One of the main takeaways from the book I’m listening to right now, Jim Collins’ Good to Great, is that the vast majority of innovative companies –– the ones that are exponentially outperforming the market –– have leadership born from within the company. They haven’t brought in a hired gun, a superhero solver of problems, when it’s time to pivot or scale.
Chris Tucker, President of MBX Systems, is a great example of born-from-within success. He spent 10 years with MBX, a manufacturer of custom server hardware for software developers and cloud service providers, before rising to lead it in May 2018.
MBX makes it possible for software companies to get the individualized hardware they need without having to manufacture it themselves. It’s an important distinction –– becoming a hardware company changes valuations, supply chain management, and a host of other issues that are best left to those with experience.
As Chris explains, MBX enables their partner companies, such as Chris Gladwin’s IBM-acquired Cleversafe, to focus on what they do best –– game changing tech, not logistics or inventory. Here are the highlights from our conversation about the value of tenure, the importance of transparency, and what’s on the horizon in the hardware game.
You’re familiar with Good to Great and its observations on born-from-within leadership. What about your journey do you think made you a better fit for MBX than they might have gotten finding talent elsewhere?
I came up through the sales side of the organization, so I sat in the seats of the sales team. That’s really important for me as an organization. It’s always been very customer focused as well. Plus, if you look at the other executives on the management team, many have been with the company, 10–15 years –– one close to 20. We really understand the ins and outs of the business, and deeper understanding of what the market looks like –– who the players are, and which way to go.
We’ve taken organizations from the startup stage all the way to acquisition by large organizations. We’ve seen that road, not just on the hardware side, but also on the programmatic and business side. It’s the expertise that really helps us stand out.
Tell me a bit about what the company does.
At MBX systems, we build hardware for software companies. We also help anybody that has a really specialized hardware product get it to market. We design products with them and manufacture them right here, just outside Chicago. We have facilities in the EU and APEC to manage global distribution. We rebrand products for our partners, so they look like their own products when they’re deployed. Then we provide support in the field.
A typical MBX customer is a bunch of smart software guys who are writing their own code and want to deploy it on hardware. Locally, think of Cleversafe. In Indiana, Scale Computing. They’re working with hyperconverged infrastructure. We serve organizations who have a focus on really smart IP that they want to deliver, but they don’t want to deal with manufacturing and logistics. They need a partner to manage it for them.
In the manufacturing world, you can certainly make things quicker and better, but there’s a certain need to be methodical. A screw-up could be very costly if you make a ton of things wrong. I used to hear about incubators that popped up in the manufacturing space and I remember thinking, ‘I don’t know how that works at scale.’ Aren’t there people who specialize in this? You guys do.
Our goal is not to be a Flextronics or JBL, that build the same thing thousands of times. Our sweet spot is high complexity, high variability. That’s what our customers are looking for. They have product families, and each one of them has a lot of iteration, whether it’s different drive sets, different memory capacities. We’re providing these organizations with complex programs, delivering globally, that need to manage their inventory. We’re managing it for them, not making the same thing over and over.
It seems that it would be utterly inefficient for a company like Cleversafe to try to build hardware, when it’s not its strong suit.
Right. And how we manage programs for our customers, which changes over time. We deal with everyone from relatively late stage startups with a proof of concept product that’s rolling, to organizations that are being acquired, like Cleversafe.
The requirements are throughout the life of that changes at different inflection points. When they’re early in the stages of growing, they just need product fast. It’s typically on a build-on-demand model, with little inventory management. As they get larger, they’re shipping globally and need to manage inventory.
The largest amount of cash tied up in an organization is typically on inventory. But if an organization has a certain run rate, they know they’ve got some kind of forecastable product they’re shipping on a monthly basis, they don’t want to buy all those products and put them on a shelf.
We say, give us that forecast. We’ll hold it on our books for a period of time, until they move it. We’ll ship it, which is super helpful to a company in the financing stage. Moving it off the books makes you look a lot more attractive.
Tell me a little bit more about the type of company that’s best suited to work with you. You mentioned later-stage startups. In order for it to make sense to work with you, do they need to reach a certain point?
We typically engage with organizations that have done the legwork and proved a product that they’ve deployed at some level over the course of a year. We put it in revenue bands. Usually, it’s a company that’s spending at least $200,000 to $500,000 on hardware annually. That’s when we start to engage.
We do have some partners that come to us before that ranges. If they’re in earlier stages, we connect them with partners that can help them move through those stages until they’re ready to come to us.
I want to create a cheat code for would-be hardware manufacturers. Walk me through the do’s and don’ts. How do I start this process if I’m a software engineer? What should this process look like?
Essentially, we see companies go down two paths. There are companies that have invested a lot, to do manufacturing themselves. It’s not necessarily wrong, but it usually doesn’t go well. They reach an inflection point where they have to make a decision: ‘am I investing in the IP, the software that I want to deliver, or am I investing in being a manufacturer?’
Managing the logistics, finding a facility to build the products … even if it’s not their core competency, they still want to deploy what they’ve spent time developing.
The other path is a company that engages with us early with us. They’ll have spec’d out some hardware. They want to understand what they need to do to ship globally, from a compliance standpoint, what kind of inventory they need to hold, and how to forecast and manage their cash effectively. We’ve seen great successes with organizations that come to us that way, because we’ve been in the business for 25 years.
Does MBX engage in the revenue sharing model? If a very early stage startup came in with a great idea and you have the facilities, the resources –– would you potentially take a stake in the company? Or is that something you stay away from?
We don’t do that. The closest you’ll see us do is that there’s some markets that are at stage where organizations want to get hardware off their books. Let’s use the cybersecurity market as an example. That’s a market that’s running very quickly towards ultimate deployment methods. They’re deploying their software, but hardware isn’t always a part of that deployment anymore –– cloud virtualization containers, for instance.
In those scenarios we work a partner to say, look, you can still get the customer. The end user has the same experience of getting your software on hardware. You sell the software and point them to us. We’ll stand up an e-commerce site. We’ll build the hardware. We’ll put your software on it unlicensed. They’ll buy the license from you. They’ll buy the hardware from us. We’ll deploy it, and away you go. We can still manage that same experience with the end user, but in a slightly different way. We allow them to be looked at as a software company, but we still maintain the revenue from the hardware side.
Unless you’ve been through the manufacturing process before, one of the challenges is understanding how to manage workflow –– relaying iterations, bugs … it’s a gigantic advantage to have a team like yours on the other side, because it takes your bias out of the equation.
You can imagine that as an organization that manufacturers hardware, we’ve had to reiterate several times over the last 25 years. In 2010-11, we brought on a team of software developers to create the tool we use on our manufacturing floor. It allows us to manage the high variability that many of our competitors struggle with.
Early last year, we rolled it out to our customers. It’s called Hatch, and it allows them to manage workflow effectively. Engineering change is incredibly important. Typically, small to midsize companies manage it through emails, conversations or spreadsheets. It’s just ugly. Hatch enables interactive communication between us and our customers –– processes, multiple iterations, global compliance. Again, a software company doesn’t have to deal with hardware. This is a really nice interface to manage their programs.
Where do you see the hardware market going? Are there opportunities that aren’t being taken advantage of?
Take, for example, the United States Postal Service, and compare it with Amazon. If I mail a package, I just assume it’s going to get to its destination –– I’m sure it will at some point. But Amazon is providing you how many stops away it is. They take a picture when they drop it off at your front door so you know it’s there.
So if you think about hardware manufacturers from that perspective, I think the big change you’ll start to see is how we move towards more transparency. MBX has been really invested in that over the last several years.
With a typical contract manufacturer, you input how you want your product built. The output, when it comes out the other side, is hopefully on the timeline they promised you.
We’re opening up our data. There’s tons of data in manufacturing. Let’s allow people to see what’s happening behind the curtain. Our customers can log into to Hatch. If they’ve ordered 100 unique serials, they can see where each one is on the manufacturing floor. They can see if a system has trouble.
These are things that manufacturers haven’t opened up in the past –– they haven’t wanted to show the things that are difficult. But I think manufacturers are going to have to move this way, too. Customers will be consuming information from us in the same way they do in other areas of their life. We’re really driving towards that.