Technology Doesn't Cost More

Ryan Petersen, Founder & CEO, Flexport

There are no more good software companies left to be founded. Or more accurately, in the future, every company will be a software company, they just won’t sell that software. Instead they’ll use software to differentiate a real-world product or service, and most often one that customers are.

The industries that haven’t been disrupted by the internet yet tend to be the laggards, where physical assets and human expertise matter more than the connectivity or computing power of the internet. But a new generation of companies is showing that even in these real-world businesses, software can provide a huge differentiator.

Take a company like Gusto, a provider of tech-enabled payroll services. Software makes the experience of paying your employees downright delightful. But the software isn’t for sale; it’s given away free, and they make money off by charging for payroll and employee compensation services. Gusto didn’t make software for the payroll industry. They made software for businesses to pay their employees, and made money off the same traditional services provided by legacy providers like ADP.

Or OneMedical, a company that re-inventing the doctor’s office around a modern technology stack. Rather than building beautiful software to administer a doctor’s office and then selling it to the nation’s private practices or hospitals, OneMedical created it’s own doctor’s offices, and used software to differentiate the service. Their software improves the user experience, making it easy to book appointments, connect with a physician, fill prescriptions, access medical records, and all the other things a modern doctor’s office should be able to do.

The definition of technology and innovation is—finding a better way to do things

While I haven’t looked at the backend of their operations, it’s safe to say that in addition to revolutionizing the customer experience, both OneMedical and Gusto have also built an array of tools to lower transaction costs. If you can be both better and cheaper, in industries of these size, you can build a great company.

And what’s beautiful about tackling a legacy industry is that unlike for new software companies, their target customers are already spending money on these services. You don’t have to convince a company they need a payroll service, or a consumer that they need a physician. You only need to show them how your product or service is better than what they’re getting now, either because you offer a better user experience or a lower price.

Good software allows companies to do both improve the customer experience and lower transaction costs. Many traditional businesses have been protected from internet-based disruption by the need for physical infrastructure or human expertise to compete in their industry.

Incumbents in traditional industries have largely failed to realize the benefits from software-enabled business models. They don’t have the technical skills required to build the software, because why would they. They’re not a software company. And even harder, they don’t have the culture or compensation structures required to attract the talent required to become one.

Perhaps most importantly, the leaders in these incumbent industries lack the mindset to understand how software can both differentiate a product in their industry, and allow a company to provide it at a lower cost. Instead, executives in traditional companies still see investments in modern user interfaces as a pure cost center.

Look at international freight forwarding, one of the largest industries on the planet and one of the slowest to adopt modern technology. A senior executive at the largest company in the industry, Kuehne + Nagel, with some 20 Bn dollar in annual revenue, Marcel Fujike, recently told an industry conference, “You ask us to innovate but that comes at a price. At the end of the negotiations, you end up with the finance guys and the price goes down. Give us more and you’ll get more.”

The definition of technology and innovation is—finding a better way to do things. If you think that costs more, you are doing it wrong. As long as incumbents retain leaders with this mindset, that technology and innovation are only costs, and they need to be paid for by the customer, there will huge opportunities for new entrants. It won’t be easy, as by definition these laggard industries have been protected by the need to acquire physical assets and human expertise.

Given the trillion dollar markets that are up for grabs in energy, transportation, healthcare, mining, and other “real-world” industries, startups tackling these problems will be supported by abundant capital, both human and financial. Dinosaurs beware.