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3 Risks of downsizing software development vendors

21 July, 2022 | Reading 3 min.

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In this article for elEconomista.es, our CDO Julián Gómez, explain his vision on the reduction of software vendors that some companies have begun to implement.

Some companies will reduce their development vendors and are going to distribute their software developments for the next few years to 3-5 vendors. Is this a good idea?

Seems to be a great idea, because by focusing on a vendors, we can reduce the time it takes to manage them: managing 3 vendors is not the same as managing 30. We reduce the lines of communication, the time spent on generating and signing contracts, on checking KPIs, on purchasing processes with different departments… In conclusion, deleting administration excesses, but…. What about the cost?

We may think that the cost is optimally set during the negotiation of contracts, as they are large contracts for several years, allowing a low rate to be set and that’s it. After that, the problems begin.

1st risk: the deception of the low rate

When we establish a low rate with a vendor we can be satisfied with that and leave it there. What else could we negotiate? Don’t we already have the lowest cost? No, you don’t.

What is delivered with a software development project is software, a product, and therefore, the price we have to look at is the price of the product, which is not the same as the hourly development rate.

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

In the last report published by LedaMC about Software Development Market, it shows the cases of three large software development vendors in which the cost per unit of software product and the productivity they offer to different clients for the same technology are really different, the same vendor can charge up 3 times more to one client than another. Surprising? No, it is something that is repeated in the market.

2nd risk: Porter’s 5th force

Michael Porter set out an analysis of five forces that should be balanced to achieve company success: Competitor Threat, Competitor Rivalry, New Product Threat, Customer negotiation Power and Vendor negotiation Power.

When we limit the number of vendors what we do is limit our choices. These vendors 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 define perfectly the contracts that we will have with them, establishing KPIs that limit that power. Do you know how to establish them?

3rd risk: without market references we are blind

No matter how good your negotiation process with vendors is, the final price needs a reference to know if it is correct or not. It is the price of the software product, we have already seen that 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 seller gave me a price, I would go to the market to see what the car really costs, so why not use this reference in software development?

In every market, standardization of processes is a fact, enabling them to be compared with each other and to be successfully benchmarked.

By measuring the software product delivered in our projects through benchmarking, comparing ourselves with what the market is doing and then making the right decisions. It is important to take large databases market references, possibly the largest, so the comparison will be correct.

Successful vendor downsizing

To ensure that our reduction or concentration of vendors is successful, we should base on the pillar of comparison with the market, which is the one that can tell me whether what they are delivering is what the others are doing or not. This comparison should be based on a measure that combines price and necessary effort, such as the software product, which is what matters to the business. This will allow me to define a framework that allows me to extract the best of both worlds, an improvement in administration processes, management and optimization of software development costs.

We have helped many clients in this process as we are the one and only certified company in the world for the benchmarking of software development by IFPUG, the most important organization in the software development field.

Here you can read the original article published in elEconomista.es