1Mby1M Deal Radar 2012: XBOSoft, San Francisco, California

XBOSoft (XBO) is an international firm based in South San Francisco that specializes in software quality assurance. It has branch offices in the Netherlands and Norway. XBO uses practical quality assurance processes combined with deep technical expertise to serve clients and deliver a full range of QA consulting and testing services, including quality process assessment, test process improvement, functional and regression testing, and performance testing, among others. Proprietary programs and tools such as XBO ONE Automation Methodology identify defects early and reduce development life cycles. The company believes the CommONE online client collaboration tool for secure 24/7 online access to project information sets it apart from competitors, as does its focus on software quality assurance.

Before XBOSoft, CEO Philip Lew had founded Pulse Technologies, Inc., a contact center systems integration company in Chantilly, Virginia. As the company’s president, Lew managed overall growth and operations. In 1996, Pulse Technologies and its proprietary call center data warehousing software, soEZ, were sold to EIS International, a nationwide leader in contact center management systems. Lew served as senior vice-president of systems integration services at EIS following the acquisition. He then went to the Netherlands, where he managed product development at telecommunications software product company TeleDynamics. In addition to running XBOSoft, Lew serves as an adjunct professor at Alaska Pacific University and Project Management College, where he teaches graduate courses in software engineering, software quality assurance, IT project management and IT governance.

While working for a large IT services company, Lew thought the service offering was too broad and too hard to sell. After he gave them a long presentation about the company’s services, potential clients still wondered where to best use the company’s services. Also, it was difficult to differentiate the company’s services from all the others. Lew founded XBO with the intention of simplifying the solution and the message while providing specialized services.

Lew first penetrated the market by attaining large accounts such as Hyperion (now part of Oracle) and Autodesk. By building a good reputation and a foothold with these customers, XBO was able to build a base of other long-standing customers. XBO’s go-to-market and customer acquisition strategy is to take advantage of and use the long-tail concept whereby XBOSoft targets fast-growing small to medium enterprises. XBOSoft’s competitors include AppLabs (recently acquired by Computer Science Corporation) and SQS Group, which is headquartered in the UK.

XBO competitor SQS, in its annual report, has the testing market worldwide estimated at more than $17 billion. The market has become larger and more competitive since Lew founded XBOSoft. Newer crowdsourcing models, although gaining traction, can provide only commodity services and take up the lower priced end of the market. They cannot provide highly specialized or complex QA services, which require deeper technical and domain expertise. Because the world is increasingly run by software, the market for the software QA services that XBO provides continues to expand.

The company targets independent software vendors or companies that depend heavily of software for day-to-day operations in Europe and the United States. XBOSoft has three types of competitors. The first type is the boutique company that focuses largely on testing training and consulting with a staff of one main person and then many subcontractors to provide QA consulting services and partners for testing services. The second type of competitor provides pure testing services but cannot provide the higher level consulting services of Type 1. XBO aims to provide the best of both with high-end QA consulting and software testing all in the same shop.

Lew founded XBOSoft with $500,000 of his own money. In 2011, the company earned between $2 million and $4 million in revenue, with 15% to 20% profitability. According to its 2011 annual report, XBO competitor SQS had only a 2% profit margin in 2011.

For each customer, prices range from $20 to $200 per hour depending on the service provided. XBO also has productized services, which are basically services bundles, that sell from $5,000 to $25,000.

Lew has no plans to raise money at this time and plans to continue growing XBOSoft organically while looking for acquisition opportunities. Although he is not actively looking for buyers, Lew said he is open to selling his company.

Recommended Reading:
The Future of Software Development is Here. Are You Ready Yet?
The 1M/1M Deal Radar 2010: Avatron Software
Deal Radar 2010: Logic Software, Toronto

This segment is a part in the series : 1Mby1M Deal Radar 2012