How MSA uses its clients' money to develop products

There are a variety of ways to finance the development of new technology products. But at Pittsburgh's Management Science Associates, one of the favorites has been to ask a customer who really wants that new product to front its development cost. Surprisingly, the results of that client-funded development rarely remain proprietary to that one customer. Instead, they are typically used to benefit all MSA customers – and everyone seems to like it that way. Phil Antonson, Director of Client Operations for MSA's Media Division, explains.

Let's say you're an entrepreneur with a great idea for a revolutionary software system. You have all the technical know-how to develop it, but you need additional resources to get it done. You could try to borrow the funds you need from the bank. Or you could make the rounds with the venture capitalists in town. Better yet, you could find the ideal customer for your software and ask him to pay for the development work.

Is that legal?

Sounds far-fetched. Yet this is exactly how the folks at Management Science Associates (MSA) regularly fund development of its enterprise software products. It's called ‘customer-funded development,' a strategy in which the developer charges clients for enhancements to existing products. How can they get away with that when the customers are already paying license fees for the software?

It's not as hard as you might think, according to Phil Antonson, Director of Client Operations in MSA's Media Division. “Before clients come on board with MSA, we let them know right up front exactly what they're getting for their annual license fees,” Antonson explains. Customers are made aware of the ongoing benefits they receive for their money. “They are paying for a certain number of enhancements, new releases, additional features, customer support, documentation, and so on,” he said. Clients are also coached from the outset about MSA's criteria for charging them for these routine enhancements, which the company itself typically initiates.But at one time or another, most of these clients will approach MSA with ideas of their own – ideas for new features or for product enhancements. Antonson describes a screening process through which MSA managers first ask themselves whether a particular client's request is something that would benefit all customers or if it would only benefit that one client. The timeframe in which the customer is requesting that feature provides another screen for evaluating the proposed enhancement.

If the answer to the first question is that the feature is uniquely beneficial to the client who requested it, then it's clear to Antonson that the client should be charged for developing that enhancement. But even if a requested feature can be applied to several different customers and possibly help to close future deals, if the client asks for that change with a very tight turnaround time, the additional resources required to create it, and the delays it would force on other MSA projects, would raise the expectation that the client would pay those costs.

What goes around comes around

MSA's solutions in data management, analytics and technology are used by over 300 customers around the world. Its ‘customer consortium' approach, with certain products, allows each customer to benefit from every other customer's new ideas. Antonson is used to clients questioning the idea of paying for enhancements that are their own ideas but which end up benefiting MSA and its other customers. His response is to point out that they, in turn, are benefiting from MSA's other clients who are doing the same thing. He points out that they are getting features and functionalities that they otherwise may never have imagined. In effect, all customers in the consortium contribute towards the overall improvement of the application.

In addition, Antonson suggests, any veteran technology user with “a few battle scars” would tell you that he doesn't want a unique software solution. The fact that a new product or feature will be used by some or all of MSA's clients creates the comfort of sustainability – the assurance that the software is going to be around for a while. Rolling out product enhancements to their entire customer base also has the benefit of allowing MSA to better manage the software, limiting the number of versions in use.

Whose property is it, anyway?

What about intellectual property issues? MSA retains all IP rights for existing software products, even as new enhancements are added. So how does MSA handle situations when a client wants a feature and wants it only for himself? What if the client insists that this new feature is unique to how he does business and would give him competitive advantage? Although it depends on the product and the industry, Antonson's experience has shown him that, in most cases, “what a client thinks is unique about how they do business really isn't.” “In general,” Antonson advises, “we seek to avoid exclusivity with our products.” As a compromise, MSA will sometimes agree to give six to twelve months of exclusive use – a head start for the client – before rolling the enhancement out to the rest of their customer base.

However, the legal issues can become tricky. When developing something from scratch in a ‘work-for-hire' type of arrangement, as when a large client approaches MSA with a completely new idea they want to have developed, the client would normally expect to own the IP, particularly if the end result gives them a competitive advantage. However, having applied its resources to that project, MSA wants to be able to take that new product to market, perhaps even selling it to the client's competitors. This is when Antonson has to don his negotiator's hat and add conditions, such as promises of software code or functionality changes, before taking the product to other customers.

Of course, not all new development projects are initiated by MSA customers. Antonson describes as “even more challenging,” efforts to win a prospect's or customer's support for an MSA-generated idea. This could involve a brand new product or service that MSA would like to get off the ground. Or it may be an incremental improvement. The customer may not always see or appreciate the merit in funding development for a new product that is then going to generate revenue for MSA. However, additional revenues are never guaranteed, because there may not be a broader market for the product. So Antonson has gotten clients to agree to ‘incentive' arrangements, in which MSA charges the client a share of the development cost. As additional customers sign up for the new product, the original client's license fee may be reduced. MSA also offers financial incentives for the client to help to identify other prospects for the new product and to act as a reference to new customers.

Relationships matter

Another element of this approach to product development relates to the intensity of MSA's relationship with that particular client. Antonson cites a recent McKinsey study that looked at the benefits to companies that work with a few good technology vendors, compared to whose who work with many. In interviews with IT executives from 23 companies across a wide range of industries, McKinsey found that “ seventy percent said that they want to move away from purely transactional relationships by establishing stronger partnerships with a smaller number of preferred IT suppliers. These relationship-seeking customers want vendors that better understand their specific technical environment, offer ongoing advice, help them manage aggressive technology upgrade-and-innovation cycles, and provide solutions for their most pressing business problems.”

According to Antonson, MSA is committed to partnering with its clients to gain an intimate knowledge of their current and future business initiatives and to ensure the alignment of its own priorities with those of its customers. When prospecting for new customers, Antonson strives to be fully aware of his prospects' needs and pains. By matching MSA's strengths in the areas of data management, analytics, technology and domain knowledge, against those needs and pains, Antonson is able to target his business development efforts most effectively.

Nothing's perfect

Customer-funded development is not without its perils, however. As always, juggling the support issues along with new project development, can present obstacles. This is where a Product or Account Manager must be a good listener, according to Antonson, and assure the customer that you are attentive to his concerns. Once the client has reached that comfort level, he will begin to open up on other issues, he noted.

Antonson recalled one project that didn't go well. Through it, he learned some valuable lessons about managing the scope of a project and the importance of tying development fees to project milestones. He also learned the importance of ensuring mutual understanding of the process by both parties. He advises answering certain questions upfront, including what is the escalation procedure, and at what point do you get signatures on specifications? It's very easy for a project to veer off course. And in this particular case, both parties decided to discontinue the project, agreeing to disagree on the scope and walk away from it.

But the experience hasn't dissuaded him from the value of his company's approach to development. On the contrary, he is convinced that MSA's customers are benefiting every day from their unique cooperative arrangement. And his company's own capital requirements have remained much more manageable along the way.

Cathy Brennan is a new Contributing Writer for the Pittsburgh Product Strategy Network. She has a 25-year career in product management and marketing for life science technology companies including Respironics, MEDRAD, and NOMOS. For comments, write: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it