CASE DESCRIPTION

The company introduced in this case has its origins in the Finnish subsidiary of an American IT giant Unisys, within which the two soon-to-be-founders of TradeSys worked on information systems consultation projects for trade unions.

The trade unions have had a long established relationship with payment institutions in Finland, because the trade unions have collected their membership fees as a deductible from the salaries of members, who have given their permission for doing this. The move to this arrangement happened at the same time as larger companies started to favor the payment of salaries directly into workers bank accounts instead of cash or cheques. The companies and trade unions soon noticed that they need systems for handling the transactions and balances, and banks seemed to have systems that could be utilized here. The trade unions turned toward a state owned bank, which was quite happy which was quite happy to handle the transactions. The trade unions and unemployment funds had, at that time, practically only this one choice for a system supplier that could manage all the functions related to their membership-service needs and payment transactions. Postipankki had developed over the years a comprehensive set of tools for handling these. The bank exercised its monopoly position and bundling of the service to charge premium prices for the transactions from the trade unions.

Trade unions in Finland have a quite large member base (in some cases in hundreds of thousands) and they need different kinds of information services, not just the payment management. The first consultation projects by the co-founders of TradeSys (at that time working for Unisys) were carried out in 1993 to improve the management and handling of membership data of a trade union organization.

One of the TradeSys co-founders describes the situation as follows:

"Other banks and trade union organizations were tired of the situation, where there was only one supplier of the trade union operations management systems in the market. The system was provided by a state-owned bank which had bundled the information system with its banking services and, thus, forcing the customers [trade unions] to keep their assets in that particular bank's accounts."

The developers went ahead and developed a competing package. However, its introduction was far from easy. The state owned bank did not want any competitors and it tried to undermine the developments in various ways. Also, the trade unions were (and in many cases still are) quite conservative organizations, and they did not see the need to change the existing ways of doing things.

The development of this emerging business was not straightforward as the parent company was not interested in this type of software product business. On the contrary, Unisys re-directed its strategy from product-orientation into IT servicing and consulting, and began cutting out all the businesses that were outside its strategic focus in 1996. A small vertical market in a small country was not seen lucrative enough by the U.S. head quarters. The head of product development (one of the co-founders) at TradeSys describes the situation as follows:

"The development of a product business like this just did not work in a big organization, which was not committed to a product business like ours - even if we managed to carry out the first customer cases with at least reasonable success. Our customers were eager to continue and one of the biggest privately-owned banks in Finland was interested in seeing the development of our solution in order to benefit from a competitive solution in the existing market situation."

The strategic change of mind of the international information technology conglomerate forced the co-founders of TradeSys to consider their personal career ambitions as opposed to the corporate management's will to divest all its product businesses. The founders strongly believed in the product that had already been formed out of the consulting assignment, and there were potential buyers for the package. The following quotation is from the head of product development at TradeSys:

"That time I had a difficult position at Unisys, which was cutting off all its product businesses and I had just committed to start consulting a solution with some big customers in the trade union segment. This consulting contract had led into a continuous development of a solution, and was emerging into a product concept."

So, the TradeSys co-founders were confident that they could run this as an independent business. They wanted to be able to introduce a competitive solution for the industry. Furthermore, one competing bank was willing to finance the new venture. They wanted to exploit the opportunity, because the new system gave the trade unions the possibility to use any bank of their choice for the transactions. So they went ahead and acquired the business to their possession in 1996 to prove everybody - including themselves-that the product ideas they had been developing could be turned into profitable business.

They proved to be right, as they were able to gain a market share to a degree that TradeSys has become a major player in its market segment. After the MBO, the turnover of TradeSys has grown steadily from a very small start into over 1.8 million euro in 2000. Concurrently, the company has grown from a small product team of 10 persons into a leading vendor of trade union software and the second largest unemployment fund systems provider in Finland with about 20 employees in 2000.

TradeSys was sold later in 2000 to a publicly quoted software company PublicSys. The owners of TradeSys became shareholders and members of the board of directors at PublicSys. Currently, they continue to develop the business facing the challenges of growth and maturity of the current market segment.

Evolution of the Business Model

TradeSys was founded around a business proposition for a narrow and clear market niche. The original business model evolved around the identified opportunity to serve the initial customer's information system needs by a software solution. The business model then focused on personal sales and very close customer services, because the success of the business relied on the implementation of the system projects together with the first customers.

Later, especially after the MBO, the company has been actively seeking for more customers and implementing a clear product-oriented business model in the selected vertical market segment, where it aimed at being a market leader. As a matter of fact, the company is already the leading software vendor in its segment of operations management systems for trade unions in Finland (see Figure 1). To strengthen its efforts in both product development and customer services, the organization was divided into separate teams specializing in product development, customer support and customer projects.

Figure 1: Market Share (%) of TradeSys and its Competitors

Currently, since TradeSys has become a part of PublicSys, the strategic focus of the company has shifted to maintaining profitable business and a reasonable market share in its selected product areas. The management has realized that the current small vertical market is not sufficient considering future growth, and, that new customers are needed to keep up funding the continuous product development.

In the following, the evolution of the business model of TradeSys is discussed by the four key elements (presented in more detail in Appendix 1: 1) Product development approach, 2) Revenue logic, 3) Distribution model, and 4) Servicing and implementation model.

Products and Product Development

The initial idea for TradeSys' product development came about through customers' needs that were discovered along with first customer projects for trade unions. However, even in the first phase of the business life cycle, when the business was conducted within Unisys, the basic idea was not to develop customer-specific solutions, but more universal or at least parametrizable software products for several customers. The founders of TradeSys say that the main emphasis of the product development was put on the development of parametrized systems based on Oracle RDBMS (Relational Database Management System).

In the second main phase, as the business was separated from Unisys and growing as an independent software house, main focus was directed to developing product development methods in order to be able to deliver universal solutions to customers in different customer projects.

The head of product development of TradeSys says that the aim to bring about software products was clear from the very beginning of the business:

"Even if the first deliverables were based on direct solutions to customers' needs, we had the idea to bring about universal solutions to the marketplace, to be sold as software packages to customers with similar needs."

So, right from the start TradeSys has emphasized the use of good software engineering principles. This has meant that the developers have been guided to use development method and case tools while developing the systems. Also the components and their interfaces have been carefully designed and the development management has enforced their use. This approach to product development has been challenged many times throughout the history of the business. In the first major phase of the business, for instance, it would have been alluring to reduce overhead costs of the company by just answering customer's core needs without investing in product development. On the other hand, much determination was needed in the growth phase to carry out careful deployments of the products and not to invest in product development only, even if the growth through successful product development seemed lucrative. In the mature phase, questions have risen whether or not the selected market segment is sufficient to justify the focus of product development efforts to that solution domain only.

The current product family of TradeSys consists of integrated system solutions for associations, trade unions and unemployment funds. The systems Alpha and Beta are designed for trade unions and the system Theta for unemployment funds, each including subsystems that can be hidden or taken into use by system parameters. These parameters allow the slight modification of the final system along with the delivery and installation of the products.

The software products Alpha and Beta form together an integrated information system designed to fulfill the various information management needs of trade unions, associations, organizations and various other societies. They provide trade unions with a view to managing information on union members, their employers and the organizational hierarchy, as well as the collection of union membership dues.

Software product Theta is an integrated system designed for unemployment funds. The system manages the calculation and payment of member benefits.

The whole product family of TradeSys is based on the same technology. The software is mainly developed with Oracle Developer (Forms & Reports) and utilizes Oracle RDBMS as a host database. All the development is done using proven software engineering principles and a systematic modeling approach. This has kept the product family easy to maintain and left possibilities open to develop it further to suit the needs of new markets.

The system Alpha/Beta includes subsystems for member management, employer management, organization services, and membership fee management. It also includes extensions for election management, course management, vacation management and magazine subscriptions. Some customers also need the extension for strike coordination and different Web services for member organizations.

The system Theta contains modules for operation management of unemployment fund organizations, including member management, benefit payment management and statistics.

Figure 2: The Product Line of TradeSys

It can be extended with subsystems for telephone services, mobile phone messaging, electronic mail, and task management. Also, it includes extensions for claim management, various Web services and executive information subsystems, all directed for the operations management of unemployment funds.

The product-oriented offering is what differentiates TradeSys from its direct competition. The main competitor, a state-owned bank, provides an outsourcing model with large mainframes and terminals located in a service center. The director of product development of TradeSys believes that the approach of TradeSys allows for a more holistic service portfolio and better responsiveness to changes in customers' needs, while a outsourcing or service providing model may be initially less demanding for the customer. However, as compared to the competition, the TradeSys solutions enable unions and funds to deal with their daily routines by themselves. The software also enables the use of a centralized database via the Internet.

TradeSys has always stressed the quality of its development process and clear definition of the modules and their responsibilities. One of the cornerstones of TradeSys's approach has been continuous enhancement of the development processes. The company has tried to streamline its process by avoiding the need to develop tailored solutions for individual customers. Instead, the needed modifications have been implemented as options in the base package.

Revenue Logic

Profitability has been a clear business target throughout the entire history of TradeSys. Growth of business, instead, has been a secondary target. Does this seem like risk avoiding strategy? Maybe, because the steady but modest growth of TradeSys has always been financed with the operating revenue of the product business. It is worth mentioning that Finland was experiencing a severe recession in the early 1990s, and it was not as easy to raise funding to finance a rapid growth of a small software vendor operating in a narrow vertical segment as it later was for a number of start-ups in Internet business. So, creation of revenue and right pricing of offering have been important issues all the time in maintaining growth and, simultaneously, financing all development work. It is notable that all along, the company has priced its offerings based on the value of the service, rather than on the basis of the effort put into the development of the products.

Software license sales have formed the foundation of the revenue logic in the growth phase of the business as shown in Figure 3. The product offering has been priced so that the initial purchase equals approximately to 100,000 euro per customer organization. Maintenance and support creates then an annual cash flow of about 15–20% of the initial purchase. Other sources of revenue such as training, accessory sales, in which revenue comes from selling books, manuals, CDs, etc., have been be of minor importance during both the introduction and growth phases. This is apparently due to the small number of end users (and small installed base of software) in the early stages of the business life cycle. In the maturity phase of the business, the proportion of license sales has not grown as rapidly as during the earlier stages. Furthermore, in the recent phase the fraction of consultation has diminished, whereas training and support have grown in importance.

Figure 3: Sources of Revenue (Fractions of Turnover in Percentages) at the Growth Phase of Business

Distribution and Sales

The small vertical market of TradeSys allows the company to keep sales highly centralized. In fact, the managing director takes care of the marketing and sales functions almost alone, utilizing the resources of both customer services and product development units in different marketing occasions. Throughout its entire history, TradeSys has maintained direct contacts with its customers without any middlemen.

The sales model is strongly based on personal relationships and a good general understanding of customers' needs. This may have its advantages in creating an in-depth understanding of customer's needs in the selected domain, but, simultaneously, it raises questions about growth opportunities, because direct contact with customers is highly labour intensive from the software vendor's point of view.

Despite of the fact that the selling approach of TradeSys is very customer-oriented, it aims at selling only solutions that can be implemented on the basis of the existing, uniform products and not customer-specific or tailored solutions. The head of product development of TradeSys explained that in the vast majority of customer organizations, the products are customized only if the customer-initiated modifications can be turned into standardized features or add-ons in the existing products, or into new products of the product family.

Servicing and Implementation

The management of TradeSys has focused on the servicing and implementation part of their business model from the very early stages of their business. This part includes all the installation and deployment activities required to achieve working solutions based on the software products. For large systems, like the ones that TradeSys sells, this is an essential part of the success of the product. It can also make a major portion of the revenue in the latter stages of the product life cycle. In the early phases of the business of TradeSys, the product development engineers and the technical specialists in the customer service were actually same individuals or at least belonged to the same organizational unit.

Due to the fact that TradeSys is carrying out all the customer projects, including software installations and training, by itself and without employing any partners, the individual responsible for customer projects have been encumbered with several delivery projects, simultaneously. In the growth phase, a customer project organization of one to seven system specialists was detached from other operations to carry out all the delivery and implementation projects with customers.

The project organization has carried out various integration projects in which the software products of TradeSys have been integrated to customers' existing systems. However, as said earlier, no customer-specific tailoring has been made to the products so far.

Especially in the growth phase of the business, main focus areas of the customer support and project operations of TradeSys have been in the successful deployment of TradeSys' products to customer environments. Also, systematic gathering of customer feedback to further development of products, maintenance of high quality standards of product deliveries and the development of deep insight into solution domain in all customer operations have been the key objectives of the customer project organization. In the latest phase, maturity, the project organization is facing new challenges in generating continuous cash flow from software maintenance and support functions with the existing customers.