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Profile of Michael Cusumano: The business of software is ... software?

• By Jack Vaughan
• May 20, 2004

Software as a business is unique in many ways, one of which is that software development is a pretty obscure undertaking to most folks outside of the community. Few have worked harder than M.I.T.’s Michael Cusumano to clarify this murky matter of software.

ADT recently spoke with Cusumano, the author of Competing on Internet Time and Microsoft Secrets , on what goes into creating a successful software company. That topic should be of interest to application development managers, as well as entrepreneurs. As much as you just want to get on with your business, as soon as you buy a software application or tool you become connected at the hip to your software vendor, and their success in business affects your success in business.

Cusumano gets close to his subject. He has gone into ‘the wild’ of software programming in order to study Japanese development methods, the hectic life at Microsoft when Windows NT was brewing, and the uncomfortable life at Netscape when Microsoft countered Navigator with Internet Explorer. The Business of Software , his latest work just released by the Free Press, rolls up lessons learned in these and other encounters. Flexible business models, expert management, and recognition of software’s unique nature are keys to success, he deems.

To succeed long-term in the software business it is most important to have structure with flexibility. That is because the potential for change in this field is still so great. Writes Cusumano in The Business of Software : “... software managers, programmers, and entrepreneurs need to encourage innovation wherever and whenever they can, but they have a special need to contain it as well; otherwise projects and plans can spin out of control.” Too true, users and viewers can only add.

Is your vendor’s business a software product business, a services business, or a hybrid thereof? Since business models are often moving targets, this isn’t always an easy question for the vendor to answer, Cusumano notes in his new book. But the answer can give clues to a vendor’s future strategies and prospects.

“There are a lot of things going on, and in the last few years the software business has become a tougher place to do well,” said Cusumano. “We reached different plateaus in technology life cycles. We had this tremendous boom with both the Internet and Y2K coming together at one time.

“There was a tremendous spending on technology — and now a rebound against that,” he said.

For vendors, who, admittedly, are not universally loved by users, whole years of revenue gains were washed out. What is going on now? Said Cusumano: “I think a lot of the enterprise technologies have become commodity-like. There are lots of players in the same spaces. They’re competing for functionality, and prices.

“You have low-cost Indian competitors. And you have some packaged solutions. You have some other stuff that’s more difficult too, but the availability of low-cost packages –- from SalesForce.com, or almost anything from Microsoft -- and low-cost services from offshore are just pushing price points down, and that’s what companies are struggling with.”

“It is like the revolution we had in the transition from mainframes to PCs,” he said.

At the time of client/server computing, the hardware “just became so much cheaper that there was this pushback from customers on spending tens of millions of dollars on the software and services side.”

“We did settle into a comfortable space for a decade or two, with smaller machines that were becoming more powerful and cheaper every year. People were spending at a steady rate on software.” And then came the Internet-Y2K boom.

“I think we are now in another pushback phase,” Cusumano said, “where customers don’t want to spend millions of dollars on software to run on machines that cost a few thousand dollars. They don’t want to pay 20 or 25 percent of the initial license fee in perpetuity for upgrades. They want to pay a lower percentage. We are in the midst of a consolidation.”

In The Business of Software , Cusumano describes the varied paths vendors follow. It is important for buyers and sellers alike to realize, he notes along the way, that software is not really one kind of business. “Software becomes whatever function or application it addresses,” he writes. Those are the qualities of a unique kind of business, one that often borders on an adventure, one Cusumano covers most vividly.