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Organizations
The great M/E ratio lie?
As I’ve mentioned in my previous posts I’ve become interested in the role of marketing in software companies. One area that crops up is something termed the M/E ratio (Marketing/Engineering Investment Ratio). Essentially the premise is that your company is more successful if you have more investment in marketing than in Engineering. OK, maybe that is true…maybe. However, whenever I dig a little deeper I seem to uncover some "interesting" points;
1) The "proof" seems to involve surveying companies that have succeeded and failed or as the reports state, the ‘super successes’ and the ‘flaming failures’. I’m not sure I buy this proof. Lets take a look at a couple of well known names in these reported flaming failures; Xerox, Wang and Lotus. For me the suggestion that these companies failed because of their M/E ratio is be taken with a large handful of salt. I can certainly remember Lotus (of 1-2-3 fame) and their marketing was pretty slick, indeed at the time I was employed to investigate and implement a new office system for small database company. I chose Microsoft Office over the Lotus offering because of my technology investigation not their lack of marketing. I was invited to their offices for a demonstration of the products. Simply put the Microsoft offerings (mainly because of the close ties to the Windows OS) were easier to use (if only that were still true) and were quicker to utilize new OS features. So was it a marketing failure that caused Lotus to fail? I don’t believe so because the feature set was almost, and maybe even 100%, identical. It was the implementation of those features that made me choose MS and it was probably the same story elsewhere. It’s also interesting to read the number of excuses that Microsoft win because of their marketing muscle. It’s equally interesting to read a number of articles debunking this as simply an excuse, indeed a number of cases point to Microsoft having poor marketing.
2) With terms like flaming failures and super successes, who is it that popularize this theory? Oh yes it’s marketing companies. No surprise there but I certainly don’t blame them.
3) ‘Lies damn lies and statistics’. Statistics are a fun area. I was unfortunate enough to have to do ‘further statistics’ course and hated every second it, why, because I soon realised that you could pretty much put any spin on a topic by carefully ignoring salient points. I realise that marketing isn’t sales but the ability to apply spin is a shared talent. Unfortunately I don’t have access to any of the data in these reports but I’m pretty sure there are some important issues that have been ignored. For example, it is simplistic to say that the top x software companies have a high m:e ratio because the statistic ignores the scale of the company both in terms of number of heads and the Return on Investment (ROI), i.e. a small company can make a relatively large profit with a tiny m:e but they’ll never break into newspapers top 100 company list.
4) Staff type thresholds – I don’t have *any* research to back my next claim but it seems logical to me that a successful software company needs a number of people developing software, I don’t like the term R&D it’s too woolly for me. I also believe that as a company grows there becomes a critical mass of developers where adding more developers isn’t a good ROI, in-fact it encourages the command and conquer model and removes some of the best developers from developing. So lets take another look at some the poster software companies. The IBMs, Oracle and Microsoft’s of the world require a huge army different staff types to produce and sell their products. (It has been noted that a number of people that leave Microsoft to form start-up’s fail because they underestimate the "behind the scenes" support staff that are needed). A proportion of staff will be developers and a proportion will be in marketing (or at least the proportion of the costs if not head count). With my theory of a critical mass of developers then I would expect that in these large companies the number of developers will have plateaued but the ever expanding world wide customer base will require more and more marketing effort. So by examining these companies m:e then you would see a large m to e, again statistics can tell whatever story you want if you ignore the whole picture.
1) The "proof" seems to involve surveying companies that have succeeded and failed or as the reports state, the ‘super successes’ and the ‘flaming failures’. I’m not sure I buy this proof. Lets take a look at a couple of well known names in these reported flaming failures; Xerox, Wang and Lotus. For me the suggestion that these companies failed because of their M/E ratio is be taken with a large handful of salt. I can certainly remember Lotus (of 1-2-3 fame) and their marketing was pretty slick, indeed at the time I was employed to investigate and implement a new office system for small database company. I chose Microsoft Office over the Lotus offering because of my technology investigation not their lack of marketing. I was invited to their offices for a demonstration of the products. Simply put the Microsoft offerings (mainly because of the close ties to the Windows OS) were easier to use (if only that were still true) and were quicker to utilize new OS features. So was it a marketing failure that caused Lotus to fail? I don’t believe so because the feature set was almost, and maybe even 100%, identical. It was the implementation of those features that made me choose MS and it was probably the same story elsewhere. It’s also interesting to read the number of excuses that Microsoft win because of their marketing muscle. It’s equally interesting to read a number of articles debunking this as simply an excuse, indeed a number of cases point to Microsoft having poor marketing.
2) With terms like flaming failures and super successes, who is it that popularize this theory? Oh yes it’s marketing companies. No surprise there but I certainly don’t blame them.
3) ‘Lies damn lies and statistics’. Statistics are a fun area. I was unfortunate enough to have to do ‘further statistics’ course and hated every second it, why, because I soon realised that you could pretty much put any spin on a topic by carefully ignoring salient points. I realise that marketing isn’t sales but the ability to apply spin is a shared talent. Unfortunately I don’t have access to any of the data in these reports but I’m pretty sure there are some important issues that have been ignored. For example, it is simplistic to say that the top x software companies have a high m:e ratio because the statistic ignores the scale of the company both in terms of number of heads and the Return on Investment (ROI), i.e. a small company can make a relatively large profit with a tiny m:e but they’ll never break into newspapers top 100 company list.
4) Staff type thresholds – I don’t have *any* research to back my next claim but it seems logical to me that a successful software company needs a number of people developing software, I don’t like the term R&D it’s too woolly for me. I also believe that as a company grows there becomes a critical mass of developers where adding more developers isn’t a good ROI, in-fact it encourages the command and conquer model and removes some of the best developers from developing. So lets take another look at some the poster software companies. The IBMs, Oracle and Microsoft’s of the world require a huge army different staff types to produce and sell their products. (It has been noted that a number of people that leave Microsoft to form start-up’s fail because they underestimate the "behind the scenes" support staff that are needed). A proportion of staff will be developers and a proportion will be in marketing (or at least the proportion of the costs if not head count). With my theory of a critical mass of developers then I would expect that in these large companies the number of developers will have plateaued but the ever expanding world wide customer base will require more and more marketing effort. So by examining these companies m:e then you would see a large m to e, again statistics can tell whatever story you want if you ignore the whole picture.
So back to the heading of this post, is M/E a lie? You’ve heard my opinion, I don’t have a great deal of research or a diploma from Harvard Business School but I hope my little investigation and logical thought will be enough to at least make the reader question the "truth" of these M/E reports.
Market Driven Myth? Part 2
Another issue I have with placing too much emphasis on "Market Driven" is what does it actually mean? Who is your market? A market, in this context, is all of your existing customers plus all your potential customers whether they or you know it or not. In other words your customer base. I don’t believe anyone would agree with that as a definition of Market Driven. What Market Driven actually means is Market Analyst Driven (MAD
). I’m sure such an analyst would argue that they do indeed represent all the custom base but it’s their job to guess what a market wants, they don’t know. How do I know that? It’s simple really, if they were sure of something they’d do it themselves! I was talking with someone pretty high up at Microsoft and we were discussing market analysts. They told me a story about one particular well known analyst who published a paper misrepresenting a Microsoft technology. So they were invited to a Microsoft seminar and admitted they didn’t know the product and was forced to publicly amend their review. I’m not writing this to bash analysts, but what you have to realise is that these are simply the opinions of people that believe they understand your market, they don’t actually know and they do make mistakes. The emphasis of my high-school history class was to always qualify your sources. This leads me back to my conclusion from part 1, your should make decisions based upon a collection of sources not just one, and don’t assume that any of those sources will be 100% correct.
). I’m sure such an analyst would argue that they do indeed represent all the custom base but it’s their job to guess what a market wants, they don’t know. How do I know that? It’s simple really, if they were sure of something they’d do it themselves! I was talking with someone pretty high up at Microsoft and we were discussing market analysts. They told me a story about one particular well known analyst who published a paper misrepresenting a Microsoft technology. So they were invited to a Microsoft seminar and admitted they didn’t know the product and was forced to publicly amend their review. I’m not writing this to bash analysts, but what you have to realise is that these are simply the opinions of people that believe they understand your market, they don’t actually know and they do make mistakes. The emphasis of my high-school history class was to always qualify your sources. This leads me back to my conclusion from part 1, your should make decisions based upon a collection of sources not just one, and don’t assume that any of those sources will be 100% correct.Market Driven myth?
I’ve recently been "involved" in a number of discussions about the benefits of a software company being "Market Driven". After a very brief and rapid introduction to the term I believe this is the marketing version of software patterns, i.e. a a set of fancy names given to describe something everyone understands. Ok, as with my scathing hatred of software patterns I do concede they serve a useful purpose but I’m concerned that people seem to treat them both as a black or white subject. "My software uses a MVP pattern therefore I don’t allow any MVC patterns". "My company is Market Driven not Customer or Founder Driven". I think this is a very strange approach. Surely the sensible approach is take stimulus for ideas from all possible sources and make informed decisions? The Ipod is often held up as the marketing miracle of the 21st Century and lots of people have their ideas as to why it has been so successful. But I wonder how successful Apple would have been by simply listening to the market? Or do they also take a significant account of their own in-house ideas? Pete Mortensen has an interesting quote regarding the airline industry which I believe is very relevant, ‘But market demand is the expression of a shared human need that few marketers are meeting. The reward to anyone who identifies a big, unmet need is tremendous. Interestingly enough, Godin’s “Founder-Driven” category often fits this rubric as well, largely because Richard Branson is himself brilliant at identifying needs’.
So although I believe you can state that you are, "listening to the market" I don’t believe that requires you to say that you only Market Driven. I believe that a successful software company will utilize all the sources available; The Market, customer feedback (even if it requires a large amount of scepticism) and your own staff’s experience and clever ideas. What weight you choose to give to those opinions is up to the people making the decisions – that’s what they get paid to do!
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