Evolving from a software company to platform company, partnerships are key

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Back in 2011, Marc Andreesen penned his now famous essay, “Why Software Is Eating The World,” outlining the coming economic shift in which software companies take over large segments of the economy.

Gartner in 2012 predicted that “The Nexus of Forces”—mobile, social, cloud and information–would give rise to “entirely new possibilities and creative business endeavors.”

Five years in, we’re seeing that take shape with the rise of platform businesses and market places such as Uber, Airbnb and Amazon.

Solving problems with software

All of these businesses run on software, and are considered to be disruptors in their industries. In the light of their success, certainly there will be software companies that start off with grand visions of becoming a platform that disrupts an entire industry.

The reality is that a lot of today’s platform businesses weren’t born as platforms. They started out as software companies trying to solve a single problem. Once they succeeded, they gradually evolved into platform businesses. Many of today’s software companies can become platforms the same way—not by birth but by careful evolution.

The main idea behind becoming a platform is that once you have large numbers of customers using your software, you grow revenue by adding related services in order to deliver such a complete experience that customers don’t even consider doing business elsewhere. One of the keys to success is making smart decisions about how you extend your capabilities.

Knocking down the next pin

It’s similar to what Geoffrey Moore calls the bowling pin strategy. Once you dominate your core area, you expand into new areas. For example, Uber has added auto loans, delivery and carpooling; Airbnb has added guided tours and Amazon now sells everything under the sun, including the cloud services that power its own business.

There’s one big caveat. Everything you add to your platform has to be as good as your core offering, or it will hurt your brand experience. That means you have to give careful consideration not just to what to add, but how to add it. Do you build these new capabilities yourself, partner with other companies or open up your platform for other people to build on?

“To be a platform, it takes a certain amount of humility,” former Apple Chief Evangelist Guy Kawasaki told me in a recent conversation. “You have to be able to say, we can’t do everything.”

Humility as a strategy

Infusionsoft is a company that has followed this philosophy to become a platform. They started off making marketing automation software. Then they started allowing partners to build industry-specific content on top of their platform, such as templated email campaigns, and content for veterinary clinics or real estate offices, for example.

Next, they started looking at peripheral services such as shopping carts, payment capabilities, and the ability to import and export data to and from an accounting solution.

They had a deep understanding of what was core to their business. They continued to innovate in those areas where they could be best of breed.

But, it didn’t make sense for them to get into content creation, or shopping cart development, or payments or accounting. It made more sense to partner with best-in-class companies that are already out there, and focus instead on creating seamless integrations between their products.

Customer experience rules

To be successful with this approach, you have to pick your partners carefully, choosing those that apply the same level of attention to customer experience as you do in your core product.

You need to do almost the same level of due diligence and understand the requirements just like you would if you were to go off and build it yourself.

Even if it’s a partner that’s providing the service, your customers are going to have an experience that you’re going to lead them to. If the experience is a poor experience, you still are associated with that. So, you have to imagine the experience from the customer’s perspective.

No app for that

We did a poor job of this when we built our own app store during the time when I was at SAP. SAP is a visionary platform company in many ways. Though they own a database and an ERP system and transactional systems and front-end analytic systems, they didn’t dictate that you had to run all of those solutions. They had what’s called an open stack—they let you choose whatever database you wanted to use and they supported them all and integrated with a variety of vendors.

But, they really fell down building the app store. We told our partners what the requirements were and got some to contribute apps, but we didn’t really think through the whole customer experience. There wasn’t a way for an end customer of SAP to find these solutions and get a chance to use them and figure out how to derive value.

I think that given the size and marketplace footprint of SAP, they may have though if they built it, people would come, but it just didn’t take off. In retrospect, I think building an app store was clearly outside our core competency. And, it’s questionable in my mind whether an app store was even a good extension of the platform in the first place.

As software does “eat” more of the world, even software firms of modest aspirations need to be thinking about the platform opportunity. As you succeed and grow and your customers ask you to solve more of their problems, you have an opportunity to become a platform.

But you need to think carefully about what makes sense to add, and whether you’re going to build it, or whether you’re going to partner. And if you can’t serve up something as good as what made you successful the first place, maybe you shouldn’t be doing it at all.

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