About 16-18 years ago, a young colleague asked me if I would meet his friend for a coffee and a chat. He said his friend was about his age (mid twenties) and had decided to start out on his own, to build a software services business. So he thought his friend may learn something from me, considering that I was about a decade ahead of him on the curve. So, on a trip to Pune, I met this young man in a CCD outlet in Baner. He was probably 25 or 26, from a middle-class Maharashtrian background, very sincere, and probably a sharp techie. I chatted without looking at the clock, because I remembered how much such chats with my seniors had meant to me.
One of the things I told him has stuck with me, so this post is just that thought.
I asked him how he hoped to grow his business, and he said what any 25-year-old with no business background would say. He said he hoped that he would engage with clients at an early stage, execute small projects, build credibility, and get larger projects as the client grew. His naivete touched a raw nerve in me, as if I was looking into a mirror.
I told him that this is not how clients behave, at least in B2B services businesses. A B2B contract is B2B only at an abstract level. In giant B2B enterprises, a decision-maker is personally a middle-class manager, who is driven by his own middle-class fears, aspirations and glamour of big brands. (I don’t know if this is any different in other sectors or other countries, but I am certain about the Indian financial sector.) The same manager who gives me a Rs.100,000 project (say, US$ 5,000 in the American context) when he needed some tiny work done and had a very tight budget, would invite bids from a Tier 2 software vendor when he had a Rs.5-million budget (say, US$ 200,000 in the American context), and would invite bids from KPMG, E&Y, Wipro or Infosys when he had a Rs.50-million budget (say, US$2m). This is because he is always aspiring to implement Big and Glamorous solutions from Big and Glamorous solution providers. He wants to boast in his professional circles how expensive is the SAP or Oracle implementation he has deployed. And till he reaches that point in his career, he’ll give Rs.100,000 and Rs.200,000 projects to tiny 5-member teams.
I talked about Maruti and Mercedes Benz cars. A young manager in any company who has money to buy a five-lakh-rupee car (it would be ten lakhs today in India or US$ 15,000 in the US) would buy a Maruti car. But he would always aspire to a Mercedes Benz, not because he needs a Benz, but because that’s his brand aspiration. And when his income rises, perhaps over the next twenty years, and he can afford a twenty-lakh rupee car (say, US$ 75,000), he’ll buy a Benz or a BMW. He will not stick to Maruti even if his old Maruti car has served him flawlessly. In his mind, the Maruti is always the brand he settles for, and Benz is the brand he aspires to. This has nothing to do with the service quality, technical merit, or anything else of either brand. This is exactly how he engages with software vendors too.
So I told my young friend that he will have to move up the client hierarchy too. He will have to get small clients initially, and then, as he does bigger and bigger projects, he will have to retain only those clients who are happy to give him larger projects. Most of his early-stage clients will not want to go back to him and award him bigger projects when their budgets grow. They’ll slot him as a “Small Vendor” and will look for “Big Vendors” when their budgets increase. They will not let him go, but they will not support his growth either. He must not expect them to keep coming back to him with larger orders — he must let them go. And he must find new clients who are looking for larger vendors. In other words, his business will not grow because of ever-growing orders from his initial clients.
I know this is not true about many other sectors. I have seen small manufacturers who started out supplying very large Fortune 500 OEMs, dealing in small orders, and then growing the same relationship 20x or 50x over a decade. But in the world of software projects, with enterprise B2B clients, I’ve almost never seen this work. Most of our large enterprise clients got the first version of applications built by us for an order value of X, and then after two years of its successful operation, they went to one of the Big Guys to get the second version built for an order value of perhaps 20X. This is how the enterprise decision-maker’s mind works. And it’s not as if the initial versions we built were simple and easy — they were actually technically challenging, delivered high performance and reliability, and were delivered to very tight timelines. In short, we did a stellar job. They helped our client acquire confidence that such systems could work well. They then went to a Big Vendor for the second version, which was resource-hungry and flabby. We’ve seen this over and over. The clients who give us large, prestigious, and challenging projects today are not the same as the ones who gave us our initial small projects twenty years ago. Some of our older clients keep giving us steady business down the years, but they still slot us as “smaller vendors”.
Within our company’s leadership team, there were jokes about one Vice President of one of our oldest enterprise clients. My team refers to him as the “Mister five lakh”. This VP had done business with us when we were a 10-member company 25 years ago. He could never imagine giving us any order larger than Rs.5 lakhs, even when we were doing projects 20x this size for other more recent clients. When this gentleman retired, the same organisation gave us much larger contracts.
There are one or two exceptions. These are my most precious long-term business relationships — these clients have kept growing their engagement size with us. I remember one client fondly — a listed, largish, manufacturing organisation. They gave us an order of a certain value in 1997. After a continuous run of various projects, they gave us an order in 2012 whose value was almost exactly 100x the value of their 1997 order. Their requirements had grown vastly in the interim, and the information system we had set up and upgraded over the years needed a huge revamp. They didn’t flinch — they never labelled us “small”. We grew together. We delivered. Both of us are very proud of our association. Why were they an exception? It is at least partly because there was no Vice President of IT in their organisation with a middle-class mentality and big-brand aspirations. This was a manufacturing organisation with exports to the largest clients in the west, they were not a banking and finance giant. The decisions were taken by their MD, who was an entrepreneur. He saw us, understood our values deeply, and concluded that he could trust us. Assessing people carefully and then taking big long-term gambles was in his DNA.
One dimension of the enterprise software projects space is the risk aversion of the B2B enterprise decision-maker. They will choose big-brand stability and “predictability” of the largest vendors over a smaller, more aggressive, technically superior vendor any day of the week. These clients are slow, almost uncertain, in decision-making, quite hands-off in their engagement with their own projects, and less certain about the value being delivered by their vendors. On the other hand, the clients who have grown their engagement size dramatically with us over the years, or the ones who give us our largest projects, are less risk-averse. They are more agile, sharper in their thinking and requirements, and work more like co-creators of their solutions. To give you one example: the more dynamic, less terrified customers ask for automated regression tests, automated build and deployment pipelines, static code analysers, and other tooling and standards which ensure better code quality. This is how they de-risk their projects even when they give us the contract. The more conservative and risk-averse customers make no such demands, and are often happy to work with technology stacks which are three decades old. So, the latter profile chooses to bet on the “brand” of the vendor, preferring old, expensive products and the largest of the services companies. (These ultra risk-averse clients are also the slowest to adopt FOSS, public clouds, and so on. As per the Technology Adoption Curve, these are the Late Majority. )
I tried to explain some of this to the young man in that cafe in Baner. I am not sure how much of it made sense to him. These are lessons I have learned which no management course typically teaches a tech entrepreneur. He never came back for another coffee. 😀
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