Treating your OSS/BSS suite like a share portfolio

Like most readers, I’m sure your OSS/BSS suite consists of many components. What if you were to look at each of those components as assets? In a share portfolio, you analyse your stocks to see which assets are truly worth keeping and which should be divested.

We don’t tend to take such a long-term analytical view of our OSS/BSS components. We may regularly talk about their performance anecdotally, but I’m talking about a strategic analysis approach.

If you were to look at each of your OSS/BSS components, where would you put them in the BCG Matrix?
BCG matrix
Image sourced from NetMBA here.

How many of your components are giving a return (whatever that may mean in your organisation) and/or have significant growth potential? How many are dogs that are a serious drain on your portfolio?

From an investor’s perspective, we seek to double-down our day-to-day investment in cash-cows and stars. Equally, we seek to divest our dogs.

But that’s not always the case with our OSS/BSS porfolio. We sometimes spend so much of our daily activity tweaking around the edges, trying to fix our dogs or just adding more things into our OSS/BSS suite – all of which distracts us from increasing the total value of our portfolio.

To paraphrase this Motley Fool investment strategy article into an OSS/BSS context:

  • Holding too many shares in a portfolio can crowd out returns for good ideas – being precisely focused on what’s making a difference rather than being distracted by having too many positions. Warren Buffett recommends taking 5-10 positions in companies that you are confident in holding forever (or for a very long period of time), rather than constantly switching. I shall note though that software could arguably be considered to be more perishable than the institutions we invest in – software doesn’t tend to last for decades (except some OSS perhaps  😀 )
  • Good ideas are scarce – ensuring you’re not getting distracted by the latest trends and buzzwords
  • Competitive knowledge advantage – knowing your market segment / portfolio extremely well and how to make the most of it, rather than having to up-skill on every new tool that you bring into the suite
  • Diversification isn’t lost – ensuring there is suitable vendor/product diversification to minimise risk, but also being open to long-term strategic changes in the product mix

Day-trading of OSS / BSS tools might be a fun hobby for those of us who solution them, but is it as beneficial as long-run investment?

I’d love to hear your thoughts and experiences.

Could you replace a 150-person OSS team with just 1?

In 1998 Berkshire Hathaway acquired a reinsurance company called General Re. “The only significant staff change that followed the merger was the elimination of General Re’s investment unit. Some 150 people had been in charge of deciding where to invest the company’s funds; they were replaced with just one individual – Warren Buffett.
Robert G. Hagstrom
in, “The Warren Buffett Way.”

Following on from yesterday’s post about Warren Buffett’s prioritisation techniques and the recent series about the “frenzy of doing,” I was reminded of the staggering story at General Re described above.

Buffett was able to replace 150 people, and significantly outperform them, because they were performing (relatively) small value, high volume transactions and he was, well, the opposite.

OSS implementation and long-play investing are obviously very different in terms of resource requirements, but if we were to draw on this story, how would we replace whole OSS teams with just one person (or a small handful of people)?

Most CSPs have vast numbers of people who build and maintain their OSS. For most of those CSPs, the OSS isn’t the core business; in fact OSS is a cost of doing business; so does it really even make sense to have so many OSS people on staff?

How do you think this analogy stacks up:

  • Remove the legions of resources who are performing high volume, low value, transactional updates to the OSS
  • Replace them with one person who has a mindset of simplification, long-term outcomes and only betting big on the most strategic of changes
  • Outsource operations of the OSS to partners who have a strong track record of return on capital, just as Buffett avoids having to manage the companies he acquires by only investing if they are led by strong management teams who have a proven ability to deliver returns

One major chink in this strategy is that it is much easier to divest of bad stocks and wait until the right investment comes along, as opposed to making in-flight transformation of the tools a CSP needs to run all parts of its business (eg sales, engineering, field-work, etc).

If you were told you HAD to replace a team of 150 OSS implementers with one person, what would your strategy be?
Even if not being quite so drastic, could elements of your strategy work within your current OSS environment?

Alternatively, if you represent an OSS vendor that offers managed services, do you have the data to prove that you deliver strong returns on a customer’s invested capital?

The story of Mike Flint

Mike Flint was Warren Buffett’s personal airplane pilot for 10 years. (Flint has also flown four US Presidents, so I think we can safely say he is good at his job.) According to Flint, he was talking about his career priorities with Buffett when his boss asked the pilot to go through a 3-step exercise.

Here’s how it works…

STEP 1: Buffett started by asking Flint to write down his top 25 career goals. So, Flint took some time and wrote them down. (Note: you could also complete this exercise with goals for a shorter timeline. For example, write down the top 25 things you want to accomplish this week.)

STEP 2: Then, Buffett asked Flint to review his list and circle his top 5 goals. Again, Flint took some time, made his way through the list, and eventually decided on his 5 most important goals.

Note: If you’re following along at home, pause right now and do these first two steps before moving on to Step 3.

STEP 3: At this point, Flint had two lists. The 5 items he had circled were List A and the 20 items he had not circled were List B.

Flint confirmed that he would start working on his top 5 goals right away. And that’s when Buffett asked him about the second list, “And what about the ones you didn’t circle?”

Flint replied, “Well, the top 5 are my primary focus, but the other 20 come in a close second. They are still important so I’ll work on those intermittently as I see fit. They are not as urgent, but I still plan to give them a dedicated effort.”

To which Buffett replied, “No. You’ve got it wrong, Mike. Everything you didn’t circle just became your Avoid-At-All-Cost list. No matter what, these things get no attention from you until you’ve succeeded with your top 5.”
James Clear here.

For me, this story articulates one of the challenges with the Agile approach to OSS. There are generally many, many little items being inserted into a backlog, possibly even many, many Epics being created. Sure, the highest priority activities will lend to rise in the list of priorities but is it the prioritisation of the minutiae instead of the big wins?

Do we take the “avoid at all costs” approach to anything that isn’t in the top 5? There are always lots of little tweaks that can be done to our OSS that give us a sense of accomplishment when cleared from the backlog. They may even make the lives easier for some of the OSS operators. But are they contributing to the most important obstacles facing our organisations?

Can we learn from the Mike Flint story when setting OSS development priorities?

The Noah’s Ark of OSS success

Don’t be involved in 50 or 100 things. That’s a Noah’s Ark way of investing – you end up with a zoo that way. Put meaningful amounts of money in a few things you know well.”
Warren Buffett
.

There are a lot of OSS products on the market. From that list, you can probably name a handful that have been very profitable. The reason why, I believe, can be distilled down to two primary factors:

  1. Successful OSS have a specific focus
  2. Successful OSS help a large number of people

Specific Focus – One of the best* OSS that I’ve worked with had a brilliant core and covered a large portion of the TM Forum TAM map (ie delivered a lot of the components that make up a “complete” OSS). I still have a soft spot for this vendor but unfortunately they went out of business, in part because they didn’t narrow their focus tightly enough. Their product development was spread out across the whole zoo. By contrast, unlike this company, some of the OSS companies with largest market share (and profits) don’t directly develop resource performance or fault management tools. Those segments of the market are already well serviced, so those big vendors focus their efforts elsewhere.

Extend helpfulness – I believe that the fastest way to achieve success is to first assist a large number of people in succeeding. The larger the number, the better. If you think about the most profitable companies in the world, you’ll notice that they tend to help a large number of people. The same is true in OSS – the most successful vendors either support a large number of customers, or if supporting a relatively smaller customer list, then each customer tends to be large a organisation with many operators.

The way I like to think of it is:

  • For point 1 – know what’s on the left side of your whale curve and therefore what to focus attention on
  • For point 2 – without breaching point 1, think laterally about how your focused product / suite could assist a larger customer group. For example, this might be thinking about how it can assist your customer’s sales / marketing / executive / etc business units, not just operations

This isn’t just an organisational-level perspective. From a personal level, these are also the same two personal growth questions I ask myself regularly. What are your thoughts? How could I (or you) improve on these two factors (or others)?

* When I referred to the vendor as being one of the “best,” I was clearly judging on metrics other than profitability.

Why would Warren Buffett short the OSS industry?

Now if at the start of the 20th century you had seen what the auto [industry] was going to do to this country, the impact it would have on the lives of then your children and grandchildren and so on. It just, it transformed the American landscape. But of those 2000 companies, three basically survive. And they haven’t done that well, many times.

So how do you pick three winners out of 2000? I mean it’s not so easy to do. It’s easy when you look back, but it’s not so easy looking forward. So you could have been dead right on the fact that the auto industry— in fact, you probably couldn’t have predicted how big of an impact it would have. But you wouldn’t have— if you’d bought companies across the board you wouldn’t have made any money, because the economic characteristics of that business were not easy to define.

I’ve always said the easier thing to do is figure out who loses. And what you really should have done in 1905 or so, when you saw what was going to happen with the auto is you should have gone short horses. There were 20 million horses in 1900 and there’s about 4 million horses now. So it’s easy to figure out the losers, you know the loser is the horse*. But the winner was the auto overall.
Warren Buffett in a speech at University of Georgia in 2001.

We’re currently in the middle of a maelstrom of change, as described in my market research report, “The changing landscape of OSS.” In addition to the hundreds / thousands of existing OSS vendors, there are hundreds of other tools either under development, or set to be developed in the near future, many that probably won’t even associate with the term OSS.

Even for someone like me who spends countless hours investigating OSS vendors, products, trends and techniques, it’s daunting to try to pick which ones to invest the most attention in. Like the auto industry, it’s probably impossible to predict the “3 out of 2,000” that will win out in our industry over time.

In my version of “shorting horses,” I feel comfortable in predicting the demise of current OSS technologies / concepts and that they’ll be replaced by newer models… so much of my (and your?) current knowledge base will need to be discarded and refreshed with new ideas.

Whether you choose to actually short the stocks of current OSS vendors is another discussion entirely, one that I’m not qualified or informed enough to comment on.

* As an aside, I actually suspect the even bigger loser is the horse-drawn carriage industry. There are still lots of horses out there, but I doubt there are many carriage builders left (am I jumping to a big conclusion by not actually researching this?).

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.

Would Warren Buffett invest in OSS?

I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough–I owed this to future capitalists–to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.
I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors
.”
Warren Buffett
.

Warren Buffett doesn’t tend to invest in technology, which brings derision from many in the tech industry. But his logic is perfectly plausible. Technology tends to be complex and difficult to build a protective moat around (ie a durable competitive advantage). Information technologies are perhaps even more difficult to protect.

The OSS market is highly fragmented with no vendor / integrator looking like taking a dominant position. Customer needs vary markedly, there are always shortages of skilled experts, delivery projects have significant risk, revenue is often lumpy. These are just a few of the reasons why, despite massive revenues ($67B per annum according to Insight Research), profitability is difficult to attain consistently.

The organisations that lead the market by revenue (Ericsson led with about $3.4 billion, followed by Accenture, Huawei, IBM, Amdocs and NEC, each with $2.5 to $3.2 billion according to this Gartner report) all have a heavy reliance on skilled experts to derive that revenue. They thrive on the relationships and credibility that this expertise provides, which is possibly the closest anyone in the industry gets to building a moat.

The question for others in the industry is what you can build your moat upon. What gives you your durable advantage that ensures overs on profitability?

You may have noticed the recent sale of Solarwinds for $4.5B. Their most recent profitability statement gives some insights into why that number is so high. You’ll also notice in the profitability statement that Solarwinds’ cost of sales is vastly different from the other players mentioned above.

They do things a little differently from the other vendors mentioned above, servicing the longer tail of network management with easier, faster, intuitive, self-serve solutions that also better suit the price point of the long tail.

I use the term “frictionless.” That is, simplifying things for customers across all dimensions of the customer journey – vendor selection, trialling the product/s, product procurement, installation, configuration and data migration, onboarding users, ongoing operational use, support, etc. I compare / contrast it to Apple’s attention to detail across their entire customer life-cycle such as making the packaging beautiful and making “unboxing events” a thing. We simply don’t apply UI/UX across all facets of the customer experience in OSS.

Which OSS model would Warren, or you, most likely invest in (if at all)?

What would Warren Buffett’s OSS look like?

Lethargy bordering on sloth remains the cornerstone of our investment style.”
Warren Buffett in his 1990 Chairman’s Letter
.

It’s been said that 90% of Warren Buffett’s immense wealth has been derived from just 10 deals. That’s 10 deals in roughly 60 years of investing.

Warren undoubtedly gets to see many opportunities but only invests in a select few, bypassing many great opportunities to bet big on the ones that have almost no downside risk.

This is the complete opposite to the way most OSS are treated. We try to do everything and cram more and more into our OSS, even though many features or requirements will never provide much tangible benefit.

I once saw the usage count of an organisation that had paid for around 500 custom tools to be developed on top of core products. Roughly 100 were in common use, some being used thousands of times a month. At the opposite end of the scale, there were around 100 that hadn’t been used in the preceding 12 months. [Have you noticed that the 100 high use tools out of 500 equals 20%, perpetuating Pareto’s 80/20 rule?]

At the time, I’m sure there were good reasons for commissioning the bottom 100 tools, perhaps built for data loads or fixes that were no longer required or used for rare, but important purposes. I’m also sure that some haven’t proven to be worth the time and money invested in them.

In 1998 Berkshire Hathaway acquired a reinsurance company called General Re. “The only significant staff change that followed the merger was the elimination of General Re’s investment unit. Some 150 people had been in charge of deciding where to invest the company’s funds; they were replaced with just one individual – Warren Buffett..”
Robert G. Hagstrom in, “The Warren Buffett Way.”

Buffett made an entire investment team redundant, replacing them with just one man – himself – and proceeded to significantly outperform the high transaction count team with his “slothful” strategy.

Could he achieve similar results in OSS with his minimalist approach? Could we all learn from this quote by Warren, “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”

Value doesn’t equal price

[Guy]Kawasaki told the audience that this was one of the most important learnings from Jobs: “Price is something you pay on the first day, but value is the sum total of the experience.”.
Max Nyman
on the Comptel blog.

I recently assisted a customer through a vendor selection process as they migrated away from their home-grown network management system to a new vendor-supplied OSS.

The selected vendor was a clear winner on many aspects of the evaluation but it has been their actions since winning the contract that has demonstrated that they understand the difference between value and price for this particular customer.

The customer was struggling to evolve their operational processes to the new, vastly different solution. The vendor and customer were both able to see that without additional support, there was a risk that the project may not be seen to be successful by the customer’s executives.

The vendor decided to leave one of their implementation team on-site for many months after handover at no extra cost to help the customer to evolve to a new way of operating. This value-add is costing the vendor but is strengthening the long-term relationship with their customer

OSS acquisitions

Much of what is called investment is actually nothing more than mergers and acquisitions, and of course mergers and acquisitions are generally accompanied by downsizing.”
Susan George.

In recent times, OSS has come under increased attention from the incumbent equipment manufacturers for a variety of reasons, not least being their shifting focus towards services rather than products and virtualisation making networks more software definable.

Following this trend, there have been a number of expensive acquisitions of OSS solutions. I’m sure there are many compelling reasons (eg customer footprint, clever employees, projected ROI, etc) for each of those acquisitions but I would tend to exclude the technology roadmap as being one of those reasons in a majority of cases (if I was on the evaluation team).

In yesterday’s blog entry I spoke of the challenges facing current OSS implementations. Following on from those concepts, I feel that the acquiring organisations would be better off investing in the development of revolutionary, next-generation OSS (real-time, unstructured data, decentralised, etc) rather than purchasing long-held OSS IP that could potentially become out-dated quickly – IP built on platforms that are already decades old and in need of refactoring.

This could be controversial as OSS have adapted to many network technology changes over the last few decades, so perhaps they will be able to once more with virtualisation but the fundamentals are so different now.

Fragmentation

As markets grow, they fragment, forming distinct sub-markets that may break away from the parent market to become sustainable separate markets, with different products and services.
Fragments start as small segments of customers with similar needs but for which there is no customized solution available. As a result they do not buy or make do with the best alternative. As the market grows, it becomes economically viable to develop and sell products to the fragment. Improvements in technology and production can also help with this.
Fragmentation is a way to growth. If you can spot (or even cause) a fragment to break away from an existing market, you can become that market’s leader. You can also of course continue to serve the parent market (where your reputation in the new market may enhanced your parent market position).

Borrowed from a page about Market Fragmentation
on ChangingMinds.org.

The OSS market is highly fragmented. Herein lies the opportunity for each vendor, depending on their respective strengths.

There are niches for:

  • Product creators – from specialty products to innovators to segments to broad-spectrum
  • Product integrators – from re-sellers to customisers to mix-and-matchers to partners
  • Consultants – from vendor selection to implementation to efficiency evaluation to subject matter expertise to specialist services
  • Revenue models – from open-source to middleware to managed service to licensed to perpetual purchase
  • Customer segments – from CSPs to enterprise to utilities to retail providers
  • Organisation size – from one-man-bands to SME (Small to Medium Enterprise) to multinationals

There are so many options on the OSS vendor continuum. Which one or ones suit you best? If you put on the hat of a business valuation, which one/s will increase the value of your organisation?

Are you making a strategic play to get from one part to another? Is this strategy positioning you for macro or micro market trends?

How do you leverage what a SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis identifies with regards to your place on the continuum?

Where do you derive your differentiation or competitive advantage from?

So many questions. So many ways to skin an OctopOSS. Just one further question. If you’re already servicing multiple parts of the continuum, do you measure which parts are most profitable, as opposed to generating the most revenue?