The blueprint of a brilliant OSS business model

Warren Buffett has said that ‘leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return’ and ‘a truly great business must have an enduring “moat” that protects excellent returns on invested capital’.
We think we’ve found one. Hansen Technologies (ASX: HSN) is an off-the-radar small-cap stock that makes billing software for telcos and utilities. If you’re an Optus or Energy Australia customer, Hansen prepares your monthly bill.
Here’s the great thing about Hansen. The company doesn’t have customers, it has voluntary hostages. A utility chooses its billing software provider but, once the software is installed, it isn’t going anywhere without significant risk. It can take a year or two for a utility to install new billing software and often costs millions. Any stuff-ups and the company faces cash flow problems and a customer relations nightmare
.”
Graham Witcomb
in an article entitled, “My favourite small-cap compounding machine”.

Interesting article written here by Graham Witcomb, an investment analyst. I’d definitely recommend taking a deeper dive by clicking on the link. It’s a fascinating analysis of a BSS company that has found a profitable niche in the market and is showing strong growth on the back of it.

The principles that it lays out form the basis of a strategy for OSS companies:

  • Progressively build a customer base that needs your product (obviously)
  • Turn customers into voluntary hostages (in the nicest sense of the word), which represents Warren Buffett’s moat, by providing:
    • A solution (technology, people, process) they can depend upon month after month
    • Keeping the scope as simple as possible knowing that there is an inherent complexity in these solutions that make the risk and cost of switching a large hurdle for customers
    • The ability to customise to each client’s specific needs, meaning that their integration and switching costs / risks become higher
    • Note that this captivity delivers an element of pricing power (but still needs to provide a discernable value for customers to retain them)
  • Ensure growth through building a recurring revenue model (with defined annual license increases) to act as a base on which to grow through acquisition of the new clients that are relatively rare in this industry
  • Deliver a high return on capital by keeping overheads and risks low through simple operations and solutions, as mentioned above
  • To reiterate on point 2, ensure you do everything in your power to keep almost every customer you ever win (only a handful of Hansen’s 200+ companies have left in 20+ years)

There aren’t many OSS that find themselves in this position. The 70% of revenues that come from recurring sources and the very low churn are the key differences between the Hansen model and most OSS vendors.

Note: This blog takes the analyst report at face-value and has not been verified. The intent of the blog is to talk about the business model, not Hansen specifically or whether Hansen represents a good investment. Your author doesn’t own any interests in Hansen.

If this article was helpful, subscribe to the Passionate About OSS Blog to get each new post sent directly to your inbox. 100% free of charge and free of spam.

Our Solutions

Share:

Most Recent Articles

No telco wants to buy an OSS/BSS

When you’re a senior exec in a telco and you’ve been made responsible for allocating resources, it’s unlikely that you ever think, “gee, we really

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.