3 Dangers of Downsizing Software Development Vendors

Some companies have begun to reduce software development providers, that is, they are going to distribute the developments that they need to carry out over the next few years between 3 and 5 selected providers. It is a good idea?

If we explore it quickly, it may seem like a good idea, since concentrating on just a few providers limits their management time: we don’t need the same time to deal with 3 as with 30. We reduce the lines of communication, we reduce the time dedicated to generating and signing contracts, to checking KPIs, to purchasing processes with different departments within the company, in short, to eliminating excess administration, but… And the cost?

We can think that the cost is optimally established during the negotiation of the contracts with these software providers, since they are large contracts for several years, they allow a low rate to be established and that’s it. Then the problems begin.

First danger the low rate deception

When we establish a low rate within the negotiation with a supplier, we can feel satisfied with it and leave it there. What else could we negotiate? Don’t we already have the lowest cost? Well no, you don’t.

What is done with a software development project is software, a product and, therefore, the price we have to look at is the price of the product, a price that is not the same as the rate per development hour.

The price of the software product carries both the fee and the amount of effort required to make it. If we don’t close both, a supplier will charge you little per hour, to then bill many more hours for the same product, do we see it with an example?

In the latest report published by LedaMC on the Software Development Market, the cases of three large software development providers are shown in which the cost of the software product unit and the productivity they offer to different clients for the same technology they are really different, charging the same provider up to 3 times more to one client than to another. Amazing? No, it is something that is repeated in the market.

Second danger Porter’s 5th force

Michael Porter laid out an analysis of five forces that must be balanced for a company’s success: Competitive Threat, Competitive Rivalry, New Product Threat, Customer Bargaining Power, and The power of provider’s negociation.

Some companies have started to make moves to downsize software development vendors

When we limit the number of providers, what we do is limit our ability to choose. These suppliers will know that we will have to carry out our software development projects with them, so they will be in a strong position, they will be able to negotiate from a more dominant position, unless we perfectly define the contracts that bind us to them, clearly establishing some KPIs that limit that power. Do you know how to set them?

Third danger without market references you go blind

As good as your negotiation process with suppliers is, the final price needs a reference to know if it is really good or not. I am referring to the price of the software product, we have already seen that the rate is not useful for this. The comparison is immediate and we are going to see it very clearly with an example.

If I were going to buy a luxury car and the dealer gave me a price, I would go to the market to see what that car really costs, so why not use this reference in software development?

In all industries, the standardization of processes is a fact, enabling them to be compared with each other and to be able to carry out this comparison successfully.

By measuring the software product delivered to us in our projects through benchmarking, we will be able to compare ourselves with what the market is doing and then be able to make the right decisions. It is important to take a large market reference database, possibly the largest, so that the comparison is really correct.

A successful supplier reduction

To ensure that our reduction or concentration of suppliers is successful, we must base ourselves on the pillar of comparison with the market, which is what can tell me if what they are giving me is what the others are doing or not. This comparison must be based on a measure that combines the fee and the necessary effort, such as the software product, which is what matters to the business. With this I will be able to define a framework that allows extracting the best of both worlds, an administrative improvement, management and optimization of software development costs.

We have seen it in a multitude of clients whom we have helped in the process and it is not for nothing that we have been named the first and only company worldwide certified for benchmarking software development projects by IFPUG, the most important in the field of software product.

Julián Gómez Bejarano, Chief Digital Officer LedaMC