Non-Tech Companies Emerge As A Critical New Market For Software Product Development Services
Historically, one of the main segments of the product development services (PDS) market has been software product development for independent software vendors (ISVs). My colleague John McCarthy and I have just published a report that outlines how this market is undergoing a significant shift as it splits between serving the traditional ISVs and serving what Forrester refers to as “software-is-the-brand” companies.
Software-is-the-brand companies are those firms in industry sectors like financial services, retail, information services, and media and entertainment that are seeing more and more of their business value coming from their software-based products and services. This new segment will comprise the majority of growth in the software PDS market over the next four to five years.
This growth will occur as these companies increasingly require high-end product development capabilities for what, in many cases, were seen as traditional IT projects. My colleague Christine Ferrusi Ross recently wrote how technology has become the supply chain for these software-is-the-brand companies because it is the “raw material” that allows today’s products to be built. Frequently, however, these companies need help from service providers to acquire the appropriate skills and expertise to handle the current complexity and speed of technological change.
Meanwhile, there has been a concurrent collapse of the ISV segment of the PDS market, triggered by four key factors:
- The "not invented here" mentality of large ISVs.
- The number of midmarket ISVs acquired by their larger brethren.
- The high cost of sales that accompanies serving a large number of startups.
- Competition for product sustenance work that is profitable but requires hand-to-hand combat among the vendors.
What does this mean? Vendors will need to pivot away from serving their traditional constituents in the ISV segment of the market and instead engage with a new set of customers who have a different set of needs and requirements.
Meanwhile, sourcing and vendor management (SVM) professionals will also face challenges because product development is a different proposition to traditional IT engagements. In particular, the SVM group will need to shift its focus from technical skills to program management and the fostering of supplier oversight skills. It will also need to expand its influence to a new set of stakeholders who, in many cases, will be working with third parties for the first time. While this may not mean proactively managing the relationship, SVM pros should at least provide training on supplier management.
Are you a software-is-the-brand company? Do you plan to use a PDS provider? What challenges are you facing? Tell us about it in the comments below.