@adlrocha - Should you be a product company or a project company?
i.e. selling products v.s. selling manpower
|Alfonso de la Rocha||Mar 1, 2020||1|
So you are thinking about building your own company. You think you are a really creative and smart individual, and you feel underpaid on your job considering the skills you have, how much you produce, and the responsibilities you handle.
Or maybe you are a brilliant manager in a company with big pockets, and you have decided to open a new line of work. You have detected a new technology, a user need, or a business problem, that no one has solved yet, or at least not as efficiently and brilliantly as you think you can solve it. And say hello to the first key question in this new venture, how should you sell this solution or technology, as a product, or as a project? This is a question that many companies, managers and entrepreneurs may have faced during their lives. I would like to share with you my view of this matter.
Selling a project means selling a unique solution to a problem through professional services. After executing the project, your client will have a solution/system that suits perfectly his specific problem, and which (a priori) is unique, representing a good head start until the competition manages to successfully implement a similar project. This is a great differentiating value in a world where technology makes a difference for companies advantage.
When selling projects, you as a company, will need to hire the brightest and smartest professionals in the field in order to successfully approach the project. So ultimately, what you are selling is well-directed human manpower. This pose several disadvantages:
At the beginning, with one or two projects sold, you may have a small number of employees really well prepared to approach the project successfully. However, once you start selling more and more projects, you will need to increase your workforce, with the consequent increase in costs. It is true that, at the beginning, until you sell your first project, the investment you require is really small, but as you grow, your variable cost will grow accordingly.
Your employees will like to benefit from permanent contracts but, how will you manage this when the number of projects is variable, and your projects portfolio may be decreasing and you don’t have money, nor work for them? At the end, they are your most precious asset.
And related to this, how are your employees going to feel when they realize they are just “tools” or “resources” in order for you and your managers to deliver what you promised to your clients? They may opt to leave you and work somewhere else (even to the competition). And this is a critical issue, as the one leaving may be one of your “core” resources for your ongoing projects.
Finally, while selling project you have the advantage of diversification. You can always try to sell different types of projects to different clients without any additional investment. While in the case of products, as we will see, additional product lines mean necessarily additional investments.
OK, so you don’t want to sell projects any more, and you want to sell products. This is not a pass of roses either.
First of all, you will need an initial investment in order to build a first version of your product. This has a considerable risk, as after building your product people may not be as interested as expected in it, and all the money you invested may end up in the trash.
Your variable costs, however, will not increase with an increase in sales, so your potential profits are higher. There is no upper limit to the profits you may make as, in this case, more sales does not necessarily mean the hiring of more employees. You may be able to benefit from scale economies.
Your employees are not resources, assets or tools of your company anymore, as your real asset is your product. Thus, all your employees have a common mission (apart from earning money) which is building the best product possible. This makes a bit easier the task of retaining talent, as you employees feel part of something bigger (not just like a tool on a manager’s hands).
Finally, when building products, aiming diversification means additional investments, and this can be hard issue. This is why building products is riskier than building products. It’s up to you the risks you want to assume in order to reach a scale economy in your company (more about this in future posts).
For the lazier readers, let’s draw a table to depict a brief summary of what we have discussed above:
Summary Table (by: @adlrocha)
And you may be wondering, what is your opinion in this? As a salaried employee, I would prefer working for a product company. As a freelance, I would prefer a project company. And as an entrepreneur, both. I think that building a product poses many advantages for a company, however, in order to reduce the required investment and be able to explore the market, is it a good idea to start as “Kind-Of Project Company”. What do I mean by this? You can invest to build a platform or a basic general technology that you can use to sell projects, until you are ready economically and from a market point of view, to start selling your own products. This is a really simplified view of entrepreneurship, but I hope you get my point on this.
OK, and I have been talking about projects and products all the way, but what about selling services and the well-known SaaS (Service as a Service)? Services may have some peculiarities according to the field but, for me, they work similar to products.
Disclaimer: All this discussion is mainly focused on the engineering/IT-related fields. I think it applies to many other industries, but as I am talking from my personal experience and opinion, I can only talk about what I know, so forgive my ignorance.
I humbly accept any kind of feedback to this personal reflection.