VSJ – June 2003 – Work in Progress

Council member Scott Levy, FIAP has been involved in building software businesses in the financial services industry since 1990. He is co-founder of D&S Concepts, an organisation established to ensure delivery of value-creating solutions within the financial services sector. In this article, he discusses the use of non-executive directors within the SME software sector.

Over the past two decades, there has been considerable emphasis on establishing better corporate governance guidelines in the UK. The use of non-executive directors (NEDs) has been encouraged in larger companies. Are there any lessons for a budding software entrepreneur?

The principal need for non-executive directors is sound. To have respected and experienced ‘internal’ feedback on the management of the business can be vital for the software entrepreneur. NEDs are cheaper than bringing in consultants and they can help create an environment on the board which, stripping out the technical detail of what is being done, can evaluate how the business is progressing. It is difficult sometimes to explain to a layman what the business is all about but that is exactly the point. NEDs should provide guidance in establishing the business, considering the management of the business as a business, rather than as the embodiment of some new ideas. Whether the business is selling products or services the fundamentals of business should be put in place early— cash flow and risk management, employment practice and sales and marketing strategy—and cannot be overlooked. The role of NEDs should be to provide the foundations on which a solid business can be built.

Within the software environment, it is easy to believe that the business will succeed if the ideas are special and the product or service is exceptional. This is a good reason to set up a business but not enough to ensure that someone will buy what is being sold. The business fundamentals are the same as for any other product. The NEDs should be considering the issues of design, packaging, quality, price, testing and distribution. Have the questions been asked and are the results clear to ensure that the really clever bit is saleable? It’s important to choose NEDs who have software experience, as their assistance and expertise in overseeing the establishment of effective controls for the quality of development, licensing conditions, key performance indicators, intellectual property, selection of partners and alliances, and the use of consultants can be invaluable.

The inclusion of such expertise is no guarantee of success. Many ventures fail despite having advisory boards of experts with contacts in the desired sphere of operation and significant prior boardroom experience. The difficulty in constructing this group is to ensure that the board has an incentive in helping to deliver results to the company and that their other interests do not provide too many distractions. Previous government papers have suggested a limit to the number of other NED positions; this should be carefully considered when inviting people to join the board. Indeed, the overhead of managing a board sometimes will distract from the business of running the company or, more specifically, fulfilling the vision that gave rise to the company in the first place. Do not ignore within the sales process the importance of having NEDs; this can give potential customers a feeling of stability and professionalism that belies the size of the new company.

The effective composition and use of a board of directors should ensure against business failure for the wrong reasons. The potential benefit of using NEDs as mentors is substantial both for the entrepreneurs and the key management team. In the long term, the continued use of such experience should ensure that the new generation of management learns from the experience of others. The future success of British software entrepreneurship is dependent on the proliferation of sound business practice at all levels; that process has to begin with the SMEs.

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