Pushing the region into technology product innovation

This week on What’s Working in Washington includes a double-feature: two smaller panels centered around driving the D.C. region towards technology product-oriented businesses that can help grow the economy.

First up, Oliver Schlake, clinical professor and senior executive teaching fellow at Robert H. Smith School of Business; and Jack McDougle, president and CEO of the Greater Washington Board of Trade, discuss the benefits around pivoting towards product-oriented business.

ABERMAN: Jack. I’ll start with you. What is your view on the region’s current position as a hub for innovation and technology-driven economic development?

MCDOUGLE: Let’s back up a little. If you think about our region’s economic portfolio, and economic performance, over the last decade or even longer, there’s been a reliance on professional services, as you’ve pointed out. And particularly, within those professional services, government contracting. So, we tend to go up and down based on government acquisition, government procurement. There needs to be greater diversification against the economy. But, what that means is, it doesn’t mean necessarily less reliance on professional services, what it means is adding to it.

Our region has an advantage that few regions have, in that we have this natural foundation of economic activity that surrounds the federal government, in particular. Okay, so that’s an advantage, but that’s not enough in and of itself to remain globally competitive, and to create the kind of jobs, and to generate the kind of wealth, that we need for our region to be prosperous and have an inclusive economy. And so, when we think about diversifying, it’s not just then adding other types of professional services, but it’s bringing in other types of industries, in particular manufacturing and products, becomes much more critical to that longer term economic portfolio.

ABERMAN: Oliver, I’ll turn to you. You’ve started various businesses, you help people grow businesses. What’s the difference, from the standpoint of the economic outcome? First of all, what’s the difference between a product and a service business, why do we care about having the diversity, and what does a product business actually mean?

SCHLAKE: Products are the interface for the consumer. It’s easier to understand if we’re looking at everything that’s around right now with the industry revolution 4.0, all of the technology there is something giving the consumer opportunity to link into this new world. You know, it is glasses, it’s your phone, it’s a widget here. Consumers understand it much easier than a service. They’re always complex. That’s why a lot of people don’t get this region, and ask, what are you guys actually doing?

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But if you can showcase a VR system over your head, or you have the newest phone with you, consumers react, the media reacts, in our short-attention-driven social media world, that is getting the headlines. And unfortunately, when you dominate the headlines, you get more attention, other people see this is something we want to be engaged with. So, products make sense for a lot of people.

ABERMAN: So, what I think about maybe is, a simple analogy would be: service is, I make you a suit and it’s designed specifically for you, and it’s beautiful, and I put a lot of time and attention into it, and the once I give it to you, it’s done. On the other hand, if it’s a product, I can make that same suit a thousand times to a common spec, and just sell it again and again. So products are, by nature, they could be much more profitable there, because you don’t have labor being the same component of a business.

SCHLAKE: It depends. Strategically speaking, products are not very favorable on the strategic chain of things, because products are easy to copy. They’re easy to make, so that’s a benefit, but they’re also easy to copy. That’s why we have to move away from standardized products, from products that don’t have things in them that make them unique.

So, we really need to think about, what are the products that we can create in this area, this region, or even this country, that are not as easy to copy as things we have done in the past. So, we need to add all the services, and the intellectual components, into this product. I think that could be a challenge for this area to find: what are the products that we can load, like Jack mentioned, add the product to that, combine this with what we have, so the product, often, can be the starting point of a whole new type of business.

MCDOUGLE: To add to that, and use your suit metaphor a little bit: making one suit is still a value-added activity, and replicating is a value-added activity. And so, if you think about the multiplier effect of producing a product, it is much higher than providing a service, for example. So, if you’re telling somebody how to make a suit, that’s not as valuable as actually making the suit. And so, what you need to do is, you need to balance out this advisory capacity with also actually then producing a product, because the job creation is greater, the wealth creation is greater, and the return on investment is that much higher.

ABERMAN: It seems to me that, when you look at the companies that really drive our economy, whether it’s an Amazon we’re trying to attract, an Apple, a Capital One, the various companies around the country that really drive a large number of jobs, and high stock prices, what they all have in common is they’ve freed themselves from tailored delivery of something, to delivering a product, something that’s uniform, but is unique in some way. And it strikes me that our regional challenge may be two: the first one is the interesting question, whether or not we have a lot of product development expertise. We’ll talk about how we’re addressing that.

The second one is: Oliver mentioned this, the thing is, when people think about technology products, they think about Silicon Valley. They think about financial services products, they think about New York. When they think about consumer packaged goods, they think about Cincinnati. What do we want people to think about for this region, with respect to products? Jack, I know you’ve been thinking a lot about this.

MCDOUGLE: So, I think it needs to be more broad than that. I’m not a fan of industrial policy. I don’t think that we should put policies in place that say we should develop this product, and this product, but not that product. I think you create an environment where the entrepreneurs, and innovators, and creative thinkers, and rule breakers, can come together, and they can think about whether it’s a new food product.

We have a major agricultural industry across this region. So, whether we’re developing new food products, whether we’re developing new technology products, whether we’re developing other types of products, how do you create that innovative environment where entrepreneurs are celebrated, where we invest in and we help entrepreneurs scale here? Because what that does, that creates a stickiness, and it also attracts others to want to come and be part of that. It’s like, hey, you know what? I can go there. I got an idea, where am I going to go? I want to go to Washington.

And so that it’s not just limited necessarily by biotech, or health tech, or something that’s very narrowly defined, but it could be across. And that’s where real innovation comes, if you’re trying to solve a problem, and you’re solving it with a solution that works over here, that’s where you get some real innovation. And so, it’s that cross threading, I think, that creates a real dynamic environment.

ABERMAN: Which brings me to the Tandem Product Academy, that you’re both involved in helping me launch, which is to help all these people who are innovative learn how to develop product as well as services. Oliver you’re going to be teaching in the program, and I know you’ve taught a lot in this area. From your perspective, do you think that you can teach somebody how to become a product entrepreneur, if they spent their lives delivering a service?

SCHLAKE: Yeah, I think you can, and I’ve done some of that in in my past. I’m originally a product engineer. I see the product as a starting point, and you don’t have to unlearn all your ability to deliver service. In actuality, if you look up any of the products we see, very few of these products are just plain asset sales, you get the product, use it, and then discard it, and that’s the life cycle.

Most of the products we get these days are products that are actually starting a complete service agreement with what we have. And so, if you can add the product to this large amount of service experience that somebody brings to the table, that product, then, can bring new customers to this particular service. I mean, if you have a button from Amazon that says, press me when your detergent is empty, yeah, it’s a nifty product. It’s hooked up to your wi-fi, and all this stuff, but the real benefit of that product is the whole service-providing that comes in the background. So the problem, again, is the outside interface that doesn’t have to be particularly difficult to make, or complicated.

ABERMAN: So, at the end of the day, what it comes down to is, the understanding that you sell differently, you create a product differently, you may build your team differently, but these are all skills that can be taught, if somebody wants to broaden in their base. Jack, the Board of Trade, you made a big statement organizationally around smart cities, and various technologies that you think will drive the 21st century, and your organization’s a big supporter of this initiative. What does success look like for the Board of Trade, and Tandem Product Academy, and all the things that we’re doing together?

MCDOUGLE: I think it’s further diversification of the economy. I think, over time, having to track successful scale-up operations, that, as you look at the economic portfolio right now, it’s predominantly services, as that pie begins to change shape a little bit, and we start to see growing value-added in other sectors, and I think there are some sectors here that we’re very well-positioned to take advantage of. I think financial tech, I think education tech, I think healthcare, and health tech are really viable to this region. There’s really no reason that we can’t get out in front of those, which I think is really important. And so, I think over time, it’s probably not one of those things that you can point to, but over time, all of a sudden, it will be like, hey, you know what? Washington is a pretty cool place to go innovate.

ABERMAN: Gentlemen, I want to thank you very much for taking the time. We were talking with the Oliver Schlake, professor at University of Maryland, and Jack McDougle, president and CEO of the Greater Washington Board of Trade. We’ve been talking about product, and how we can help innovators here develop product. That’s what the Tandem Product Academy is all about. If you’ve listened to the segment, and you’re interested in developing a technology as a product, you want to check out this program, we’ll teach you how to do it. It’s www.tandeminnovate.com. After the break, we’re going to come back and talk with two instructors with the Tandem Product Academy about why they are interested in this program, and why they think it’s important for all of us to be better at innovation.

Next up is Ed Bersoff, serial entrepreneur and angel investor; and Tami Howie, partner at DLA Piper and former CEO of Maryland Tech Council, discussing how the Tandem Product Academy works to spur innovation in the D.C. area.

ABERMAN: Ed, I’ll start with you. You’ve seen it from both sides, and I know this is a topic you and I have talked a lot about. What do you see as the biggest differences between providing technology as a product, vis-a-vis providing it as a service?

BERSOFF: Well, as a service, what you’re contracted for, what people ask for, is labor support for innovation, or for some kind of delivery of a system, or something like that. So, it’s really a provision of labor. It’s not a provision of intellectual property. It’s more, I need help in developing something, and so, give me some engineers, and let’s go do that. On the product side, of course, you have to be specific, you have to focus, and you have to be concerned about what the market’s like for that particular product. So, it’s a whole different mindset, in terms of the people that are in that industry, and and how they develop and mature as engineers.

ABERMAN: Now, from your perspective, having been a technology provider, working with government for a long time. One of the things that’s driving this is, the government wants product more than they did, say, five or ten years ago, right?

BERSOFF: Well, precisely, because in the old days, what they would want is to provide services, and to help them develop systems that were one of a kind, and unique. Today, they’re looking for broader solutions that are off the shelf. And so, the migration from custom built systems to off the shelf systems is dramatic, and been changing very rapidly in the last several years.

ABERMAN: So we need to adapt, in effect, in order to compete.

BERSOFF: If you’re going to work for the government, for sure, but in addition, those same products have commercial applications that are outside the government, and it’s really important to take that technology that the government’s willing to fund, and to move it into the private sector.

ABERMAN: Tami, I want to bring you into the conversation, because of your expertise. You’re involved in startups, and you’ve been doing it here and Silicon Valley. This is what you do. How do you see the divide between product and service, and the opportunity here in the region?

HOWIE: So, as you know, I am committed to make this region the number one region in innovation. And the biggest complaint I get is that there are not enough product companies here. So, we don’t see as much investment as we otherwise would if we had the product companies around it. We have a lot of inventors that have great ideas, we have a lot of ideas that are patented, but they don’t really commericalize it into a product, and they have all of the basic raw materials there to do it, and they just need help in how to organize, and get those products out to market.

ABERMAN: As you compare the entrepreneurs and innovators you work with here, Tami, vis-a-vis Silicon Valley, what’s missing?

HOWIE: I think the federal government is our best friend in this region, and also our worst enemy, because we have a little bit of risk aversion. And we are often compensated with huge government contracts that put butts in seats, as opposed to compensate us, as Ed was talking about, for actually bringing that product to market. So, here I hear about, Oh, I got a contract, I can get 25 people on payroll, and I can make money off of it, rather than leading with, oh, I have this amazing product that I’m bringing out to market. So, I think we need to get that as part of the conversation that first, we start with the product, and then we worry about where we’re selling it.

BERSOFF: But also, the service sector gives you a false sense of security, because you are kind of lulled into a feeling that, I’ve got this funding from the government, and the incentive to give it your all and developer a product, is really not there, because you’re being subsidized in part. And I’ve seen so many companies trying to leverage their work with the government, and develop a product, but they’re really not committed, because they’re giving their all to the services side, and they don’t give enough attention to developing the product. That’s kind of what I think is fueling that discrepancy.

ABERMAN: Now, I want to make sure that we’re fair to people who do this, because it’s still entrepreneurial activity, and Ed, as you learned from your own experience being the founder of BTG, and on the board of ICF, and Tami, you’ve got many clients that are service-related, heck, my family business is a service business. Entrepreneurial people provide technology as a service to the government all day long, there’s nothing wrong with that.

BERSOFF: Well, for sure. I made a career doing it.

ABERMAN: We’re talking about growing the pie, we’re not talking about making people who are doing it feel bad, I just want to make sure we bring all those people into the conversation, not have them that we’re telling them what they’re doing is wrong.

BERSOFF: No, it’s not at all wrong. It’s just a matter of, if you’re going to develop product, you need to focus on developing product, make sure that the market is there for the product you want to develop.

ABERMAN: Now, Tami, what are the advantages, from the standpoint of wealth creation? You have entrepreneurs that grow service businesses, people like Ed. Why does a product business grow faster? What makes the biggest companies in America product companies, not service companies?

HOWIE: From my standpoint, at the entrepreneurial level, the funding sources quadruple when you have a product attached to it. So, you get more money in the door. You also get more help from the government entities. They really want to have products out here for manufacturing, you get a lot more incentives, you get a lot of more tax savings, and it is a lot easier when you have a product there that someone can hold, and invest in it

ABERMAN: Or, it could be a product like Amazon web services, you know, software as a service. To my mind, Ed, the point is that if we have a product, we can take the same intellectual property and reproduce it again, and again, and again, and sell the same thing instead of just creating it once and handing it to a customer.

BERSOFF: Well, exactly, and that’s what the product sector is all about. The problem is that it’s not self-funding. You need funding to develop the product, and to keep it current over time. So, unlike government services, or any kind of services business, which is repetitive and continues, on the product side, you have to have a continual supply of money in order to keep the product development going. That’s where the focus really has to be, and entrepreneurs don’t often like to give up, especially service-based entrepreneurs, don’t like to give up their equity and their business in order to get more funding so they can develop products. They don’t want to bootstrap things. And that’s really not a positive way to do product development.

ABERMAN: Which brings us to the Gordian knot that the three of us, and others, are trying to loosen with the Tandem Product Academy, which is, we’ve got to teach people how to be product entrepreneurs, because it’s different than providing a service, but people don’t want to give up equity, or be deluded to learn it. So, that’s why we’re giving this away for free. People say to me, wait, it’s really free? Yeah, it’s really free. Our sponsors, Fairfax County, DLA, and some others are providing the money, so we do this for free. What kind of skills are we going to teach people?

HOWIE: From my standpoint, I’m going to teach them how to set up their corporations legally, how to get money in the door that doesn’t kill the company, that allows them to grow and add additional investors in. I’m going to teach them how to make sure they have the IP protections, that they actually own their product and will continue to own it, and they can grow and develop it as they move along with growth in their company.

BERSOFF: One of the big shortcomings I see in entrepreneurs in the technology industry, especially, has to do with understanding finance. It’s partly bringing money in the door, but then, what do I do with it, how do I leverage it, how do I work with banks, how do I really deal with the investors? They’re great innovators, and thinkers, and very smart people, but they just don’t put it all together sometimes, and have to learn how to build a business, because it is a business. It’s not just fun.

ABERMAN: Right, and I think that here in town, you know, we have over 130 programs that help people start businesses, and find an initial customer, theoretically, but what lacks, and what we’re running after here is, there’s a difference between finding your first customer, and finding the next hundred, and the next thousand. If we’re going to focus on that, how are we going to define success? Is it getting more capital in, because we’re going to create more financial entrepreneurs, or having people grow businesses without ever raising a dollar?

HOWIE: What I’m excited to be part of Tandem Academy for is that I don’t view it as we’re growing businesses, I think we’re growing leaders here. So, I think what this industry, and this region, is lacking, are people that are serial entrepreneurs, that are leaders, that know what they’re doing, that top talent. And I think part of the problem is, they’ve had to figure it out at the bottom themselves, and they’ve learned along the way.

And I think if we put this solid foundation, where they understand finances, and understand that they need to have services, but you also need a product attached, and understands what to do with that money once they get it in, and how to protect their company, that then they’ll share it with next level of management that comes in. And then, I’d like to have five, in the next two years, Amazons that come in, and have a ton of companies behind that, with repeat entrepreneurs that are there to mentor toward the next level.

ABERMAN: Ed, you were part of the team that launched the Northern Virginia Technology Council, and I think just about every regional organization that promotes innovation in the region, you have your fingerprints on. Is this the next generation for you, do you see this as the next iteration of where we need to take the region?

BERSOFF: Absolutely. The NVTC was based on the service economy, primarily dealing with the government, but there’s been a sea change going on, and this region has the talent pool to make that happen. My view of success here is, I’m a metrics kind of guy, and so I think the ratio between service-oriented businesses and technology, and product-oriented businesses and technology as that changes over time, that to me would be the definition of success. Yeah, I think that recognition that this region is undergoing a major change is a very important thing.

ABERMAN: Any final words, Tami?

HOWIE: I’m super excited to be part of the Tandem Academy. I think this region has all of the materials to be viewed as the top region in innovation. I think we have products, and I think we have services, and I think what’s great about Tandem Academy is that we’re going to teach people how to promote both of them.

ABERMAN: So, if you’re listening to this podcast radio show, and you are doing government service, and you’re trying to figure out how to grow a product, or you’ve gotten some federal R&D, or you’ve gotten some money from an angel investor, and you’re trying to figure out how to scale, please check out tandeminnovate.com, and come join the party. We’re looking forward to meeting you. We’re looking for 25 great, entrepreneurial companies to help grow this fall.