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.

First and foremost is competition. Technology companies, due to high profit margins, were able to historically ignore the need for additional cost savings giving them the luxury of building everything under one roof. That is not true anymore. With increased competition, technology companies are increasingly being forced to move away from the NIH syndrome (Not Invented Here) and look for ways to get more value from the dollars they spend building and testing software.

Second is globalization. The world has become flatter (since the original declaration by Thomas Freeman). Ubiquity of the Internet combined with almost unlimited availability of qualified software developers and testers in countries like India, China, and Eastern Europe has paved the way for software to be ‘manufactured’ in those countries, ‘assembled’ in the U.S., and ‘consumed’ by the world market.

Current market dynamics of global product development
There are three software product development realities worth noting here: First, it is rare that a newly funded technology startup will hire and place 100% of its engineering team locally in a single facility. Second, in the vast majority of cases it is some combination of onshore and offshore development teams that join together. Third, a rapidly growing number of the latter are utilizing the global product development model, with product managers in these early stage companies entering into a virtual partnership with firms that specialize in this area.

While there are pros and cons to doing global product development or doing it under one roof, the recent trend line clearly points to the growth of the former. Leading technology analysts such as Forrester and IDC, the technology media, venture capitalists, and others in the industry all agree this trend is here to stay.

Chief technology officers (CTOs) and engineering vice presidents (VP-Engineering) at technology companies have unique needs with respect to product development that are very different from the needs of the CIOs of Fortune 1000 companies. Their needs are more dynamic. For them, quality and agility is the name of the game. The traditional model provided by big IT outsourcers does not work for them as they receive some flexibility but virtually no control. Until now, the only other option was to build their own “captive” software development facility in India, China, or Eastern Europe, giving them complete control but no flexibility.

The challenge faced by the U.S. and the European technology companies that build offshore captives is significant. Small captives in particular, employing less than 200 engineers, are proving non-sustainable. The reasons include large upfront costs and an inability to attract and retain top engineering talent. In fact, a recent report by Forrester Research estimates that 60% of U.S. owned captive development centers in India are failing. Pure play service specialists in Global Product Development have quickly stepped in to address this unique business need by helping technology companies accelerate innovative software products to market with the right control and the appropriate flexibility required.

The future of global product development
As mentioned at the beginning of this article, the technology industry is slowly, yet inexorably, adopting the global supply chain model. When a new automobile rolls out of the GM showroom, chances are that it has parts developed by BFL (Bharat Forge Limited) based out of Pune, India or by other auto parts manufacturers in Tamil Nadu, India. The same model is taking hold of software product manufacturing. The companies that specialize in this area and truly understand the needs of the CTOs will thrive. Offering a virtual partnership model around the global supply chain for software product development, these new global product development services companies are here to stay. As Flextronics did for electronics manufacturing, so too will this new generation of GPD service companies do for software development.