Tag Archives: Software economics

IT $pending: Does it affect your company’s size?

There is an age-old question which should be on the minds of tech folks and tech sales folks alike: What happens when firms spend money on Software Technology? It’s a deceptively simple question, however, when you dig deeper you find it one of the toughest questions to answer.

A little bit of history is in order here: The question was originally posed when an economist (Ronald Coase) questioned the wisdom of treating the Firm as a blackbox. Blackbox as where Input goes in one end, and output comes out the other with economists never paying attention to what happens inside the box. The answer was also part of my graduating Thesis at the University of Strathclyde, Department of Economics.

It’s a very interesting and a very important question especially if you are in the technology business. Let’s say you want to invest in a multi-million dollar Business Process Management System, and you CFO/CEO asks you, is this going to reduce my headcount and cut labor cost? This is a very similar question to what would happen if a Firm were to outsource a specific function. Does the outsourcing result in reduction of headcount, or expansion in business activities? Pretty tricky question! And you need to have the answers handy before you pitch any proposal to the savvy CxO level person. Remember there are people’s livelihoods hanging in the balance including the IT department you deal with on a daily basis.

Let’s zoom back out a bit here: It is well-known that the aim of the firm, and by extension, IT spending in it, have a shared goal in common, lowering the friction and costs which might arise from such friction within the firm. Therefore, if the IT project is successful (Big IF), then naturally, the friction costs should go down meaning the freeing up of resources and the increase of organization surplus and the freedom to carry out business expansionary activities if all the activities are carried within the firm and not utilizing an assembly line of contractors to do the job each has been designated to do.

So what does research tells us: According to a paper entitled: “An Empirical Analysis of the Relationship Between Information Technology and Firm Size” by one of my favorite Technology Economist of MIT, Erik Brynjolfsson, et al (link here), the evidence and answer is highlight dependent on the organization itself.

Let me clarify: If there are a lot of low-level jobs in the firms to be automated away by technology then those jobs are gone forever. You might say that upskilling those folks to perform higher-level jobs is a possibility, however, it is highly unlikely. This is short team. Long-term however, if there are plans in place to expand the business and there is a need for domain-knowledge, those folks who were automated away in the short-term, can be repurposed and gains can be reaped based on the strategy the company has in place.

From an employee stand-point though, skilling up should be a never-ending endeavor to keep one’s skillset up-to-update in an ever shifting market place.  Remember, outsourcing is not all that cracked up to be and there are many ways to circumvent the outsourcing hammer.

In the next segment, I will share how outsourcing has actually fallen flat on its face and what people did to get back in the employment game through the same companies their jobs were outsourced to….

Open source software, Microsoft Strategy and the dynamics of multi-sided platforms.

You cannot beat FREE!… The Free Software movement shook the foundation of the software industry and posed a serious challenge to the very essence of capitalism in this industry. It forced vendors to offer “basic” versions of their software as an open-source, free license entry point alternative.

Microsoft is one of those vendors. Two of the severely under-advertised are two Microsoft programs for Students and Start-ups to get full version software is DreamSpark and BizSpark. It works like this: If you are a student and your school has an agreement with Microsoft, you can get a lot of free Microsoft software ranging from Visual Studio Pro to Server 2012 R2 and SQL Server 2012, Operating Systems and a load of other goodies to get you on your way to develop software for the traditional desktop, cloud, App Stores (both Windows and Mobile)…

The process is very simple. Just get to the dreamspark.com site and check if your institution has a participant agreement in place and you are set to go. DreamSpark works in a similar fashion, however, it is geared towards start-ups with a preset revenue limit and a number of developers. The cost is a few hundred dollars. This is kind of Microsoft’s strategy to influence the incubation phase of a business in an attempt to try and steer them clear of the LAMP stack.

This phenomena is not new. Most people are unaware of lowering of market entry cost by any software vendor is a very well-known strategy in any multi-sided platform business model. It is very well studied and researched in the gaming industry where the entry cost of game developers is heavily subsidized by the gaming/software platform company or sometimes the reverse is true. Of course, the subsidy is supported indirectly by the customer who always ends up being the party who ends up paying for the cost of the subsidy given to the game/software developers.

Depending on what side of the platform you are on, having a strategy is very important especially if you can pool your industry peers together to garner some buying/negotiating power. Sometimes though, being the customer is most disadvantageous position in the multi-sided platform game. Gaming companies have been lowering entry costs steadily for the past few years and if you are a product manager, there are quite a few lessons to be applied from such industry as well as a the open-source/license movement to move your wares… TBC

Software and the human mind: Is there an Evolutionary Gap?

I have done this experiment a while ago where I asked people what is software? It was a lot of fun and I recommend that you try it. I found out that if you are a programmer, you think its code, an architect, you are thinking abstraction layers, connectors, models. Customers however think cost, will it do what they want without disrupting their business? And then I asked my mother, her answer was: “software is what makes the computer whirr and allows me to check out her friends on Facebook, Skype and watch my favorite soaps” (which I found amazing insofar as it was the closest to reality answer!)

Software is like someone telling you, the shop you are looking for is about half-a-mile walking distance. I find these (directions) to be the funniest since you have to have walked to that shop many times and measured the distance before you can be even close to accurate as to where the shop is (or used Google Maps!) But even with maps, for the majority of us, our human minds cannot really visualize a mile or a mile-and-a=half or two. We are simply not equipped to conceptualize distance, which is the same with Software.

It’s difficult for me to believe that the human mind has totally evolved to fully understand Software Engineering, as it does understand say Civil Engineering. I believe this where most of the problems affecting our industry comes from.

In general, there is no one definition in reality that matches the one stating that a program is a “set of instruction performed on data to transform it into a desirable output”. And this is where and why we get into trouble. Say you are estimating a project, each person on the project/product team will have a different context associated with the definition of software. OK, they might be close, but there will always be subtle yet sometimes detrimental differences.

So what’s the best approach to solve this problem? I can think of a few: use a framework/methodology to as a contract to maintain perception cohesion. Also, you can keep a core team to use frequently as repetition can potentially cause convergence of perception and help in overcoming our evolutionary deficiencies. This approach will result in consistency, but not necessarily creativity. For that, you have to mix up the team and go through the pains I started this post with!!

Do you agree? It’d be great to hear about your workaround our yet-to-evolve human brain.

The Currency of Knowledge: How Realizing the Economic Value of your Knowledge Will Help You Succeed in Technology and Beyond

Remember the wheel? The first Plow? The domestication of animals? The first tribe who settled down on the Nile river delta or Mesopotamia and turned into communities farming the land and actually having the first surplus as archaeologists have discovered?

What happened afterwards? Ever since those social changes took place and the first signs of civilization begun to spring up, the only thing that has been changing since then is, yes you guessed it, Technology!

Everything we have achieved as a civilization since the day of the first surplus and amassing enough food supplies to survive droughts or bad weather gave way to a new breed of humans specializing in functions such as accounting, Trade, governing, minting money, inventing numbers then alphabets and it has not stopped since then.

Fast forward a few centuries and we get the printing press which made the diffusion of ideas an order of magnitude more when sharing a new invention which has been proven pivotal to the survival of our species and spreads a lot faster than previously.

Think about it: Everything you and I do today in any field around us is technology-related or driven by technology. 
In a past reality, economy drove knowledge, however, in today’s world it more of knowledge driving the economy.

Think about your job and ask yourself a question: Do you think that the majority of us today are information/knowledge brokers? Think about the explosion of inventions and meteoric growth of information created and is available today? Do you believe that those two trends necessitate that there are professionals like you and me who specialize in specific areas where we hold an over-average or an extraordinary amount of technical information/knowledge in the areas we specialize in regardless of the vertical industry itself.

What’s the point you may ask: The point is knowing that at the core, we are information/knowledge brokers offering our clients advice on what to do, but more importantly, what not to do, and what they need versus what they want based on the tremendous amount of knowledge we possess which is our key to reaching any goal or objective we have set for ourselves.­ It’s the knowledge we posses is what holds the key to our, and our clients’, success.

Did I lose you? Ok, let me restate this: the foundation of everyone’s career is based on his/her knowledge in the area they specialize in. Achieving awareness of this fact with some introspection on what you do day-in, day-out, is guaranteed to have an impact on how you view yourself and the way you deal with your customers and colleagues. It certainly impacted how I deal with my clients (I consider colleagues as internal clients and treat them the same way I do external clients).

In one of my favorite books, Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics by Eric D. Beinhocker, the book description states: “Accounting for the creation of wealth has long challenged humanity’s best minds” which could not be further from the truth.

The book establishes a key idea/hypothesis summarized as the ingredients to creating economic value are your usual economics foundational ideas: Land, Capital, Labor and now, Technology, as an endogenous growth factor and not an exogenous one as had been the widely held view in classical economics. Rephrasing from page 42 in the book: “The hypothesis which came to be in the mid 80’s by a Stanford economist Paul Romer…. who was became increasingly dissatisfied with the idea that that the real driver of growth, technology, was exogenous. So in 1990, Romer published a paper that kicked off the development of what has come to be known as endogenous growth theory where Romer located the source of energy for growth, not in the heroism of the entrepreneur, but in the nature of technology itself. He noted that technology has a cumulative, accelerating quality to it.” [Emphasis is mine] Simply stated: The more stuff we know, the greater the base of existing human knowledge, and the greater the payoff from the next discovery.”

This last statement is a belief which I hold very strongly and believe that the more knowledge we pass on to others, the more we are freed up to learn more.

I really like welcome your comments/opinions on this topic as I am very passionate about the subject and the very fact that technology (software) is nothing but knowledge packaged in several formats to solve business problems, empower people.



Searching For the Economics of Software!

A few years ago my primary role was, and still is, an Enterprise Technology Strategist. For the longest time, my role could be summarized in achieving one main objective: To economically justify the software expenditure decisions by my clients both in the Public and Private sector to modernize their IT environments and become more efficient. This article briefly surveys the literature on the Economics of Software, the challenge it faces and why it’s so important for businesses to pay attention to this important topic and the sad state the industry in in today.

What’s my motive in writing such an article? Well, one day I stumbled upon a book, a text book, The Economics of Strategy by  David Besankoet al. I enjoyed the book so much, and at that point have read so many books on the same topic that I decided to pursue a Master’s Degree in Economics. The reasoning (after much research) was that the science of Economics provided a rich base of analytical frameworks, proven theories, and plentiful of ideas which could prove very useful when applied in the comparatively fairly young industry of software.

Think about this for a minute: In the software industry we borrow so many euphemisms, concepts and terms from other industries, such as construction, electrical engineering, math, physics, philosophy, just to name a few, so why not Economics?. So I set out on a mission to find out just how prevalent is the computer science and economics cross-discipline and if I pursue one, would I be rewarded?! I was surprised to find so few examples and academic scholars who are active in this area. I found more economists trying to apply their science to technology and a lot less technologists who were doing the opposite.

The one high profile company who has formalized such role is Google. Google is the only company I found to have a Chief Economics Officer, Mr. Hal R. Varian. Mr. Varian is truly a luminary when it comes to combining the two sciences and synthesizing theories, such as auction theories, applied to Google Ads and the auctioning mechanism. I was awestruck by the precision of the science behind what seems like something mundane! Mr. Varian along with Mr. Joseph Farrell and Mr. Carl Shapiro  published a very important book, Information Rules: A Strategic Guide to the Network Economy followed by an invaluable book, The Economics of Information Technology: An Introduction. Both books, the more recent of which, provide the bridge between the two disciplines. There are of course other academicians worthy of mention here for their positive contributions and ensuring this cross-disciplinary area remains active, Barry W. BoehmErik BrynjolfssonShawn ButlerKevin Sullivan and plenty others whom I simply did not keep up with or their names escape me for which I apologize. Worthy of mention is the Economics-Driven Software Engineering Research or EDSER conference which takes place annually I believe and not to dismiss the great contributions the ACM community makes.

Anyway, once I made the decision to finding an accredited online University (I found two in the entire US in 2009!), and one in the UK (University of Strathclyde) which holds “triple accreditation” a true rarity, I settled on Strathclyde, applied, got accepted and went on my wonderful Economics learning journey. Some of the areas we covered were conventional economics, while others were more specialized such as Regulations, Technology, Healthcare economics, Industrial Organization and so forth. It was a truly mind opening experience (and a tough one considering that I have been out of school for over 20 years!). Finally, I emerged from my studies knowing that my approach to solving problems and tackling technology strategy challenges will never be the same way ever again!

Armed with this new knowledge, as I neared graduation, I did what most new grads do, tried to capitalize or monetize my self-financed Masters’ Degree. I spoke to many employers, including those I was working for at the time period 2010-2014 and reality was shocking! No one I asked from HR to the highest level of the company’s brain trust envisioned how such a cross-disciplinary approach combining the two sciences, Computer and Economics, would be of practical use! Simple stated, no one thought about it!! It was a shock to my system. All a Business person or a technologist or a Marketer in the IT industry have to do is to look at the Table of Content of the book Messrs. Varian, Farrell and Shapiro to see how this cross-breed of sciences is not just relevant but its absence from the corporate arsenal could be and is negatively impacting the business’s bottom and top lines. Why? Because most decisions are being made without a solid data foundation and theory to support them.

A case in point is what I chose for my thesis: I asked a deceivingly simple yet powerful question: How does software expenditure affect the size of the firm? Using Transaction Costs Economics, a branch of economic theory concerned with the analysis of the existence of the firm in relationship to others through a continuum of transactions, along with data from several sources as well as real-life examples of large-scale automation projects I delivered in the past, the results are astonishing.

The “paper argues that at its core…the use of software inside the firm…is to minimize friction costs both within and outside the firm in both governance modes such as hierarchical and market transactions…for the sole purpose of lowering…transaction costs. In other words application such as payroll applications …and EDI systems software’s sole aim is to….automate the firm business process causing transaction costs to drop…. thus impacting the size and organization of the firm and the industry where it operates….”

Only the science of economics when applied correctly to software problems can yield such stimulating and exciting results and guides the conversation through the use of a common and standardized paradigm which could be easily adopted for the software industry.

In summary, whether you are looking for a practical R&D framework to manage your business’s innovation process or simply trying to determine a price point for a new product package or an SaaS-based feature, or just want to find out where your product/business ranks in the marketplace, you are doing your business and clients a disservice by not using the rich foundation of the Science of Economics to apply it to your technology challenges and discover truly innovative and novel solutions to today’s problems.

It would be great if you can share your perspective, experiences and feedback on this topic. It’s been a passion of mine for quite some time now and any contribution would be greatly appreciated.