R&D: a bottomless pit? Gain control over R&D costs!

Gain control over your R&D costs.

R&D and marketing make up the majority of your operating expenditure

As software product company or ISV, R&D is an important part of your business continuation. In fact, the majority of an ISVs operating expenditure consists of research and development (R&D) costs and marketing spending (read here). How do you gain control over R&D costs? How do you gain clear insight and know that the expenses you are making are justifiable for the future? Is R&D a bottomless pit or can you do it wisely and keep the balance between spend and return on investment?

In the past, software product companies made a roadmap for a few years ahead, developed until they reached a release as planned on their roadmap and then brought it to the market. These were major, big releases with little customer validation during the cycle. Although a budget would be made and the ROI calculated at the beginning of the roadmap, the long release cycle made it impossible to keep a grip on costs. New functionalities would be added along the way, little of no validation points with end customers during the development period, staff changes, technology changes, new market conditions, new competitors entering the market, etc. would increase the expenses to the point that was impossible to keep a good grip on costs versus returns.

Quantify R&D costs and gain control

Times have changed. It is possible to quantify the R&D costs and to optimize the control over it. R&D is an essential element for the business continuation of an ISV, whereas cost control and future sales projections are critical for management to continue steering the company in the right direction. So how do you get control over R&D costs and create transparency?

1. Reduce the release cycle

Short release cycles give a clear insight into the costs per cycle. And your clients receive frequent but less evasive releases making it easier for them to continue business as usual.

2. Clear separation of your standard software versus special customer requests

This means less waste or features not needed by the majority of your clients. If you keep your software product to meet the standard market demands, it gives you more transparency in your R&D costs, but also makes it much easier to maintain the product. The customer with exceptional needs can pay for the tailored software development and maintenance.

3. Continuous customer validation

It is imperative to have outside-in development to keep your R&D costs in control. If you develop inside-out, and by that, I mean that internally you decide what your customers want, develop it and then release it, you are bound to create waste as new functions and features were not validated with a group of clients first. You gain the most control over the costs if you start with your customers’ needs, prioritize and develop them and release each one in a short cycle.

4. Continuous delivery (read more here)

Change your development and delivery method to continuous development. In the B2B software world, we are not as far with continuous development as some of the major consumer platforms such as Booking.com or Amazon are, yet we can follow in their footsteps. A reduced release cycle goes hand-in-hand with a new development method.

5. Identify relevant KPIs

Identify those KPIs that are relevant to give insight into your R&D spending, give you transparency and thereby a grip on your R&D costs.

Note: I have highlighted each item separately, yet they are all part of what is called continuous delivery.

For startups this is easy. They have to get their product on the market as soon as possible to claim their position and start generating revenue. For existing ISVs, this often means change and change can be daunting. Each ISV has its business and revenue model, type and number of customers, type of product, market position and competition. We all want to ensure our companies’ health and business longevity. And by moving to shorter, focused and measured development cycles we can get a grip on our R&D costs and validate that what we spend will add value.

Mihai Nadas
Managing Director Yonder