Emperor or donkey: Where does software end and service begin?
Deconstructing the chimera of B2B SaaS
There’s a really interesting caricature of Napoleon III from 1870 called Badinguet Allant a la Guerre - Badinguet Revenant.
Source: Wikipedia Commons
Napoleon III was nicknamed Badinguet by his rivals, a term of humiliation in reference to a workman who he is said to have impersonated to escape from imprisonment at the Fortress of Ham in 1846.
The satirical image is now one of the most famous ambiguous images in the world. In typical French fashion, the caricature depicts the last emperor of France as himself from one perspective and as a donkey from another.
I think it’s a fitting metaphor for my concern this week - is software a product or service, the emperor or the donkey? The answer is the same - depends on how you look at it.
Yes, I realise it’s a debate as old as time at this point. But it deserves further examination because
No single side has prevailed despite such a vibrant discourse
The unresolved nature of the dispute routinely throws up operational challenges
So let’s dive right in.
I present three scenarios from Bertrand Meyer, the French academic and author (clearly, I have baguettes on my mind).
Software is a service
Amazon.com, Inc. v. Barnesandnoble.com, Inc. was an early ruling in cyber law at a time when competition in the e-commerce space was just heating up. Amazon sued the bookseller Barnes & Noble over Express Lane, its checkout functionality that was all too reminiscent of Amazon’s own one-click technology for quick checkouts.
The court ruled in favour of Amazon - letting it patent the service that came with a shorter checkout process. No matter that the underlying programming language or algorithm used by Barnes & Noble was entirely different.
…still a service
Some software companies like Capgemini and Accenture focus not so much on programming in their day to day operations, but on providing services. In fact, Meyer claims that these companies would be loath to sell their offerings like products with various configurations, versions, upgrades and platforms, but would instead pitch them as 'integrated solutions'.
Software is a product
The reason why Microsoft is so big is because its products like Windows, Project,
Office and Visio are successful. However, companies selling their offerings as 'products' cannot function without services - but only as long as they are layered on top of the underlying product.
What do we learn from these three propositions? From a legal standpoint, software is a service. As far as packaging the technology goes, software is a product. Commercially, however, it treads the path between the two.
The distinction for commercial purposes
Blume Ventures’ The Indus Valley Annual Report 2022 summarises India in a single tweet -
What explains these purchasing habits of software buyers - small and large?
Both categories of buyers look to extract maximum value from an external software provider. Small businesses are often determined to get access to the capabilities of the entire stack notwithstanding their usage requirements.
Enterprises, on the other hand, seek out these capabilities at low prices, threatening tech service providers with their in-house capabilities to build these. For smaller software providers, partnerships with such large brands are good for business, which often means they may be willing to close deals well below the standard pricing.
This points towards a larger trend in the software industry - software products are highly commodified and standardised. Differentiation, specialisation and defensibilityhave been compromised, as a result.
To defend against this, software providers are inserting a service layer into their operations. This helps them provide a superior customer experience and reap the business benefits that come with it. Incorporating services into the value chaingives a boost to margins and helps customer retention. Here’s how -
The product is a tool, but this tool helps the customer make strategic decisions. And who knows the tool better than its developer? So, the software provider must act as a consultant who can help the customer enhance their business, through services
Cultivating relationships by way of services makes software vendors irreplaceable. Such relationships are symbiotic that often leads to a balanced, mutual exchange of value
Services layered on top of the core product help the software vendor coach the customer through a barrage of upgrades in technology
Services pivot a software vendor into the realm of providing solutions through problem solving as opposed to simply selling products
As entrenched as client servicing may appear to be in a software product company, it is still regarded as an additional layer that enriches the ecosystem by those running the company - it does not alter the business model.
How commercially viable are services, really?
When services become such an integral part of the value proposition, they tend to themselves turn into standardised commodities - the very challenge they were created to tackle. This exposes companies to several challenges -
1. Scalability and growth
The scalability of services depends on soft factors such as quality, relationships and personnel dependencies. Services, by definition, are bespoke, which hinders the scale and efficiency of the business. Compared to a product-centric business, the return on scale is also lower.
2. Costs and ROI
Companies may agree to providing non-standard functionalities and dole out customisations which can lead to high support costs. This often involves going beyond contractual obligations and even alterations of the software product by way of tweaking the code. As a result, it can end up diminishing value for investors.
Moreover, services can only serve as a temporary profit centre for SaaS businesses at the outset which can be leveraged to develop the core product.
3. Revenue
When services become projectised or standardised, it eases decision-making and streamlines expectations. These models become repeatable and efficient as well.
However, this comes at the cost that pricing options are likewise made simpler and pre-packaged. A services-focused business also poses a revenue challenge in the sense that projects tend to be finite. So, projects on the cusp of ending need to be replaced with new projects at a faster rate.
4. Company valuation
For all the growth that services facilitate, it is considered to be of inferior quality than product-driven growth in terms of valuation. The common perception is that introducing a strong services division should happen only when the company has reached scale in order to protect valuations.
What’s the give-and-take?
Should software businesses give preference to the product or the service? There’s an interesting analogy to answer this question - listen to customers’ demands, but choose to serve only their needs.
For instance, there’s an urban legend (there’s some debate as to its authenticity) that Apple considered adding a QWERTY keypad to the iPhone before its launch in 2007, due to the popularity of BlackBerrys. It may have struck Apple executives as a customer demand, but was it really needed?
No. Similarly, a product is the underlying offering on top of which services are provided. It is the underlying foundation, on top of which the services superstructure is built. It is critical to remember that the customer will always demand for all manner of assistance, but a prudent business is one which can extract the right needs, instead of pandering to every demand.
That’s all from me this week! Where do you stand on the product and services debate?