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.


The Big Bucks Are In S-I-T-B!

At an IT services company that I used to work for, we used to do PDS / OPD work for both ISVs and banks. The latter work revolved around development of "platforms" viz. Trade Finance Portal, High Value Payment Engine, which were used by the banks to achieve competitive advantage for their LOBs. A typical ISV engagement would have a ticket size of US$ 100-250K. Since many ISVs were fueled by VC funding, these engagements had a fairly high rate of mortality, with at least 15-20% of them leading to bad debts. On the other hand, the platform business from banks inevitably had a ticket sizes of a few tens of millions of US$. Even at the height of the GFC, our bills were always paid. So, big bucks are in the Software-Is-The-Brand segment. This segment is likely to explode in at least two areas that I can think of: (1) Customer-facing mobile apps (e.g. Mobile RDC in the case of banks) (2) New verticals entering into this segment (e.g. Schneider Electric - in its recent ad campaign in the FORTUNE magazine, the engineering major is showcasing a "sustainability calculator" software as an integral part of its brand.

Ketharaman- thanks for your

Ketharaman- thanks for your interesting comment, particularly with regard to the volatility of serving start-ups in the ISV space. I fully agree that banking and financial services will make up a key component of the software-is-the-brand segment - just look at how mobile applications have become the always available equivalent of your retail bank as just one example.

We are also a product based

We are also a product based software development company. Thank you so much for informative and awesome post. Meanwhile, we are not facing that problem. In future, we will definitely let you know!

Kevin- thanks for your

Kevin- thanks for your comment and glad to hear you found the post informative

Constant Validation of This Trend

Charles, since we spoke in August we have seen constant validation of this trend from our customers and others. For example, a recent presentation on Services Leadership by Mary Jo Bitner, Ph.D. of the Center for Services Leadership at ASU stressed that services organizations would succeed with differentiation, and that differentiation would come from their technology. At another event that addressed metropolitan transportation options, new companies were basing their success on better software technology more than better mechanical technology.
Thanks for your thought leadership.

Mike - I appreciate your

Mike - I appreciate your comment and validation of what we are seeing in the market. As you say companies are basing their success on better software. Forrester's CEO recently wrote this blog post ( ) which highlighted how every company in the age of the customer will be a software company. Clearly this will have profound implications for product development, and of course the product development services market.


Charles - awesome post.