Technology companies should not build software!
Strange as it may sound, a technology company’s core competency should exclude building software. While the computer and silicon chip industries have largely outsourced manufacturing to contract manufacturing partners, the software industry remains a laggard in this area. That is now changing, however. Evidence of this fundamental shift can be seen in the rapid rise of global product development service specialists that partner with technology clients to deliver software products to market.

The analyst firm IDC wrote that the market for global product development in the U.S. grew from $300 million in 2001 to $3 billion in 2006. McKinsey estimates that this market in India alone will grow to $11 billion by 2008. What is behind this dramatic shift in numbers? Quite simply, a realization by technology companies themselves that like any other company they should excel at product marketing, not product development. That means they need to understand how to find the right path to introduce their products successfully into the market.

When the time comes to take market requirements and convert them into great software products, technology companies are increasingly turning to the global product development services companies that specialize in building software products. These relatively young service providers work exclusively with technology clients in what has come to be known as the Outsourced Product Development (OPD), or Global Product Development (GPD) market.

It is interesting to compare the process followed by technology companies that build software with the process followed by, say, General Motors to build cars or Boeing to build the next generation airplanes. GM and Boeing do less than 5% of the actual manufacturing. Both companies understand market demand for automobiles and airplanes, conceptualize their products to meet this demand, and then test the concept in the market. If the market approves, they break their “products” into components, build clear “interfaces” between different components and place orders with their suppliers to build these components. Their manufacturing plant is a supply chain and not actually a manufacturing plant in the traditional sense. Success of the end product is a function of how well this supply chain is managed. While at one end of the spectrum are companies like Dell who have even “outsourced” management of the supply chain to companies like UPS, with UPS doing the “assembly” of the components, at the other end of the spectrum are technology companies that run completely integrated “manufacturing” operations with almost everything built under one roof.

It is apparent that software “manufacturing” is migrating toward the automobile and airplane manufacturing model. Of course, it will not happen overnight. In the next couple of decades, technology companies will willingly adopt the supply chain model for software development. It will happen for a number of reasons.