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Software subcontracting survey findings: Why can’t we combine the benefits of own development and subcontracting?

Posted 7/29/2019

Couple weeks ago, I asked from my network about the SW subcontracting business – especially in Finland. I received several responses, private messages, links and calls. Thanks for all of those, very much appreciated! Here is the summary of my (and your) findings.

Business is there and it’s growing

Worldwide, companies continued to increase significantly their R&D investments in 2017/18 for the eighth consecutive year. The top 2500 global R&D companies account for approximately 90% of the world’s business-funded R&D. They invested €736bn in R&D in 2017/18, up 8.3% on the previous year. /1/
In Finland, software business is growing faster than other service businesses because of (i) Internet as efficient marketing and distribution channel, (ii) digitalization both for consumers and companies, (iii) earlier successful investments /2/

To subcontract or not?

There are several (strong) opinions about either having own product development or subcontracting. In my history there were different waves: sometimes there were a plan to have everything outsourced and sometimes we were religiously insourcing.

According to the responses and my experiences, there are three main categories: 

1. DIY – Do It Yourself: No subcontracting - we do everything by ourselves. No matter, if the ramp up is slow, no matter if we don’t have enough competences
2. Conductor business model: No own development, no own people, outsource everything and orchestrate the business.
3. Practical business view: use subcontracting as a tool to help your business 

I believe that the third – business driven – approach is getting stronger and stronger. If you have a need for software, then you can either develop it by yourself or buy it somewhere – it’s business decision. There are several business factors: cost, lead time, linkage to company strategy etc. 

What to subcontract then? The overall principle is that you should not outsource what you don’t understand. On the other hand, partnering is sometimes a good way to accelerate own company learning. Working with the companies that has the knowledge is a good way to learn.  In the old management books there is division to core and context. You should not outsource your core. You need to take care that the knowledge and possible IPR’s are retained in your business. 

There are several business models in buying software. 

• You can buy ready-made SW products – this is cost efficient if you don’t need tailoring.
• You can have some partnership. Here you can have business models where you both take risk and get possible reward only when your customer pays to your company
• You can have fixed price about the product or work. The downside is that you need to have this well-defined.
• Time and material, buy hours. This has been traditionally considered simplest but many procurement guys don’t like it because “vendor don’t take any responsibility”. When looking some modern practices like agile sw development, this might be the easiest. Very seldom you know what you want in the beginning.

For me those all are possible. The business need is driving to the right business model.

From Finland or abroad?

In Finland there is some discussion about subcontracting from abroad versus Finland. For me, this was a little bit difficult to understand because during all of my career, I have had international product development. Finns are not better or worse developers. Closer co-operation, yes, but when the team is not on the same floor and not using the same coffee machine they are as far as different country. Knowing Finnish language is a benefit but in SW business, everybody speaks English. And all the user interfaces need to be multilingual.

Some government type of organizations prefers Finnish companies to support local business in Finland. This is understood – every nation is doing it. However, as a Finnish taxpayer I don’t like them to overspend too much.
Some of the horror stories like Boeing 737 MAX are eye-opening /3/. I’m thinking that the root cause is the competence & experience of the engineers – not the nationality.

Different countries have different benefits/4/. What is the time zone difference, cultural fit, EU/GDPR, … There is available several studies about different destinations. Quite many are biased. 

My takeaways

To be frank, based on this short survey, I didn’t find any comprehensive study on the topic. So, I will keep on searching.

When studying this business more I have now couple ideas. First, many horror-stories can be avoided with a good management. Can we systematize that to prevent those mistakes? Secondly, why can’t we combine the benefits of own development and subcontracting? Next I will work on this one to define a model that combines the best out of the both worlds.


Stay tuned!
- Tero 

 

 

References:
1. 2018 EU Industrial R&D Investment Scoreboard: https://iri.jrc.ec.europa.eu/scoreboard18.html
2. 2017 Finnish SW Industry Survey (in Finnish): http://www.softwareindustrysurvey.fi/
3. Boeing's 737 MAX software outsourced to $12.80-an-hour engineers: https://www.smh.com.au/business/companies/boeing-s-737-max-software-outsourced-to-12-80-an-hour-engineers-20190629-p522h4.html
4. https://igniteoutsourcing.com/it-outsourcing/top-it-outsourcing-destinations/