In the life of every successful company, there comes a pivotal moment early on where the fledgling company has to scale. You’ve built a product, and on boarded some early customers. Things are humming along and you’re poised for growth.
This is actually a precarious time. Will your company be able to handle the increased workload that comes with growth without breaking and while maintaining profitability? Probably not without making some very difficult decisions. The first and most painful may be kissing some part of your product line–and the revenue it generates–goodbye.
This is exactly what we had to do while scaling Pilot Software, a company that was later purchased by SAP.
A hammer in search of a nail
Pilot started out as a general-purpose business intelligence tool. There’s a saying in that industry that BI is a hammer in search of a nail, which is why a lot of companies in the space pick just a couple of problems or industry segments to focus on.
Our original product qualified as a hammer under that definition. It could solve a lot of problems for a lot of businesses, and because of that the sales process took a very long time.
As we progressed and looked at the competitive landscape, and talked to enough prospects and customers, and understood why they were buying from us, eventually we were able to build a solid ring fence around something called operational performance management.
It was a rapidly emerging space that had a very concrete set of needs, some of which were already in our product and others that we had to go build. But, it was clear that we were already differentiated in this area, and this was our future direction.
The problem was, we had 1,200 customers paying maintenance on various versions of our general purpose BI product. They weren’t calling in much, and we weren’t really doing anything proactively for them, so it was essentially free money. We could keep collecting that revenue stream while pivoting to operational performance management.
Or so we thought.
The first thing you need if you’re going to pivot like that is a solid plan. When we took the idea of pursuing operational performance management to the board, some members naturally wanted to know how we were going to cover the revenue gap as we scaled that side of the business, while others wanted to know what resources would be freed up if we moved in this direction.
What we realized in these discussions was that these legacy customers were a distraction. There was no future upside with them. The revenue stream was only going to decrease over time with customer churn. It was creating a false sense of security.
Not only that, even though these customers weren’t making a lot of demands, they represented an ongoing obligation for the company. We had to support old software and old code on old hardware. And, we had to make sure that internally we had employees that knew enough to support all those things, as well.
There were few big logos we could leverage for marketing, and even if there had been they no longer would have represented the customers that we now knew we wanted.
Finally, they were hurting our growth numbers. What investors are looking for is strong, double digit growth. These 1,200 customers were making our base revenue number look really big. It looked like we were only growing by like 15 or 20% because we had this big maintenance revenue stream. But, once we took that out of the equation, what it highlighted was that on the new customer acquisition front, we were coming close to doubling the business every 6 months. That’s a much better growth story.
What became readily apparent is this free money actually had a bunch of costs. Looking at it over a two or three-year period, reallocating those resources to write new code or provide new services to help us fuel our growth was a much better strategy.
So, we took a deep breath and fired those 1,200 customers and abandoned general purpose BI. It was tough, it was painful, and it was scary because that was money we had been using to fuel the company.
The new vision
The second thing you need to do when you pivot is clearly communicate the new vision and focus. Once we did that, things started to fall into place.
Initially there was a lot of internal discussion about what it meant and what people’s roles were, but once everyone was clear on the direction and the plan was defined, people either got on board or left.
Everybody’s job got much easier because instead of trying to balance and prioritize trade-offs, it was now crystal clear as to what we should work on. The extended leadership team could just make decisions. Not everything had to bubble up to the executive team or the C-suite.
We could go faster. People could go deeper into the problem and look for the components and partnerships we needed to really solve the problem.
With the entire team just focused on building the product for this new market, we scaled rapidly with a very small team. In a relatively short period of time–about 18 months–we were winning industry accolades. We were able to secure some pretty large deals in the enterprise software space, primarily with SAP customers, which is why SAP was so interested in purchasing the company.
Many young companies struggle with this same problem—a significant revenue stream that isn’t relevant to the future direction of the company. In Pilot’s case it was maintenance revenue; for some companies it’s ongoing revenue from a few large, early strategic customers.
As you mature your offering and hit those inflection points where you need to scale, you have to evaluate whether you’ve outgrown the customers that got you there. And if that is the case, you have to decide what to do about it.
Knowing when to stop
With Pilot, it was clear that we needed not only to focus on our future direction, but also to stop doing things that were disrupting our focus and creating confusion as to where to deploy our limited resources. But that’s not the only way to approach it. You can gradually sunset a line of business, spin it off, or make it a separate line item on your revenue plan.
In the early days, you’re just selling to prove product market fit, and show you can make money at whatever it is you’re doing. But for most companies, there comes an inflection point where if you want to scale efficiently, you need to let go of certain ropes and focus on others. You could have amazing entrepreneurs, a great product, plenty of customers and leadership in the marketplace, but if you can’t make those difficult changes, the struggle to scale will be much more difficult and hazardous in the long run.Google+