The New Math: Product + Process = Service

Despite the straightforward definitions of margins and breakeven analysis, the math that can go into profitably offering a product or service can be an unusual calculus.  This post, originally written for the UBM Tech site, Business Agility, notes how businesses are finding ways to transform their products into services. Incorporating business process in the delivery, however, remains the true answer to the arithmetic of creating profits

Much of transformation has come courtesy of businesses attempting to build on the success of the open source business model. Many businesses have offered no or low cost software and applications. Offering services to maintain those applications generates revenue.

The end result is an increased dynamic of digital assets that were once passive tools.  Websites are an example.  Advanced techniques with programming language have changed websites from passive documents presented from a server to platforms that can provide simple services to customers.

Companies are scrambling to compete with those who have successfully adopted open source approached into their business model. The economics are still being studied, but most pundits agree that the trend will continue.  Neil Gandel, a professor of Economics and Head, School of Government and Policy at Tel Aviv University noted on Vox, a Centre for Economic Policy Research (CERP.org) website showcasing global economic studies, that “many proprietary firms now use a mixed-source model…a model in which some of their products are proprietary and are distributed under traditional licenses, while some of their products are open source and distributed under an open source license. Such a mixed-source strategy enables firms to benefit from the advantages of both open source and proprietary development.“

One example of a business transforming its business model to include more comprehensive services occurred from a former grad school friend of mine.  Garrison Atkisson, founder of broadAngle and a past Zimana client, emailed me on the change his company made from being a producer of a video platform to a broad provider of platform services.

 “We started broadAngle in late 2007 with the intent to develop and market a product that helped corporate clients manage and deliver video content using a custom branded player.  The economic crisis of 2008 made this very difficult for us.  We found ourselves in a position where we needed to re-evaluate our strengths and the needs of the market to find a more viable business model.  We had assembled a great development team for our own product development, and pivoting the business to provide their development services to our clients was a natural fit.  It was much easier to demonstrate value with a services-based strategy that it was trying to create a new market for our product.”

Despite notable successes, the math of a business plus software is not a straightforward answer to success.  Longevity and profitability lies in creating unique business process management practices that enhance the services that serve open source programs.

Developing the service systems can lead a business to providing even greater value than simply offering the product itself. Many experts, in varying degrees, believe such value is attainable. Jonathan Byrnes in his book Islands of Profit In a Sea of Red Ink notes that the “Selling more products can give a vendor additional leverage with customers, but selling the right related services can give vendor a new strategic position and a host of valuable benefits.”  Indeed Garrison states that broadAngle has made such gains. “We’ve built solutions that integrate SaaS services to add customer relationship or salesforce management functionality to custom applications that otherwise would have been out of scope due to time or budget constraints.”

Businesses that incorporate business process management may want to examine its content management and business analytics practices to optimize service delivery opportunities. Doing so adopts the economic benefits of open source-based business model into the right mix of incremental related services that outweigh any potential initial costs.

Gaining more by adding the right business process management approaches is a math I can live with.

 

 

 

 

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