What Happened to Long Term Vision?

One of the most famous research projects is known simply as the Stanford Experiment. You've probably heard of it as the Marshmallow Test or something like that.

Here's the simple experiment: Put a kid alone in a room with one marshmallow. The rules are:

1. You can eat the marshmallow anytime you want.

2. We're going to leave you in the room for fifteen minutes.

3. If you do not eat the marshmallow during that time, we will give you a second marshmallow.

The goal was to learn about delayed gratification in preschoolers. This research has been repeated many, many times and with dozens of variations. In addition, there have been follow-up studies to track the effect of delayed gratification on future performance.

One of the key findings in the studies is that delaying gratification is highly corrollated with long-term success. But even in the short-term, the truth is pretty obvious: You can have a small treat immediately, and a larger treat if you are able to wait a little while.

And that brings us to a number of the large vendors in our industry today. More and more, the largest vendors seem incapable of delaying gratification at all. They eat every marshmallow as fast as they can.

As you probably know, most of these vendors are funded by private equity companies. These companies sometimes claim that they're long-term investors. But, realistically, the folks who fund these investments have only a four or five year commitment. In that time, they want high profits and all of their original investment back . . . so they can move on the next adventure. Their idea of "recurring revenue" is to get huge payouts in short order.

The best the investment fund can hope for is that a big investor with a three or four year timeline will renew their commitment for another three or four years. If "long-term" means ten or twenty or thirty years, then there are no long-term investors. 

Anything and everything they can do to increase short-term profit is done in service of these payouts. Actions frequently include cutting staff, increasing prices, and cutting development programs. In other words, what "investors" want is revenue extraction.

A secondary objective is to increase the appearance of guaranteed long-term income. This results in three year contracts (absolutely a horrible expectation in a high-tech industry unless you're selling hardware), unfriendly pricing models, and extreme difficulty in getting out of a contract or even reducing your license commitment. In other words, things that are bad for the customer (in this case, reseller/partner/MSP) increase the perceived long-term value of the organization.

Why do they want this perception of increased future revenue? Because it allows them to get another round of "funding" from new investors. Sometimes, this comes from bank loans. More often, it comes from investors who have been over-promised results. Those investors have a four or five year timeline to get back all their money and a lot of profit.

It's not quite a Ponzi scheme, but if you were to imagine an increasing pyramid of debt, commitments, and promises that seem to grow until they collapse in on themselves, you would be forgiven. 

Missing from this equation, of course, are the end user client, the success of the resellers and MSPs, customer service, innovation, good governance, fiscal responsibility, and a healthy business model.

Eat the marshmallow. There may never be another one!

In my January State of the Nation Address for SMB IT, I said that I think the clock is ticking. I believe we have five years or less before there's a major economic catastrophe for one of these mega vendors. Well, we're about six months into that five years. So far, I have no reason to reconsider that projection.

If your primary vendors have unsustainable business models, this could be a major problem for your company. There is an intoxication with revenue extraction that is hard to resist. But there has to be a limit. If all a company does is extract money from the industry, something has to collapse.

The good news is very good. If YOU have a good, sustainable business model that can last for twenty years, then you can survive anything. You will need to partner with great vendor partners who also have sustainable business models. And you'll need to put a lot of attention on great service and great employees. Those are very manageable if you've got a great business model.

Wait for it. With a little delayed gratification, the treat will be bigger in the long run.