The Prolonged Death Spiral Business Model

I recent message from a friend tells me he is putting on his parachute. He can’t take it anymore. He’s tried hard, very hard, to change a challenged company. Actually, I know a little bit more about this company than I should. I once told him that working there was like being aircrew in Catch-22: Only the sane should work there because it was cruel to employ ill people, but it was such a crazy environment wanting to leave was a sign of sanity.

Unfortunately this is not the only company I have heard of, even seen inside, in the last few years that have such a business model. In fact, I’ve now seen so many that I’ve named it: The Prolonged Death Spiral Business Model.

Let me explain… this requires two or three building blocks but I’ll get there…

In Business Patterns for Software Developers I wrote:

“Most [software] companies never make it past the conception stage: ideas stay in people’s heads, business plans fail to be funded or people start but lack the energy to follow through. Even those plans that get past inception regularly flounder – products fail to make it to market, and those which do fail to sell. …

Companies can fail at any time during their existence. However the younger a company is, the more likely it is to fail. Infant mortality is high: most companies under one year old fail. However, once a company is past its first year, survival chances improve remarkably. …

Death comes to a software company when its sales do not cover its costs. Once a software product is developed and sold, companies can reduce costs and continue selling the product. Companies that have an installed user base, particularly when customers are paying regularly for support services, can stagger on for months or even years. This process can be especially prolonged when customers have data locked up in a proprietary data formats or on servers.”

When I wrote this I was thinking of the growth of successful software companies, the kind of companies I wanted to work for. I first saw a prolonged death play out when I was working at Quadratron in the 1990s. What I never realised was that a prolonged death spiral could actually be a viable business model itself.

Quadratron was dying, it eked out its last few years collecting maintenance royalties from legacy customers - one customer in particular. In fact it was dying when I joined, they lured me in with a plan to spend a lot of the remaining cash on a new product. But things were worse than that.

Like so many companies Quadratron found that once you have survived the first few years, once you conquered the risk of developing a product and have an installed user base you can continue milking that base for a long time. Provided you don’t do anything silly like trying to develop a new product that is! Quadratron had been very successful, it had a lot of customers to milk.

When you reduce a software team to care and maintenance only your costs are much lower. Importantly your risks are much lower too, and you have cashflow. Yes, an accounting term I know but it means: money is coming in. And money continues to come in because while some customers may dump your product the longer you are in place the more difficult it is to dump. This is what accountants call “free cashflow”, its how much money the company has to play with, its a better measure than profit because profit can be gamed.

Now, like many others in the software industry I think of venture capitalists as nice people who live in Sand Hill Road, Palo Alto and invest in software companies with the capacity to grow very very fast and make everyone rich. Call this the Californian model of venture capital.

OK, these guys are not so lovable that you want to take them home to meet Mum and Dad but they have financed a lot of good software companies over the years - Lotus, Yahoo, Google. They invest in 100 companies, they expect 90 to lose money - they try to minimise it - 9 to break even and one to make so much money they make up for all the losses.

Then there is another type of financier. Call them the private investor or private equity. I think of this as the European model of venture capital. They buy existing companies and milk them. In buying they look for two things: lots of free cashflow (i.e. day to day profitability) and minimum risk (i.e. they really want to limit their down side.)

As far as possibly they buy the company with debt. With other types of company assets can be used to secure debt but software companies have few assets. So debt is serviced from the cashflow, and the cashflow comes from an installed user base who cannot, and do not want to, change.

Since debt is serviced from cashflow and cashflow comes from existing customers the emphasis is on keeping customers - don’t loose them! So most development work is driven by what individual customers want. Backlogs are stuffed full of customer specific requests.

Growing the company, especially developing new products, would be really risky. The owners and managers are into revenue protection. They want any new product development to be paid for by customers, software alchemy.

Software Alchemy: When a software company believes it can develop a “product” for one customer (preferably paid for by the customer) and then sell the same “product” to multiple other companies.

You can certainly develop technology for one client, you may solve their problems, but developing a product for multiple customers is a different undertaking. Very occasionally, at the start of a technology cycle, companies pull of this trick (usually by accident or by having a very stupid customer.)

Of course keeping customers means you need to persuade customers your product has a future so you need a bit of a roadmap, a bit of a vision but its weak and flexible. If an existing customer doesn’t like it change it! Forwards the end, like when I jumped from Quadratron, even maintaining the pretence of a future for the product is jettisoned to save money. The final few customers are trapped.

Because the company is now loaded down with debt (and needs to pay interest) they find making any sort of profit impossible. Actually, if there was some more free cash then the private equity owners would leverage it by taking on more debt and paying it out as dividend, or they would re-leverage the company - possibly by selling it to another private buyer.

Another trait you sometimes see with these companies is acquisitions: when they can these companies buy related companies who also have products which are past their best but have an installed base. Again they can do this with debt. They hope to get some technology crossover but in reality the people who run these companies don’t have the skills to do that so the mess gets bigger.

By the way: since the companies are loaded with debt they pay no tax because tax can be offset against debt.

These companies chase EBITDA - Earnings Before Interest Tax Depreciation and Amortisation. Because that is the only valuation which makes sense when the company has been leveraged to the hilt.

In short the company is being run as by “financial engineers” - and thats the polite term.

These people know a lot about debt structures and taxation but nothing about software businesses. Today they may be running a software business, tomorrow it could be toothpaste.

Its worth noting these companies want to be Agile because even these guys have heard that Agile will result in lower costs, faster delivering (faster cashflow), and happier customers (even fewer losses and even more reoccurring cashflow.) But they aren’t prepared to make the necessary changes, perhaps a little Agile training or coaching but anything that requires serious investment (e.g. TDD) is off the table.

These companies are a success by some criteria: the people running them and the people who buy them stand to make lots of money. Financially they look good - except the debt. And customer continue to use the products they want to use. They exist, they employ people. By some criteria they are a success, we should not forget this.

They can be miserable places to work in because real engineering is not a consideration. And pity the poor customers who are being led up the garden path about future products.

It would be criminal for any of these companies to take advantage of an ill person by offering them employment. As a sane consultant I’ve even tried to help a few of these companies. However, not wanting to work with these companies - as an employee, contractor or consultant - is a sign of sanity.

If you work for a company which is run by financial engineers in Britain, Europe, America, London, Cambridge, Cheshire or anywhere, you know what you should do for the sake of your sanity.

Xanpan update

I’m glad to say I’ve just completed a minor update to Xanpan: Team Centric Agile Software Development. The new version is available right now from LeanPub, updates to the physical copy on Lulu will follow in time.

These changes are really just to make the book a bit more professional. The new version has:

• A new professionally designed cover; this will end the situation where the physical and ebook versions had different covers (both of which were thrown together by me on wet afternoons.)
• The ebook versions have genuine ISBN numbers; again this will follow for the physical version.

As to the future, I hope to put Xanpan on Amazon in time and I still have more draft chapters for Xanpan 2: The Means of Production but combination of being busy with work this year and moving house means progress is slow.

Scarcity, not Slack

Question: What is the opposite of Slack?

Or, perhaps a better question: What is the problem to which Slack is the answer?

Lots of software people like to advocating the benefits of slack for development teams. I’m not talking about the popular collaboration tool Slack, rather I’m talking about Slack in the sense discussed by Tom DeMarco in his book. DeMarco’s is a good book and has some good arguments but on the whole I’ve never been a fan of introducing random slack into the development process. (Have a look at my comments on Seb Rose’s blog post from a few years back to see what I mean.)

Now I’ve found a book, and two academics, who have done the hard work of creating an anti-dote:

Scarcity: Why having so little matters so much by Sendhil Mullainathan and Eidar Shafir (this is the UK edition, in the US the publishers have a different name slightly, Scarcity: The New Science of Having Less and How It Defines Our Lives)

Scarcity is the opposite of slack, and just maybe, scarcity is the problem which requires slack.

This book is highly recommended. Although it has nothing to do with the software community this book deserves to be essential reading for everyone who claims to know something about software management and in particular Agile.

The authors are ambitious if nothing else: they set out to create a new discipline, the study of scarcity. Although most of their experiments, examples and studies concern scarcity of money and/or time they endeavour to project their arguments into a more general space, scarcity of anything.

As you might expect, I read this as a software engineer. I read the book applying their thinking to the world of software and specifically Agile Software development. And after all, so much of managing software development comes down to the scarcity of time and the scarcity of money even if it manifests itself as a scarcity of people and excessive demands.

Now there is good news and bad news for software people.

First a little theory: the authors suggest that when people encounter scarcity they “tunnel”. In other words their mind starts devoting a lot of capacity to the resource which is in short supply. This has advantages: our focus increases, our productivity increases, some of judgement (yes estimating) skills improve and overall our effectiveness increases. Yes, scarcity can create productivity improvements. Scarcity is not all bad, it can be beneficial.

But there is a downside. For people in the scarcity tunnel their mind devotes a lot of time to thinking about this problem. As a result there are negative effects. Anything that doesn’t effect the short term tunnel is pushed to one side. So, for example, the short term benefits of taking a payday loan displace the long term problems which will be made worse.

This creates what the authors calls a “bandwidth tax”: so much of the mental energy is devoted to the tunnel and scarcity that less capacity is available for other things. For example, parents who have to juggle childcare arrangements for children are less effective at work.

The authors present serious evidence that the bandwidth tax reduces intellectual capacity, i.e. IQ, intelligence quotient. Perhaps controversial this leads them to suggest the poor are poor because they are poor, a vicious circle develops which is difficult to escape and traps people.

OK, enough of the book, read it yourself. What about software development? What does this book mean to software?

I see that tunnel a lot with development teams, they are doing stuff they know they shouldn’t but they feel they can’t afford to do the right thing. As a result they never get out of the mess they are in.

It is immediately obvious that one of the ways Agile Software Development - specifically iteration based Scrum, XP and my own Xanpan - work is by creating a short term scarcity of time (two weeks!) which causes tunnelling. Effectiveness goes up as items outside the tunnel are pushed out.

Work in progress limits (whether flow based or velocity/points based) are another form of induced scarcity. They force managers and product people specifically to tunnel on what is important, what needs going an they push less important items out.

But this comes at a cost.

One clear implication is that activities with benefits which will fall outside the tunnel will be dropped, skipped or minimise. And the obvious thing here is Technical Quality and improving the Technical Infrastructure. For example, adding automated tests, applying test driven development, improving the build system, refactoring, the list could go on.

(Indeed, it was worry about not investing in these which causes Seb Rose to advocate Slack.)

Mullainathan and Shafir give examples of poor farmers who save money by not taking out insurance against crop failure, drought or other possibilities. They also show how the same farmers would benefit and save money by taking out insurance.

They give example of vaccination programmes where those who will benefit - and know they will benefit - do not partake.

When they need the benefits of such insurance it is too late, they are tunnelling and cannot afford to invest. When they have the time or money to invest in insurance it seems unnecessary. People are optimistic and under estimate the risk to small problems occurring.

This is the same as teams who don’t do practices such as Test Driven Development. They are tunnelling.

There is more evidence here about the role of deadlines and routines: deadlines and routines help us manage our time and ensure things happen. The research presented in the book complement my own notes on time estimation (Notes on Estimation and Retrospective Estimation and More notes on Estimation Research). (It is because of such finding that I cling to fixed length iteration in Xanpan rather than going abandoning them like Kanban.)

And those vicious circles which keep poor people poor parallel software teams too. Poor people find problems which can be solved with a little money become very disruptive because even a little money is hard to find, they tunnel more, more problems are ignored. The current fire is extinguished but other problems are worse now.

I see the same thing with software teams. Projects run late and over budget so managers tunnel on the project, while this is happening other problems are building up, quality is neglected, technical debt is incurred, support tickets are left unanswered, changes which could help are put off until the fire is extinguished.

Sometimes I think the answer is simple: choose not to enter the scarcity trap, choose not to firefight, choose to do the right think. It reminds me of the talk JB Rainsberger gave on his 2015 European tour “Just Stop It.” It reminds me of Renton in Train Spotting: Choose Life. It reminds me of Joe Bergin’s (in)famous “Do the Right Thing.”

Perhaps easier said than done, personally I have one piece of advice for these companies: Stop Thinking Projects. Project thinking obscures the problems and solutions.

The authors have some advice, some solutions, but they don’t have a complete solution. I find myself in the same boat: I can see how their arguments play out in software and I have some solutions but I don’t have them all.

Importantly they do identify Slack as part of the answer to Scarcity. Anyone who has studied queuing theory knows this.

Not only does this book deserve to be widely read in the software community - and specifically the Agile community - but I hope to see these two authors appearing at software conferences before long.

Finally, I consider myself lucky to have found this book. After several years where I struggled to find books which said something new I’ve been lucky enough to read three in the last year. (I blogged about Scaling Excellence last year (another must read), I didn’t blog about Joy by Richard Sheridan but his book deserves reading just for the share life affirming enjoyment, a reminder that software development can be and should be joyous! OK, I enjoyed it for another reason, Richard and I both had our lives changed by the same events on 2 January 2001, but that is a long story!)

Agile is Punk - Agile is Democracy

From time to time I’ve been heard to say: “Agile is Punk.” But I’ve never explained myself.

I’ve also been heard to say things life “Agile is about democratising the workplace” but I’ve never explain myself there either.

Let me try…

What I mean when I say this is: Agile (software development) has a lot in common with Punk rock.

To me the important thing about punk rock was that it was about people trying it - music, their own thing. Anybody trying to play music, anybody forming a band, anyone who had a novel idea trying to get a record contract. Yes, even if they couldn’t play an instrument they could have a go, and who knows, maybe they would learn as they went.

(I should say that while I’m old enough to have been around when punk was I’m not old enough to have been there. Both post-punk and post-disco influences were at work in the New Wave music which was common when I came music listening.)

Punk had a democratising effect on music. Music has aways been of the people, anyone can listen, anyone can try to sing - although I’m not very good at it even I can try! But the music industry was something different, performing, recording - there were barriers there! Punk tore down barriers.

Punk opened up the recording industry. Punk opened up music.

Agile opened up the software process industry.

Before Agile official software processes were pretty locked down. You had to be an academic or expert/consultant to dabble in that space. Programmers who worked in under official software processes were on the receiving end.

Agile said: “Your opinion is important too.”

In truth music has always was been open to everyone, just not the recording industry. And in software development processes were open to anyone, most programmers did not work under an official process, mostly it was common practices which, if they worked, were probably more effective than official ones.

Unfortunately these unofficial work practices came with guilt: because we did not do it the way the books said we should. When faults occurred we blame ourselves for “not doing it properly”.

Agile says: “Everyone involved with software development should have a voice in deciding how to work, it can be improved and you don’t need to be an expert, academic, consultant or certified member of some body to express that view.”

That also makes it democratic.

I don’t mean democratic in the sense that we all get to vote, I mean democratic in the sense that it is power is vested in the hands of the collective people. Everyone has a voice, everyone can participate, and those who hold executive power do so by the will of the people.

Agile is about giving everyone a voice. Like Punk that means accept that those who don’t have much skill are also entitled to a voice.

Funnily enough, I’ve long held that any punk band that made a second album weren’t punk anymore because they were part of the industry, they were now experts! The same is true with Agile, hang around for long enough (like me) and you are no longer an outside but an insider, an expert.

Increasingly we see Agile heading outside of software development. When this happens it becomes necessary to ask: What is Agile?

My answer is: Democracy.

Agile is about valuing everyone, agile is about giving everyone a voice, agile is about putting the power to change the workplace (process, systems, norms) into the collective hands of the people who work there.

Yes at times it feels revolutionary, but there are fellow travellers, it is all a Theory-Y movement.

Agile Banking conference

For the record… OK, so I don’t loose the URL…

Despite my scepticism about Agile in Banking environments, particularly investment banking, I’ve also become convinced that those who are attempting Agile enablement/transition/working/change in a banking environment need help!

Specifically I think they need their own conference. Having looked at some of the available conferences I think they are rubbish. So I’ve prodded the good people at Software Acumen to make it happen. I also intend to keep a big dirty finger in the pie to make sure they come up with a good programme - although I don’t plan to speak myself.

So, if you want for a bank, and you are trying Agile of any description mark your calendar with Friday 20 November and sign-up for notifications at the Agile Banking conference website - http://agileinbanking.net/2015/.