total cash flow generation is one of the most important factors when analyzing the different models. The second important factor is the break-even date. The break-even date answers when the total product sales provide enough cash to cover all the development costs. As the Figure 1 shows, OTS breaks even somewhere between February and March, while the SaaS model barely crosses the mark in August. If you have third-party financing (investors, bank loans, etc.), this is an important metric.

 

Example #2

 

In our second example, we assume the same facts as Example 1, except that only half of the clients accept the OTS model, 500 new clients a month. While we are not basing this on hard data, we can assume that because many clients have not tried the product, 50% of them would not pay the full price. In other words, asking for $25.00 is a lot easier than asking for $300.00.

 

Assumptions – Ex. 2 Software-as-a-Service One-time Sale
Development costs $500,000 $500,000
Sales price $25 / month $300
Sales & Marketing expenses 15% of sales 15% of sales
Customer service & warranty 15% of sales 15% of sales
New clients per month 1,000 500
Churn rate (clients cancellations) 0% 0%

 

 

Figure 2

 

Decision makers will not lean towards the OTS model so swiftly with these assumptions, would they? Analyzing total net cash flows, the SaaS model now generates $865,000. Which is $105,000 more than the OTS model. Still, the total cash flow generated by the OTS model in Example 2 is $760,000, or $1,260,000 less than Example 1. ($2,020,000). Furthermore, the break-even point for OTS is somewhere in May (instead of February) and the SaaS model’s break-even date stayed at August.

 

 

Example #3

 

Example 3 uses the same assumptions from Example 2, except we add a “Churn rate” of 5% to the monthly clients. In other words, the software is pretty awesome, but 1 out of 20 clients cancel subscriptions every month. Churn is normal in subscription based models. There might be a period where the company experiences no churn, but eventually, clients will start leaving. While some of the reasons can related to the product per se, some other times it is really because the company has completely independent motives not related to the product (Ie. Client closes operations, client no longer needs to the software, client is acquired and holding company uses your competition’s service, etc.)

 

Assumptions – Ex. 3 Software-as-a-Service One-time Sale
Development costs $500,000 $500,000
Sales price $25 / month $300
Sales & Marketing expenses 15% of sales 15% of sales
Customer service & warranty 15% of sales 15% of sales
New clients per month 1,000 500
Churn rate (clients cancellations) 5% 0%

 

 

Figure 3

 

By taking into account the churn rate for this product, the OTS model generates $760,000. Which is $116,605 more cash flow than the SaaS model ($643,395) . This should be easy to understand, since you are catering to a lesser amount of clients.

 

 

Example #4

 

Again, we maintain the same assumptions of Example 3, but add a 20% discount to the OTS model sales price to lure clients into paying a lump-sum. Like mentioned in Example 2, selling OTS for $300.00 is more difficult than selling a $25.00 a month SaaS. So, in order to provide them an incentive to go for the OTS rather than the SaaS, we provide them with a discount for paying upfront.

 

Assumptions – Ex. 4 Software-as-a-Service One-time Sale
Development costs $500,000 $500,000
Sales price $25 / month $300 – 20% disc. = $240
Sales & Marketing expenses 15% of sales 15% of sales
Customer service & warranty 15% of sales 15% of sales
New clients per month 1,000 500
Churn rate (clients cancellations) 5% 0%

 

Figure 4

 

These assumptions have changed the game again. Total net cash flow for the OTS model is $508,000. Which is $135,395 less than the SaaS model ($643,395). Our break-even point for the OTS has moved from May to June. That means that while we are generating less cash, it will take up one month longer to recover the investment. Again, a change in our models can convince us to change our strategy between selecting an OTS or SaaS model.

 

Example #5

 

In our last example, assumptions of the prior example remain unchanged, except for the total marketing and customer service / warranty expenses. We are assuming that the OTS model cost for marketing and customer service / warranty expense is 20% instead of 15%. We assume that because selling at $240.00 is more difficult than selling a $25.00 monthly service. So, we modify the pay structure because we need more aggressive and incentivized sales rep.

 

We change the commission assumption, but in reality this can be anything. We just used sales & marketing to express how important small changes in the structure change the cash flow models…

 

Assumptions – Ex. 5 Software-as-a-Service One-time Sale
Development costs $500,000 $500,000
Sales price $25 / month $300 – 20% discount = $240
Sales & Marketing expenses 15% of sales 20% of sales
Customer service & warranty 15% of sales 15% of sales
New clients per month 1,000 500
Churn rate (clients cancellations) 0% 0%

 

 

Figure 5

 

Total cash flow for the SaaS model is $643,395. Which is $207,395 more than the OTS model ($436,000). Our break-even point for the OTS has moved from May to July, taking one month longer to recover the investment than in our previous example.

 

Summary

While this post barely scratches the surface of Software Revenue Models, with these five (5) basic examples, we can visualize the differences between a subscription model or software-as-a-service (SaaS) and One-time Sales (OTS) models. It is important to understand how little changes in your cash inflow and cash outflow structure can completely change the profitability and risk of your project. After doing small tests within you sales organization, whether by asking your team, current customers, or prospective clients, and plugging them into your financial model; you can better assess which model will adjust better to your organization’s goal. One thing is for sure, the market is currently shifting towards the subscription-based model. Most clients will prefer to do a smaller investment in your product, while having the flexibility to cancel if they are not happy with the service or the service does not adjust to their organization’s needs. This shift is now obvious in most consumer software products. For the enterprise customers it is less obvious, as many of these developments are custom-tailored to the organization’s needs.

 

There are many issues that have not been addressed in this post. Our goal with this first post was to set the basis for comparison between OTS and SaaS models. In our second series we will address the metrics and other terminology frequently used within the software industry. We will also visit some of the benchmarks executives, entrepreneurs and investors are using when deciding in which software development to pour their money and energy.

 

Note: If you want me to send you the Excel with the formulas for this post, or if you have questions or comments, let me know. My email is: mmoreda@wovenware.com. I will respond to every email with questions or comments, and if they are important, witty and/or relevant, I will incorporate them into the following post of the financial series.

An Interview is a Pitch of You

The company should hire me because blank.

Do you know your story? Are you ready to pitch your story and get the job? “Well, tell me your story, tell me about you”, the interviewer said.

That is the moment when candidates start looking down to their resume just to make sure they do not screw up. The very busy interviewer thinks, “Did you really just do that? Don’t you know who you are? This is a waste of my time!” The candidate starts saying exactly what is on the resume and immediately highlights the non-impressive skills that are already in the resume. “Hard-worker, disciplined, multi-tasking, excellent interpersonal communication skills, organized, leader”… STOP!

Dear Candidates, we are sure that you have a lot to bring to the table…just do not read it from your resume! An interview is a conversation, not to a read out loud. Let me explain, from my perspective what an interviewer really wants when they ask, “Tell me about you”. You have lived your own life and have worked hard to be the person you are today, so before going to an interview create your success story. WAIT, WHAT? Create a chronological movie of how you came to be the professional you are now. Answer questions like: Why you decided to study what you did? How you got your first job? Why you decided to change your job? What you liked most and less from your past job experiences? And please, please know what is your competitive advantage for the position you are applying and/or the company you want to work for.

For example, your competitive advantage may be that you are a natural leader. Make sure to show in your story how it leads you to achieve your goals. Another thing to keep in mind, is to focus on your successes, I am sure that some negative things do happen within experiences but do not let them opaque your story’s bright side. (Tip: Interviewers will ask you later on about the worst experience in different situations.) After you have your storyline, ask yourself, is this movie ready to be sold? If the answer is yes…Time to Sell!!!

But how do you sell a good story? Of course, it needs an: EXTRAORDINARY MOVIE TRAILER! As movie viewers, interviewers do not have much time during an interview to know your whole story, so you have to create a movie trailer that captures his or her attention and make them want to know more about you. What should be told in this trailer? Emphasize the parts that highlights all the skills that add value to you as a professional and to the position you are being interviewed for. As a candidate you may be thinking, “Why should I do a mental movie and then a trailer?” Well, as you capture your interviewer’s attention with the trailer, more questions will come. The movie will help you answer these questions.

Finally, remember to make your movie trailer an exciting one, make the interviewer want to know the whole movie. SELL YOUR MOVIE!!! Interviews usually take 45 minutes and from those you have 5 minutes to impress and sell your story to the interviewer. Differentiate yourself and make sure that the interviewer never forgets your movie clip.

Now…GO! create your movie and tell me more!

X12 EDI: From Electronic Transaction to Paper Format

Following a brief history of our Tx Manager product, a software solution that converts electronic 837 X12 EDI transactions, e.g. electronic claims, into a visual representation of their paper format, e.g. HCFA-1500, UB-04, and Dental Claims.

Note: Although this is a universal business problem, when the article refers to electronic transactions it specifically refers to ASC X12 EDI 837 electronic claims transactions.

Electronic transactions fail to process everyday.  There are multiple reasons why electronic transactions fail to process:

  • incorrect transaction formats
  • communication issues
  • subpar systems integration
  • availability of core systems
  • etc.

What happens when these electronic transactions fail to process correctly? Do you ask your providers to resend the transactions or do you reprocess them yourself?

In our experience, we have seen that when a customers is able to identify that an electronic transaction failed, they reprocess the transactions themselves. That is, companies seldom burden their customers to resend electronic transactions that have failed to process. How do they reprocess the transactions, you may ask.  The majority of companies manually reprocess failed electronic transactions.  They usually have a data entry department that takes the failed transactions and enters them into the core system.

Having a data entry department process failed transactions can be a time consuming error-prone endeavor. It is very difficult for data entry personnel to read an electronic transaction in its original format and be able to process the data into the core system.  Data entry personnel need that the electronic transactions be converted into a readable format that allows them to understand the data details of the transactions. Once they can read the electronic transactions they are able to enter them into the core system.  But organizations need to be very careful with this approach, because processing electronic data manually can lead to serious data errors and inconsistencies.

At Wovenware, we identified this problem and built the Tx Manager to help healthcare insurance companies overcome this challenge.  The Tx Manager reads ASC X12 EDI 837 electronic claims transactions extracts their data and presents them to the user in a visual representation of their paper format (HCFA-1500, UB-04, or Dental Claim). The TxManager includes workflow functionality that allows multiple users to work in the web application at the same time, ensuring that no two users work on the same transaction. Additionally, the TxManager validates the accuracy of the transaction information in the core system, thus, ensuring data quality of the process.

We have successfully implemented the Tx Manager in various customers and have seen an improvement in the quantity and data quality of all manually processed electronic transaction in the core system. Need to improve your process, what are you waiting for?

What is content marketing and how can it benefit your company?

Nowadays every costumer out there wants an engaging relationship in which they can exchange valuable content with the company they are receiving services from. It is now widely known that there is a new kid in Marketing Town, and yes this kid is as useful to the IT industry, as it is to other industries. This kid is “Content Marketing“. You might be asking yourself: “What is content marketing and how can it benefit my company?”

According to the Content Marketing Institute, content marketing is “a marketing technique of creating and distributing relevant and valuable content to attract, acquire and engage a clearly defined and understood target audience with the objective of driving profitable customer action” (CMI)  The point of using content marketing is to create valuable content. As marketers that are helping IT companies in the midst of change, we must learn what our clients need the most, so we can plan strategies to help them. We are living days in which Twitter, Facebook and LinkedIn can do our work without us knowing. So, as content marketers we must know how to use these tools in all the right ways.

It is not only about selling something, is about creating value and making people engage with it. Give something to your clients that they can relate to so that they can understand better what you do and how you can help them. Facebook is a great tool these days, people are always scrolling that news feed like there’s no end to it. But, is that the only site you want to be in? We suggest you go big or you go home. Instead of focusing on Facebook, write blog post, white papers, provide webinars. These things attract audience and they get to know more about what you are selling without seeming like you are selling them. Once you grab their attention they will be intrigued to know more about your company and, if content is valuable enough, they will buy your products and services. For IT services companies, it is harder to sell, especially since they don’t have a specific software solution. All IT services companies sell is knowledge and experience that transforms into extraordinary service that help solve clients problems. Make sure you are letting your clients know you provide this value… and do it through content marketing.

 

5 Tips to Be a Better Consultant

Working for a client is not an easy thing.  Whether it is related to information systems, finance or operations, just the simple exercise of understanding the needs that a client has is a unique experience and sometimes it can be a task of titanic proportions.

But, that is your job.  Consulting gives you and your client the opportunity to see things from another perspective, taking into consideration aspects and issues you didn’t thought of before. In the end, you are the expert.  It’s you who the client chose to help him solving the problem he’s facing.  It doesn’t matter what he hired you for, what matters is that you are the person best qualified to find the right solution to the problem because, after all, you are the expert.  You are the one who understands the topic better than anyone and you are in a better position than him to make an assessment or recommendation.

So, just doing what the client asked you for is not good enough. You need to make a good analysis of the problem at hand and put the client in the best position possible to make the best decision.  What good are you if you are not advising your client correctly? Aren’t you supposed to be the expert? What’s the point of going into a meeting with a client and not make recommendations?  By not being proactive, you are not creating the necessary value so that the client feels satisfied with your contribution and you are putting a future relationship with your client at jeopardy.

In my experience this are 5 important keys to be a good consultant. As you can see, not all of them are related with your technical capability about a topic. As a consultant, you have to pay attention to other areas that sometimes go unnoticed.

1.  Know your stuff

Obviously you have to know what you are taking about. You are the expert the client chose to address the issue. You don’t only have to know why you recommend option A; you also have to know the reason by which options B, C and D are not appropriate. Remember that besides convincing the project “champion”, there are other crucial people that need to be persuaded too.

2.  Win their trust

There is no better proof that you are doing a good job as consultant that when your client trusts you. A vote of confidence not only earns you “bragging rights”, but also puts you in a better position than other consultants and in occasions above employees of that client. The power that trust gives you will let you be more effective and more assertive when giving your opinion and making recommendations.

3.  Beware of your hygiene and always dress to impress

I shouldn’t have to say this but…you have to pay attention to your hygiene and mostly your breath. Keep mints or chewing gum and use them after lunch or before a meeting. Your clothing is vital and you shouldn’t make assumptions about a specific way to dress. Always maintain conservative business attire, at least until you know your client well. This will earn you initial respect from your client and will make him look at you in a better way. Remember that you dictate the norm and there isn’t a second chance to create a first impression.

4.  Never Say Never

We have to watch the way we say things. One of the worst things you can do as a consultant is going to a meeting and say something can’t be done and end of story. It looks bad and participants don’t take it in a good way.  The way to say that something “can’t be done” is by giving alternatives and explaining why that option is not feasible. To say “can’t be done” puts you on the side of those who don’t want change and see the glass half empty. In engineering we say that: “everything can be done, it’s only a problem of time and money”. Try to always be positive, give options and alternatives.

5. Learn how to write an email

Marc Twain once said: “I didn’t have time to write a short letter, so I wrote a long one instead.” Writing a concise email to a client, in general, takes times because we have to be careful of:

  • how we say what we want;
  • who do we send it to; and
  • what is the purpose.

We have to question ourselves: Is the email well written grammatically and logically? who should receive it and who I should send copy to? What the tone of the email?  Emails have replaced personal contact and, sometimes, people don’t pay attention to the way they write them. You have to make sure that your grammar is perfect because this says a lot about you. We have to make sure that we put the reader in position of understanding what are we talking about. Writing perfectly what we want to say is essential since, if we don’t do it, we are at risk of causing misunderstandings that we will have to explain.  Always remember that it is better to speak directly with the person rather than writing a long and confusing email.

Finally, don’t forget that everything has a balance. The client will place on a balance the cost of a consultant versus the value that you bring to him. It is your job to create enough value for the balance to move in your favor.