State of the Software Market

The software market is undergoing a period of rapid change caused by structural changes in the computer industry. The trend towards rightsizing of applications and the increase in the end users rather than professional users is forcing companies away from their traditional markets into the market for low price/high volume software. This places pressure on margin and causes companies to look for ways of improving efficiency as well as alternative production and fulfillment methods. Many companies are beginning to see the manufacturing of software as a bona fide industry in its own rights, as opposed to the production and supply of midrange and mainframe software which they have produced almost as a by-product of the development work.

New technologies are likely to have a major impact on the distribution of software products over the next few years. For instance, CD-ROM is seen by many vendors as offering major one opportunities for the industry in the future. Very few supply their software on CD-ROM now but most vendors, other than very small companies, expect to be supplying on CD-ROM in next 12-18 months. The key advantages offered by CD-ROM were generally agreed to be increased convenience for both the user and the supplier, and lower unit costs for manufacturing. The expectation is that all products offered by a single company, or a single product in multiple languages, would be stored on the same disc, with users simply being supplied with an access key at the time of sale. Administration of keys and license management will be one of the key critical issues in the very near future.

The trend towards the use of packaged, rather than bespoke or in-house developed end user applications also means that software companies are now under pressure from end-users to provide localised versions of their standard software packages. This is creating greater need for translation documentation and localisation of software in order to accommodate local cultural, statutory and linguistic differences. Many companies which have previously been systems software oriented and are now moving towards the supply of packaged software are finding that their in house resources are over-stretched by this sudden increase in demand. Increasingly they are looking to solve this problem by outsourcing some or all of their software manufacturing activities.

Many established software suppliers are also looking at outsourcing software manufacturing to cut costs. However, one of the most surprising results of the survey is the lack of awareness in even the largest and most successful companies of the true costs of software manufacturing. Until recently, many companies have not yet viewed software manufacturing as a discipline in its own right and have therefore not been in any position to outsource. The study revealed that many companies, including large, successful and apparently professional organisations, do not track their software development costs at all. Many had a totally unrealistic idea of what the manufacturing process costs them, and when prompted to consider them, were surprised by the actual costs, or in some cases were still not able to estimate them. Companies that do know their manufacturing costs are more likely to outsource some activities, or to be planning to in the future.

The reason that many companies do not know the current cost of their manufacturing activities is that they do not track it as a single unit. Most companies cannot point to a single manufacturing budget, since different elements of the costs are funded from different budgets. For example, packaging typically comes from a marketing budget, and documentation development from the development budget.

Customer requirements for software manufacturing

European software companies were asked to rank the most important factors influencing the decision on whether to outsource software manufacturing. Surprisingly, out of 25 factors, cost was rated number four behind three qualitative factors: quality, efficiency and guaranteed delivery, and systems reliability.

The results of the research also indicate that the key requirements are:

• a high degree of flexibility. Suppliers must be able to react to short term changes of plan, or hiccups in the original plan, without major cost penalties.
• a detailed understanding of the software manufacturing business.
• product and platform knowledge, particularly where the supplier will be involved in localisation and translation.
• fast turnaround. Most companies seek a turnaround in three days for products which are built to demand.
• ability to work within the procedures set up by the customer. For example, using the same control software, and using customer-designed documents.
• good understanding of technology trends offer "future proofing" to customers
• excellent account management: a willingness to invest time early in a relationship with a customer to understand how his company works and thinks.

The results of the study indicate that there is a sizable and growing market for the outsourcing of software manufacturing in Europe. The software manufacturing costs in Europe are estimated to be six billion USD in 1992 growing to a size of nine billion USD in 1997.

Large multinational software companies are the largest customers; smaller multinationals are generally considering outsourcing for the future, but not as any sort of priority; large national companies have a rather offhand approach to the whole business and small start up companies often see it as offering an opportunity for expanding into new markets at low cost and with good level of control.

Most software companies outsource at least part of their manufacturing activity, although no single item is outsourced by all companies. The reasons for outsourcing vary enormously. Some companies use it to spread financial risk, reduce cost, or delay cost. Others use it to avoid investment in manufacturing plant, to focus the activity of their companies on their core businesses, or to hold headcount numbers steady. Many companies currently only use outsourcing when circumstances dictate, such as when their resources are stretched.

Some implications for various elements of software manufacturing are:

• the localisation of software and the translation of documentation is one area where many suppliers are considering outsourcing, or already use external resources (often freelance individuals). Some vendors have traditionally used their distributors to do document translation as a deliberate policy, on the basis that it increases their understanding of the products. However, localisation is now the fastest growing area of the software manufacturing market and many companies are seeking a more professional and systematic solution.
• few companies actually know how much documentation development costs, but they know that it costs too much. High quality documentation is increasingly required for software products. Many believe that the only successful way to produce effective documentation is to include technical writers in the development team from a very early stage. CD- ROM technology is expected to have a dramatic effect in this area both on costs and packaging.
• Most companies use an external company for high volume printing, even if it is only the local copy shop. Again the cost is often hidden, as is comes out of the marketing or administration budgets. Printing has always been a low-margin business, and prices will remain under pressure.
• companies tend to outsource replication and assembly, and several have set up their own facilities which operate more or less independently of the parent. Packaging, design and production are outsourced by almost all of the companies surveyed.
• one of the companies interviewed currently outsourced the entire process of invoicing. If the product is shipped to the end-user direct from the warehouse it could be seen as a natural corollary to warehousing and distribution. In many cases, however, central warehousing supplies to a local distributor, who then ships to the users.
• most companies aim to produce as few upgrades as possible, as cheaply as possible. One major release every 12-18 months is typical, with one or two minor releases in between. Documentation is nearly always supplied as standard with all but the most minor (e.g. bug- fix) upgrades Many companies are considering outsourcing this business.

Conclusion

The market for the outsourcing of software manufacturing is poised to take off during 1993. As CD-ROM technology offering major new options for the distribution of software products and documentation finally comes into widespread use, efficient software manufacturing and effective, secure key/license management become central to the successful operation of both the software developer and his software manufacturing partner. This need is likely to be met by specialist companies who will provide a reliable and economic means of manufacturing and distributing software, and can reliably and responsively meet the key customer requirements.