Expenses and Growth


Most of the expenses in any software company are people's salaries. Software companies do not have elaborate machinery. Yes, we have computers, but we don't have big plants or warehouses with lots of inventory. We just have people who sit down and write software. What's the expense of a software firm? The programmers, the QA people, and the product managers. Then there are the marketing costs. The two expenses of software firms are the programming and manufacturing of it - which is all intellectual property creation - and the marketing of it. Marketing is also, to a great extent, the people cost, but there are also other expenses involved.

There are several ways to grow the business. You could add salespeople. If you add more salespeople, you get to a larger share of the market. You can add new types of sales activities; for example, you could start to sell through other people, which is called selling through channels. Occasionally we'll sell through channels. Sometimes we'll build a vertical. We'll say, "This product is very good; we've built systems in the healthcare area." So, we'll try to sell into the healthcare market, which is a new vertical. We're always looking for new niches, new methods of selling - whether it's new channels, new reseller deals, or systems integrators - or more direct sales. That's principally the way we sell, and I think many software companies have similar methods. You could also sell on the Internet, but you have to get people to know you're there, so it's really a marketing/advertising activity.

Another way to grow is through acquisitions. The advantages of acquiring another software company are that you pick up products that augment yours or products that your sales forces can do a better job with. Or, you think the people would fit into your organization very well. If you give them the opportunity, they'll invent nifty things for you. That's one of the advantages of buying companies. The disadvantage is if you make a mistake - if, in fact, the product doesn't fit so well, the people don't mix so well, the market turns and you made a poor decision. That happens.

In terms of potential acquisitions, we're always looking for good management and smart people who would fit in. We're looking for product that would either augment our existing product nicely or would be a submarket that we can do a better job in. We look at a company's market penetration, how many copies they sold, who they sold them to. We look at the bottom line, of course, but we're interested more in the influence they have had. We want to know who bought the product, how they like the product, what influence the product has. So it's not entirely a financial situation, at least for us. We're not buying big, huge companies; we're just looking at little, tiny ones.

Everything we do has a risk factor. Every time we put a price on a price list we're saying, "Maybe it's the right price; maybe it's the wrong price." Every time we open a sales office, every time we make a deal with a new agent or a new distributor, we're taking a risk. Every decision we have carries a risk. There's nothing ever guaranteed to us that's going to be the right decision. It's a matter of scale; some decisions are a little bit bigger than others. It's not very often that the life of your company is at risk with these decisions. That's very rare.




The CTO Handbook. The Indispensable Technology Leadership Resource for Chief Technology Officers
The CTO Handbook/Job Manual: A Wealth of Reference Material and Thought Leadership on What Every Manager Needs to Know to Lead Their Technology Team
ISBN: 1587623676
EAN: 2147483647
Year: 2003
Pages: 213

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