The Runway of Software Products

by Israel Gat, Practice Director, Agile Product & Project Management

In her October 4, 2011 HBS blog post Can HP Change its DNA?, Judith Hurwitz contrasts corporate DNA for hardware versus DNA for software, as follows:

The DNA that has been in HP’s bones from the start is all about excellence in hardware engineering…. With hardware markets, money is spent upfront to develop a system. However, once that product is launched, revenue streams in quickly and evenly. .. By contrast, when software is delivered to the market, it may take a year or even several years before it becomes a well-accepted and profitable endeavor… This is what I’ve observed at HP. As it has tried to invest in software, again and again it has killed products off before they had time to mature.

True that this characterization might be, the “runway” available for software products to mature and take off  is both limited and precarious. Software products are subject to two over-arching phenomena that affect the runway big time: open source software and software decay.

Figure 1, courtesy of colleague Sebastian Hassinger,  shows the innovator’s dilemma as it manifests itself in enterprise software. Open Source Software is becoming ”good enough” in any area of software that shows commercial potential. It has already met or will soon be meeting the minimum requirements of the enterprise customer. By so doing, it puts a ceiling on the runway available to proprietary software to mature.

 

 

Figure 1: Enterprise Software Innovator’s Dilemma

Moreover, software decays in a way that can, and often does diminish its value in a significant manner while it is on the metaphorical runway to matirity. In various Cutter technical debt engagements we find technical debt of >$10 per line of code. (In other words, the technical debt amounts to>$1M in an application comprising 100,000 lines of code). The accrued technical debt diminishes the value the software generates. Figure 2, taken from my technical debt workshop, illustrates how return on investment in software changes drastically (from 900% to 233%) once technical debt is taken into account. Colleague Chris Sterling sheds additional light on the subject in a recent post in which he discusses how software might turn from an asset to a liability.

Figure 2: Return on Investment in Software With vs. Without Accounting for Technical Debt

Given these two phenomena, the heart of the matter IMHO is not so much hardware v. software  but whehther a company got transformative DNA. Colleague Annie Shum discusses  the transformative aspects in numerous publications (click here for a recent Cutter Research Report by Annie on the subject). Her message is crystal clear: your product – hardware product, software product or combination thereof –  needs to harnesses cloud plus mobile plus social in a manner that changes the way your customer carries out a business function or a business process. If the product does not do so, it is not really  tranformative.

And, if the product is not really transformative, I would contend it makes little difference whether it is a software product or a hardware product. Chances are it will not be hugely successful.