As a CEO or an investor, you understand that your sales and marketing teams are strategic to your company’s growth. There are well-known KPIs that you can measure to understand their impact on your top line; both are measured in terms of the revenue they bring in, directly or indirectly.
Nevertheless, you’ll find that in order to deliver value with your digital products, software development is as strategic as sales and marketing. So, if product development or software development is strategic, why are we still thinking about technology as a sunken cost?
Every single unit of work delivered by your software engineering team should have a direct relationship to your income statement.
As an organization, it’s time to start thinking about software R&D as a competitive advantage. To do that, you need your technology team to start thinking in business terms.
In reality, before you add the next feature to your product, take a breath and ask yourself a very serious question: Will this new feature bring value to our customers and increase our revenue or decrease our operational costs?
Every line of code and every single requirement that you allow into your pipeline and development backlog should circle back to this question. If you can answer with a resounding YES (with or without the optional fist-pump), then by all means proceed. If your answer is NO, or you are suddenly stricken with the dreaded blank stare of uncertainty, then pump the brakes and stop what you’re doing.
To help you clarify your thoughts and provide some organization, consider whether or not your new product/feature/initiative falls into one of these five distinct, financial-focused buckets.
Bucket #1 – New Revenue Streams
Want to get on the sales team’s good side? Bring them a shiny new product they can take to market right away! When you align your technology team with the sales team, beautiful things can happen – like bringing in new customers and getting new revenue into the coffers. Do this consistently enough and you might find a big box of doughnuts waiting for you and your team courtesy of your friends in sales.
How do you ensure your technical team builds the best product for your market? Clue them into the product’s financial model, sales, and marketing strategies early. Often, software engineering teams deliver a completely different product than what is envisioned simply because they are unaware of the sales strategy. When that happens, engineering must retrofit subscription or payment functionality in the latter stages of product development. This late retrofitting increases development costs, delivery delays, and adds technical debt that you will have to repay later.
Bucket #2 –Revenue Retention
This is reserved for those times when you find yourself having to fix an issue or add a feature to an existing product. Unfortunately, this is usually a response to panic or fear of lost business.
Before you commit resources to add or change features due to a knee-jerk reaction, consider whether there is a strategic approach to solving the problem: Are your customers really leaving you because your software looks old? Or are they leaving because your software is not adapting to pain points in their changing environment? Maybe you need to refocus your efforts on adding the magic button instead of giving your product a facelift.
Bucket #3 – Reducing Operational Costs
Tell me if this sounds like you: The promise of saving thousands of dollars in operational costs drove you to migrate all your assets to the cloud. Unfortunately, this move quadrupled your expenses. Now you’re panicked and your operational costs are getting higher by the day.
Naturally, the conversation moves to cost reduction. Can the product be modified or improved? Or do you eliminate it altogether? These are questions that can make your head swim (and they’re actually the subject of my next blog post), but these tough conversations are part of reducing operating costs on existing products.
Bucket #4 – Maintaining Development Operations
Development Operations are another cost of doing business. I like to look at this through the lens of a hypothetical situation: Let’s say you need to have servers and you need to maintain those servers. Now you need to create a few scripts to automate file cleanup every month. That code is a sunk cost.
Activities that will reduce manual work or maintenance time are important and should be maintained – so long as they improve development operations in the long term.
Bucket #5 – Waste
We really want to minimize this bucket. (*Cue melodramatic music, dun-dun-dun!)
This bucket contains the lost time and money spent reacting to emergencies, bugs, and outages. It’s all the effort that goes to waste. While you’re tending to an emergency, you can’t build products or features, improve operational processes, or reducing costs.
So, where do your new features fit?
Buckets 1, 2, and 3 are value creation efforts because they generate net new revenue and/or improve the bottom line.
Buckets 4 and 5 are your COGS, maintenance to keep the lights on and the machines humming. As a general rule, we recommend devoting 80% of your development time to the first three buckets and 20% to the last two. And really, getting below 20% is ideal for maintenance cost.
When your development team can classify all their work under one of these five buckets, it becomes easier to understand the impact they have on your company’s financial health.
The strategic vision is the most important component of your software product. Without it, you end up creating random tools as things arise. Ultimately, your platform becomes so disparate that the next inevitable step is accruing technical debt.
As you consider adding features, I encourage you to first identify which of the five buckets best describes your situation. And of course, refocus your tech team to have a strong strategic plan to keep you headed in the right direction.
Every initiative impacts the bottom line one way or another. Make sure your team knows how to evaluate their efforts up front for maximum impact and efficiency.
Want to get even more tools to help you effectively manage your software product? Download our FREE Technology Decision Worksheet and get an action plan to tie R&D efforts to revenue.