Tuesday, March 02, 2010

Profitability for Independent Software Vendors in the post-recession economy

There is a vision of ISVs that consists of a tiny team of uber-Geeks insanely typing in a room with a soda machine. Code streams up their screens as they create visions of the future with their brains, imaginations and fingertips.

Though such places and people do exist, I have seen them, the factors that lead to sustainable profitability for ISVs since the Great Recession are far more mundane.

Right now, the software industry is going into it's phase of maturity. Success for an ISV relies on it adapting to the new environment and migrating to a sustainable and mature enterprise model.

To the uninitiated, this is NOT just about cutting costs by moving development and services offshore.

In practice, a sustainable Enterprise model is about three things;
1. Doing whatever is done wherever and however it can most efficiently be done - competitive necessity.
2. Cutting the costs of production - financial necessity.
3. Purchasing Services as a commodity - provides control and flexibility.

As an investor in technology, I would want to see the evidence of these process prior to making a technology investment.

Let us confront the issue of job migration as a method of reducing costs.

The simplistic, and wrong, approach is the concept of taking a team and moving it and it's tasks offshore. Fundamental to the success of this process is the belief that individuals in the offshore destination perform the tasks of the onshore workers as efficiently so that all that is needed is to hire the offshoring company who will do all of the hard work as after all they are the suppliers aren't they?

The nature of the vaiables that exist in this process are such that any foreseen benefits are by no means a foregone conclusion.

Hence the endless vacillation of offshoring and onshoring from partially committed businesses. They offshore because the cost savings are compelling then bring the project onshore when that fails to work as expected.
Then like a salesman desperately over-analyzing his unsuccessful pitches the details obscure the issues. Is it communication or is excessive domestic resistance? Is it lack of processes or tools? Would the project have succeeded onshore?

On it's own, this corporate introspection will not make the difference. To benefit from offshoring an ISV must make the transition from the traditional model to a sustainable model and in order to do that it must change the way that it operates across the board. Then things like offshoring become like bread and butter.

My previous career was in another maturing industry, the courier industry. In my early days, packages were flown to their destinations in the grubby paws of dedicated couriers, often employees off for a quick fully expensed jaunt to a commercial centre. This progressed to the courier companies consolidating packages from many clients in their hold baggage and now they are airlines in their own right. Now, it can be cheaper to send a package to Manhatten than London.

This process of consolidation and commoditisation is utterly inevitable and it is the businesses that accept and adapt that will survive.

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