The Innovation Entropy Problem

Mathew Ingram posts an insightful commentary on the Wall Street Journal's fascinating piece about the Ballmer-Gates transition at Microsoft, and Michael Kowalchik chimed in with some excellent comments of his own, and a repeat of one of his earlier posts that is well worth revisiting.

As I commented at Mathew's blog, I lived through a very, very similar nightmare a number of years ago, while working for what was, at the time, one of the biggest software firms in Canada, a darling of the TSE.

We’d been blisteringly hot for a few years, having risen to the top of the market on the back of the corporate shift to Windows 95/98 and client-server networks. Our main competitor had got stuck supporting an old, DOS and Netware-based product and a big installed base. We were the nimbler, more innovative company that had its Windows-native product out first.

Somewhere around about the middle of ’98, though, a few of us were starting to get really worried. Almost 40% of our annual revenue was coming from maintenance contracts at that stage. We were comfortable, in other words; too comfortable. The company had developed something of a bloated, complacent, bureaucratic feel.

Our biggest concern, from a product perspective, was the rise of the Web. We had been trying to squooge our product into something vaguely Web-ready for a while, but it was basically a trainwreck. We learned the hard way: you just can’t slap a new coat of Web paint on a clunky old piece of client-server code. Remember when software firms used to describe their products as “Web-enabled”? Yeah, that was us.

There was a big 2-day management off-site meeting that year. At one point, in the midst of a lengthy debate in which we were trying to come to consensus around precisely how screwed we really were, I floated the suggestion that a solution to our problem might be to take some of our best people, fund them, and cut them loose to hire a brand new team and grow their own thing.

Get them to start up a completely new company, unencumbered by any of our problems but with the experience, knowledge, and collective expertise we had developed over 15+ years in the market. The core of my idea was: let’s create our own best Web-based competitor. Let’s cannibalize our market share, before someone else comes along and drinks our milkshake for us.

Alas: much argument, no agreement, and – in truth – not enough corporate cojones to commit to such a madcap scheme.

Meanwhile, one of our very best resellers – a company that had built their entire (very successful) business by developing add-on tools and custom solutions around our core product, was secretly developing a pure, Web-native competitor to our cash cow. They did precisely what I’d proposed – setting up a separate, arms-length company to launch this thing once it was built (keeping their hand in the whole thing well hidden from us).

Then they took two years to slowly slim down (and ultimately close) their original business, with almost all of the people they “downsized” coincidentally getting hired by this new kid on the block. Before we even realised what was happening, they were kicking our arse in every client pitch.

You can guess the rest. We slipped slowly into the doldrums, only to be put out of our misery a year or so later through an acquisition.

The upstart competitor went on to greater and greater things, ultimately converting a sizeable chunk of our former client base to their much shinier new product. They were, in their turn, also acquired for an almost indecently large amount of money, and the founders all got very rich.


Mathew and Michael's posts also put me in mind of another rather lengthy diatribe I posted way back in the very early days of this blog and, heck, if one Michael can re-run old posts, so can this one...

I mentioned this Marketing Aforethought piece to yet another Michael - Thornley Fallis colleague, Mr. Seaton - a couple of days ago. Just re-read it and pleasantly surprised to discover that I still agree with me, seven years later.