I had a dinner recently with a friend of mine, a senior Vice-President of a mid-size, publicly traded software company, based on the East Coast.

In talking to him, I could recognize a pattern I have seen over and over with mid-size software companies. For obvious reasons I cannot disclose the real company name.

I listed below the main traits of the pattern:

• A first generation of products that has been successful enough to put the company on the map, often making it a leader in its domain

• The initial designers have retained a very strong power and influence within the company. They usually hold the positions of CTOs, possibly still VP Engineering, Chairman or President. This in turn means that the position of CEO has historically always been a difficult one, since the various CEOs have struggled for a power that the founders would only scarcely release

• The company is cash rich, thanks to its stable revenue flow from maintenance and customer services

• And finally the company is encountering the utmost difficulties to bring to the market a much-needed newer generation of its products.

A scenario that sounds familiar to many, I am sure.

Although not exactly the situation described in “crossing the chasm” by Geoffrey A. Moore, they are in the middle of a chasm that is a major gap in revenue, a situation unfortunately not uncommon for companies ruled by technical people.

The likely outcomes for the company are either to be purchased by another software vendor, or to slowly disappear, remaining alive as long as its maintenance and service revenue permits, which might mean years by the way, especially in the enterprise space area.

Of course, some companies have crossed the chasm and successfully released several generations of products, but they are the ones whose management recognized the roadblock early enough to take the proper series of actions.

Companies having problems crossing the chasm are inevitably contemplating outsourcing as a possible way to disentangle their engineering.

At this stage, there are a few major traps that have to be avoided at any cost:

1. First, CEOs/CFOs might face significant resistance from the technical management who won’t view favorably outsourcing the development of their new generation. The reasons given are usually that either none of the potential candidates would provide with an offer that would satisfy their requirement, or that their current version is too complex, too old, too undocumented, too anything to be outsourced.

   The reality is that most founders believe that outsourcing means acknowledging their inability to do it again. I also believe there is something more personal, like a parent seeing his child definitely go away from home. Companies in this situation have to be ready to make brutal decisions regarding the founding figures’ ability to interfere with the new development plans.

2. The second error is to decide to outsource, but without rethinking the innovation process. There are valid reasons why the company has been unable to release a new generation of its products. These reasons must be understood first; how could otherwise the outsourcing provider succeed where the company has failed? Outsourcing a problem does not solve it, but rather amplifies it.

3. The third pitfall consists of selecting the wrong outsourcing partner. I won’t review the usual criteria that should be taken into account, they are well known. I just would like to add one to the list, which is to play a critical role when crossing the chasm; since the company is in a critical situation, it needs to select a provider for which the project is also critically important. Picking the wrong provider will in most cases seal the company fate.

Let me elaborate by coming back to my friend’s situation. Since they are in an excellent cash situation, they could afford one of the Top 3 Indian BPO firms, a company with a well-deserved excellent reputation. And that is possibly the biggest mistake: they signed a deal that was unbalanced by design.

With annual revenue way over $ 1 B, tier-1 offshore companies are aiming at 9-figure (when not 10-figure) deals with Fortune 100, and at becoming global as rapidly as possible. Their real challenge is in delivering on multi-year BPO agreements with Fortune 100, not in developing another software product. Such a contract can only be a commodity for them.

Granted, the Indian giant has certainly assigned decent developers and an experienced project management team to the project. Of course some of senior managers will assess regularly the progress made and raise alerts if and when needed, of course the whole process is likely to be CMM-5 compliant, but at the end of the day it is not going to make any difference: an unbalanced contract is set for failure, and odds are it is going to fail.

A much better solution in their case would have been:

• Either a company with a proven experience in handling similar projects in Europe or Japan, but just entering the US market, and therefore in need of a solid reference

• Or a company already established in the USA, which has already tackled similar projects from a smaller size, and is ready for the next step

• Or a company specialized in their market segment with the required breadth to tackle the project successfully.

They would have been strategic to their outsourcing provider, since they would have helped them take it to the next step. Their CEO would have asked to be informed periodically and directly, they would have assigned their best of breed resources, etc.

It might be unfair, but some companies are growing smoothly, while some other are engulfed into crossing the chasm. Any company falling into the second category should rapidly make drastic decisions regarding their engineering management, clarify its goals, and pick the right partner for outsourcing.

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I am very often told about China having to become a democracy. I am far from being an expert of these things, but it seems to me that a culture based on Confucianism would not naturally lean toward a traditional Western style democracy. I agree that citizens of this country should get much more personal freedom, but why should it mean becoming a democracy?

China should invent its own model, and not endorse one that is so far from their culture.

That said, because of my cultural background, I am very attached to democracy, and always watching for initiatives that could help reinforce or rejuvenate it in the USA, the country that matters the most to me, since it is where I live.

I want to salute today a great initiative of Don Means: the national causus. As explained on their WEB page:

• “Our democratic process, as currently practiced, has proven unsatisfactory to the great majority of Americans. Even with hopeful new signs of Internet enabled participation, our national elections remain essentially poll-driven, mass media campaigns and little more than an ugly spectator sport, though one with enormous stakes. Now, with nearly no opportunity for input by ordinary citizens, the presidential state primaries and caucuses are being scheduled earlier and closer together, dramatically altering the primary election process. The country now faces a de facto National Primary on February 5, 2008, in which two “finalists” may suddenly emerge from this “rush to judgment” only to commence a protracted 9-month general campaign.

  In response, a consortium of partisan, bi-partisan and non-partisan interests have initiated the National Presidential Caucus with an “Open Call to Participate” in local, self-organized, web-enabled face to face gatherings across the country on December 7, 2007 in preparation for the highly compressed national primary process.”

This non-partisan initiative has already received a lot of support from various organizations like the Stanford University’s Center for Deliberative Democracy, and individuals like Tim Draper or Phil Noble.

With the presidential election approaching in the USA, it is a perfect time to pay a visit to www.nationalcaucus.com, Don’s WEB site [Click here to access www.nationalcaucus.com].

You can also watch Don Means interviewed by ABC News.

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I recently read 2 articles on innovation outsourcing; the first one by Stephanie Overby on CIO Magazine’s blog and the other one by Mark Hillary on his blog.

I am focusing my efforts on small to mid-size American software companies, and our marketing message to them is that we want to become their partner for innovation.

So needless to say, these posts got my undivided attention!

First and foremost, let me say that it seems like a very questionable move to fully outsource innovation. If a company has lost its ability to innovate, I do not see how would outsourcing improve the situation. In addition, I do not believe it is the role of an outsourcing/BPO provider to innovate in lieu of their clients.

It reminds me a comment from Bill Homa, CIO of Hannaford Bros., which I read some months ago in CIO magazine. “If you are outsourcing a problem, it will still be a problem.” How true!

Hillary talks about an initiative from TCS (Tata Consulting Services) in the UK. I understand from his article that this initiative has not produced any visible output so far.

The way I understand being partner in innovation is quite different, and it is to provide our customers with all the required instrumentation and organization that will enable them to focus on and therefore accelerate innovation; in other words, to create the conditions to “commoditize” the process of creating products from their ideas and concepts.

I might elaborate on our recipe in another post, but our measure of success is our customer’s ability to innovate faster and better.

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