Can it innovate like a tech startup?
A couple of comments that didn’t make the final cut of Wednesday’s exclusive interview with Intuit CEO Brad Smith spoke volumes about the type of competitor that is running against MYOB, Reckon, Saasu and Xero.
Smith made it clear that the $4-billion-a-year Intuit is less in the mould of slow-moving tech giants like IBM and Microsoft. It is actively trying to behave like a technology startup. This makes it much more dangerous to Australian players. First, an explanation about how tech startups operate.
Two powerful business philosophies have underpinned the success of many Silicon Valley entrepreneurs. The first is an approach called “the lean startup”.
It works like this: A startup spends the least amount possible to build a prototype to test their idea, takes it to market, collects feedback and modifies the original prototype accordingly. This loop of building, testing, collecting feedback and modifying continues until the prototype gets “traction” – when customer numbers climb at an increasing rate. (The most valuable metric is not absolute customer growth but the rate of acceleration of growth, usually measured in the single digits.)
The beauty of this model is that a startup will spend as little as possible in its search for the next big idea. Once an idea’s value is statistically proven, the venture capitalists walk in with a big cheque so the startup can scale the idea into a viable business.
The second concept is called disruptive innovation, the secret weapon startups use to unseat incumbents. According to this model, startups can test and build new products in small markets that are often unprofitable for established players. Once the startup cracks the formula for a cheaper or better product, its takeup can be so fast that industry leaders can’t react quickly enough or are reluctant to cannibalise revenue for their existing products.
Disruptive innovations can hurt even successful, well managed companies that are responsive to their customers and have excellent research and development, says Clayton Christiansen, acclaimed author of the concept.
These are powerful, proven ideas that are responsible for annointing new kings of business and deposing the old. Although they are well understood it’s very rare to see them practised by industry leaders. But in the accounting software market Intuit has listened and is actively trying to disrupt itself. This makes it a much more formidable competitor.
Here’s why offence is the best defence (all quotes are Smith’s):
1. Leadership committed to disruptive innovation.
Smith brought up two seminal books, the Innovator’s Dilemma and the Lean Startup, in the first minute of our half-hour interview to explain Intuit’s approach to building QuickBooks Online. “My job becomes removing the barriers. When you are 30 years old you have tech debt you have to eliminate that and make it easy for the engineers to move fast. It’s fun.”
2. Listening to customers.
Despite being in the game for nearly 30 years and making $4 billion a year in revenue, it’s watching competitors carefully and spending a lot of time talking to customers. This approach is hammered home from the top. At the Intuit event on Monday, senior executives including Smith each picked a small table of bookkeepers and accountants, sat down with pen and paper and noted feedback. “We try to remain very paranoid. If you don’t continue to listen to customers they may end up being over-served at the lower end (by new players who are) going to come in beneath you.”
3. Customer-driven model of rapid experimentation.
Intuit has moved decision-making from the top to “two pizza” development teams (that is, small enough to be fed with two pizzas). “We can literally iterate with customers and the customers are telling us what they want.”
4. Improving its ability to innovate.
Before the two-pizza teams arrived, less than half the 54 products launched in the past 10 years had made more than $50 million. Last year the software company made $100 million from products less than three years old, a tenfold increase on the same metric two years ago. “Rapid experimentation ends up taking the guesswork out. It takes pressure off the leadership and empowers the engineers so they actually feel like they are in a company where they can innovate.”
5. Willing to destroy existing revenue.
This is the big one. Taking a knife to your cash cow requires enormous faith in your development teams, that they can build an even better product.
“If you’re not willing to cannibalise your sales, someone else will. You have to be willing to take those kinds of changes.”
If you are interested in reading more about these concepts, Eric Ries coined the term and wrote the book, “The Lean Startup”. Another major contributor to the theory is Steve Blank and his latest book is “The Startup Owners Manual”. He is also running a free online course on how to build a startup.
Christiansen invented the term “disruptive innovation” and best explained it in the best-selling The Innovator’s Dilemma. A number of entrepreneurs contribute to the development of this philosophy; check out this list of blogs on Business Insider. I’m a big fan of Mark Suster who writes Both Sides of the Table.