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Outsourcing: Persistent Systems Interview (Part 10)

Posted on Tuesday, Jun 8th 2010

By guest author Tony Scott

Industry Trends Driving Outsourcing – The End of Software?

Tony: Do you see other trends in the software industry that will drive more companies to outsource product development?

Anand: Well, a key trend is this whole cloud computing business. As people start to look at things that can be a service, the price point at which the service is going to get delivered is going to be very different from the price point at which people have been used to buying it as licensed software. So companies that want to deliver software as a service will see this happen – prices will drop dramatically. I am sure this will happen, no question about that in my mind.

As that starts to happen, the price point at which people are going to have to deliver products is going to be at most a fifth of what they are trying to do today.  I believe that at the end of this trend, the market is going to shrink by 10% to 20% in terms of total CIO spending, because if that doesn’t happen, what’s the point of doing all this software as a service? As a consequence, the market will shrink in terms of the money available for building and deploying products. If that means the market is going to shrink by 15% to 20% – and maybe even by 25% – the VC equation changes. Everything in the entire software ecosystem will be impacted by that shrinking of total spending.

As we start to get into that kind of an environment, I see huge difference in how we will operate.  What we have been doing is trying to cover the complete hierarchy of cloud computing. We want to be able to say, “Whatever you want to do, wherever you want to do it, whether it is building infrastructure out or putting applications in the cloud, we have been working with all the people involved in that arena. My view is that ultimately you will get “snap in, snap on” products. Customers will be able to choose to subscribe to products, and software companies will have to build products faster and quicker. If they don’t, someone else is going to replace their product, because the cost of replacing the product is going to be a lot lower because their data is going to be part of the fabric rather part of the software.

As this starts to happen, the cost of building the products must come down, and companies will have no choice but to go to a factory like us because they won’t be able to build a product on their own as cheaply as they build it with us. They just won’t be able to put in place the infrastructure or train the people at a cost and in a timeframe to be able to get a product out the door on time and at a competitive cost. What is today a typical $25 million dollar software product company, and certainly $10 million to 15 million dollar software companies, are going to come down to only $3 million to $5 million in revenues. And if that starts to happen, it’s going to just force everyone to think very differently.

Tony: What is that going to do to your market size – will you and other outsourcing companies focused on product development be forced to shrink your top line revenues?

Anand: No – we think we can actually win and grow in this market. The application software custom development business will go down, but in its place some of the product-focused business is actually going up. We think that we are better positioned to go after the product-focused market compared to the application software business. The development life cycle that I shared with you is more likely going to be the case on the product side of the business than on the custom software application side of things. The tools and the capabilities needed to deliver on product-focused business are very different from those needed for custom software application development, and we feel we are better prepared to potentially react to that market than the other guys.

Tony: So if we look another five or ten years out from today, do you believe that is the time when outsourcing companies with the skill sets and specialized expertise that you have developed will be driving more of the product development for software companies? Is that when software companies will be moving through the same phases that manufacturing companies have moved through over the past ten to twenty years, and the leading outsourcers will become ODMs?

Anand: Yes, absolutely. The other thing that I am very excited about in this, and this is a trend worth discussing, is that today when you want to build a software product, you are committing to a two- or three-year time frame. You have to have people who understand this process, and it’s something that only software people end up doing. Now if a business leader who has a business problem wants some sort of software to solve the problem, that person is not thinking about creating his or her own software company. But once this movement of componentizing software and separating core from context in software starts to change, that will happen. I think that will start to happen in about two years. I am very confident that you will see bankers, doctors, and a whole bunch of other people who have no idea about software creating productized software solutions. They will come to people like us and say, you know what, I have this great idea, go build it for me. They will figure out the solution, we’ll make it happen, and they will collect the money.

We are already seeing some customers like that, who have zero software engineering background – doctors, financial people – people who have a great idea, saying, “Hey, if you can build this, I know how to sell it.” To sell a product you don’t need to have a software team.

Tony: So you take care of building the product completely?

Anand: Yes, we will take the responsibility for developing, supporting, maintaining, training, and planning, everything that’s needed. They just have to sell it.

Tony: Does that change your business model and how you charge for what you provide?

Anand: Yes, definitely. We are doing revenue sharing on many of these.

Tony: Royalty-based models?

Anand:  Yes. We are doing some revenue sharing on new products. We have also acquired a few “end of life” products from companies. I have done several of those kinds of deals now, just taking a product off another company’s hands and saying, “We’ll handle it for you.”

This segment is part 10 in the series : Outsourcing: Persistent Systems Interview
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

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What an insightful piece, Tony.

I am reading it and twitting as I am readying it so people who follow me could enjoy the key points from your story even if they don’t have the time to read the whole thing.

BTW, I’m 1M1M Ambassador and I do similar long insightful interviews with Angel investors here.

irina patterson Monday, June 14, 2010 at 6:06 PM PT