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Responding to price and functionality pressure

Lloyd’s List today has heralded a move towards cheaper ECDIS. Most ECDIS are a pretty bog standard PC bolted into a nice case along with some software. It is the software that makes the PC sing and dance. This is what turns an ordinary computer into an ECDIS. This is what the navigator works with and steers his ship by. This is what the training is all about.

How do you reduce the price of software? There is a simple equation in industry that says you cannot sell things for less than the cost of manufacture. Well you can, but not as a long term proposition. In general the idea of any manufacturing business is that you get some raw materials, make something from them and then sell the product so that you can cover your costs and maybe make some profit.

Making cheap software then, how can you cut the costs? There are three broad areas of cost in manufacturing:

  • premises, infrastructure and plant
  • sales and marketing
  • raw materials

Nothing too special about the premises. Any half decent office will do. Infrastructure is the usual raft of management, accountants, office cleaners, human resource experts and other essentials. Plant pretty much comes down to computers and an Internet connections.

Marketing is essential. If nobody knows about you then it can be quite hard to sell.

So far there is nothing unusual, by which I mean that these considerations apply to pretty much any industry to a greater or lesser extent. The way you control costs on this stuff is conventional and well understood. P8049541

However when we get to sales things start to get a little more interesting. Cost of sales for software? Just about zero. There was a time when we would put a CD in a pretty box with a thick manual but we’ve just about grown out of this now. Nobody ever read the manual, the box would end up in the bin and having installed the CD you would often find out that the first thing you needed to do was to download an update. So most software is supplied directly these days and that costs nothing, approximately. The server sits there supplying copies of the software and whether is sends out to 10 or 10,000 users really makes little cost difference. In fact really all that business with the boxes and CDs still didn’t add any significant overhead. Low cost of sales means that there are some big bonuses in selling large volumes of licenses. When we talk about selling software we are really talking about selling licenses to use a copy of the software and this is really cheap to do.

The raw materials for software are people. More specifically people’s brains. The rest of the person is needed as support infrastructure. You need good people to write good software. It is not easy. You need good people and you need time. To build a brick wall faster you can put more builders on the job. Put more programmers on a project and it will often backfire. I have not just made this up, the principle was established over 25 years ago.  Employing clever software engineers is expensive. Very expensive. In fact this is where the bulk of your manufacturing costs are. For a typical software house as much as 90% of their total costs will be wages. People really are the raw material in this industry and in terms of quality, you get what you pay for.

So how can we cut costs? The only cost area that will make and significant difference is the programmers.

Option one. Make the programmers more productive. Shouting, threatening and beating is not very effective (I’ve tried). Providing good tools and using modern project management techniques is much better. Even so there is still a limit. These approaches should be part of a modern software company already so there is not much scope for cutting costs here.

Option two. You could try going for cheaper programmers. This does not work very well. Typically you end up with badly designed software which takes twice as long as you hoped to develop. It is difficult to use, looks rubbish, nobody likes it, there are bugs, it crashes and it is very difficult to maintain. None the less this approach is tried from time to time – you may have encountered some of this software.

Option three. Stop development. If the software does its job and there is no real requirement for further features then this is very effective. Your development costs will be massively reduced and with the minimal cost of sales you will be able to ship software at bargain basement prices.

In the ECDIS world option three has got to look very tempting. Making the software better is very expensive and don’t forget that each new release needs to go through a type approval phase. More expense. Is this a good idea? Well with some 50,000 vessels that will need to fit ECDIS only 5% or so actually have it (ECDIS Revolution Conference). At the same time a much larger proportion have some sort of ECS (not to be used for navigation). This suggests that although they like the electronic navigation bit they are not so keen on the actual ECDIS. Why not? Many possible reasons but my point is that the forthcoming legislation is going to force them to buy a piece of kit that they don’t want. So what would you do? Buy the cheapest solution that gets a tick in the box maybe.

It all comes down to price. A global market of 50,000 is not really all that big for a software product that takes many man-years of work to create. It is going to be hard to claw those costs back. The change in the regulations mean that ECDIS will compete on price and very little else. This will effectively freeze ECDIS development. Option three. You have a type approved solution, it ticks the box and the lower the price the more you will sell.

So, just maybe, we are going to arrive in 2018 with a modern vessel using software written in 2008 based on a display standard from 1998. Yep, it’s going to be 20 years out of date. Just think how good the sat nav in your car was 20 years ago.

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