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Software costs continue to soar
As a recent Forbes headline put it, ‘it’s a software economy’, with global spending on software predicted to jump by nearly 12% next year to more than €700 billion.
It’s hardly surprising to see spending balloon, given how many companies are still in the early stages of their digital transformation, with much of their required IT investment still to come.
However, as FTSE 100 companies continue to pour billions into bespoke software and related services, it’s remarkable how few metrics most of these companies have at their disposal to accurately gauge the value of their investments and control initial spend on them during the early procurement phase. But does it have to be this way?
Software buyers should shift to a “design-to-cost” mindset
Design-to-cost is a way of optimising costs at a product’s design phase and – for the purposes of buyers – also a valuable tool to aid with vendor discussions and negotiations. Based on a detailed cost breakdown, the cost to produce or deliver a product in a way that meets a set of basic parameters is estimated (e.g. customer expectations for functionality/performance).
By adding estimated SG&A and profit, a “should cost” is calculated – what buyers should be paying for a particular product. Based on the detailed cost calculation for each feature optimisation, opportunities can be discussed and the product can then be designed to meet the target costs.
While this methodology is certainly not new – it has been successfully used in many sectors (notably automotive) and can generate double-digit percentage savings – up until now it has largely eluded the software category.
This is mainly because of the difficulty (perceived or otherwise) of unbundling all the various elements that contribute to software spending. Costs depend, for example, on the programming language used, the capabilities of the design team, and the design model (e.g. Waterfall or Agile). The fluctuating supply of labour – and its impact on cost - is another factor. In Europe, for example, demand for software engineers is expected to grow by 21% by 2028, at more than four times the average growth rate of all occupations (5%).
For using off-the-shelf, licensed software products, costs typically depend on the company’s negotiation power. However, for those companies relying on bespoke software, it has previously been extremely difficult to untangle the disparate elements and assess whether you are actually investing wisely and receiving value for money.
So what’s changed, and what opportunities do we see?
With advances in artificial intelligence, we believe we have now reached a point where it’s possible to gain a much clearer understanding of different cost elements for projects involving bespoke software.
Our design-to-cost methodology incorporates a variety of tools, including AI, to help companies make more informed decisions about their software spend. This includes using technology to spot patterns and correlations in thousands of previous software projects, to help identify areas for improvement and optimisation.
Specifically, our methodology can:
- Help guide internal discussions about features, expected ROI and potential optimisations
- Enable fact-based discussions with suppliers in order to agree a fair cost share for software developed for a specific purpose
- Ultimately, reduce software costs – typically, by anywhere from 10% to 30%
Applying a design-to-cost methodology is neither a silver bullet to reduce an organisation’s software spending, nor a solution to reduce standard software providers’ licensing costs. Companies should not be looking at this as a one-off procurement fix, i.e. a tool to help them quickly renegotiate with an existing supplier.
Rather, it should be viewed as part of a long-term change of approach to software expenditure with an explicit focus on applying rigorous control to bespoke development costs. Once a costing methodology is agreed with a supplier, future change requests can be handled in the same way, with the price of any change becoming clear from the outset.
It will take a mindset shift to move away from a position where negotiations are driven by the relative bargaining power of the different parties, to a more collaborative model where the goal for the company and its supplier is to find the best possible solution and agree on a reasonable price. Pilot, proof-of-concept projects can help to build internal trust in the methodology.
Ultimately, however, this is about companies realising that soaring software spending is neither inevitable nor unavoidable, and that the opportunity exists for them to develop their capabilities and better control spend.
