The Hidden Dangers of Interim Solutions
One of the hardest challenges in business is knowing when to use an interim solution and when to start over from scratch.
From a pure financial perspective, interim solutions almost always win out. I see this regularly in the software industry. The progress looks something like this:
- You (i.e. your company) write a piece of software. It is successful and useful and sells and grows.
- Over time, you add more and more features and capabilities, leading to a more useful but more complex product.
- Eventually some of the underlying components or delivery mechanisms change, leading to a new preferred design.
- You struggle with whether or not to invest in rebuilding the product based on new technology vs. using interim solutions.
A great example of when not to rebuild appears in Eric Jackson's excellent "The PayPal Wars."
When technologies such as components or delivery mechanisms change, as they inevitably do, companies step in to provide bridging solutions that get you from point A to point B without having to rebuild.
Nine times out of ten, the bridging solution is the "obvious" choice. Rather than invest $1MM in rebuilding it now, you can spend a lot less on licensing some product, often on a subscription basis. Problem solved, didn't cost us too much (and no capex!), and we can keep going!
Much of the time, this analysis is correct. But it can be dangerous.
First, while the interim solution that made sense day 1 may make less sense on day 120, year 365 or later. Bridging solutions are not there to do you a favour; they are there to make money. As such, they usually make sense only in a relatively small context. Beyond a certain scale - which changes with each particular case - the economics of the interim solution may add up no longer.
Second, you need to look at the competitive environment. Just because you don't want to invest in building a better product from scratch, possibly because you lack the skills in newer technologies, doesn't mean some competitor doesn't! If your business is worth your investing in every single day, it is worth it for someone else to as well.
In many ways, the competitive environment is more important than the financial analysis. Cash is king, and cash invested in the business is a way to enable growth and future profits. If the competitive environment changes underneath you, no amount of cash saved from a better investment choice will help.
Does this mean that an interim or bridging solution should never be chosen? Absolutely not. Interim solutions can be an excellent choice for an extended period of time. If the product is in the "cash cow" phase, it might be the permanent solution for the rest of the product's life.
It does mean that when deciding whether to replace a product or use a bridging solution, always:
- Do the analysis not just today, but for the future. Ask the question: at what scale will the bridging solution no longer make economic sense?
- Revisit the financial analysis at least twice a year, preferably once a quarter. Did the economics of rebuild improve? Did the scale of bridging deteriorate?
- Consider not just the internal financial environment, but the external competitive environment. Who else will offer a similar product? What will they use? How will it be better than our bridged interim solution? When will they start to become a threat?
- Revisit the competitive analysis at least once a quarter. Did new competitors arise? How are they and existing ones offering services? Make this part of a general regular competitive analysis.
- Begin gaining the skills necessary for replacement immediately. Accept that you will have to rebuild someday; if you wait until it is urgent, and only then begin to learn how to design, build, deploy and operate it, you may be too late.
Summary
The decision between bridging existing technology and replacing it is both a financial analysis and a strategic competitive analysis. Neglect either at your peril, and revisit the assumptions and analyses regularly. Never let competitors steal a market you own because you didn't check if your 18-month-old assumptions are still accurate.
What product in your offerings is based on older designs and technology whose life is being extended by bridging solutions? Have you performed an accurate financial analysis recently? Do you know who else is nipping at your heels or moving silently under the radar? Do you really know how to build and operate the replacement?
Ask us to help you determine the product's financial and competitive present and future, and plan for its next generation of life.