[ale] Last Gasp - New Economy?

[Geoffrey]

Hogg, Russell E wrote:

> The classic rules of business management are rooted in the industrial
> age's manufacturing traditions. Unfortunately, they have yet to
> address the new realities of the information age where products
> consist mostly of software.

I totally disagree.  I don't know what percentage software makes of the 
total products in the world, but the number of 'physical' products has 
grown along with the advent of software products.  'products consist 
mostly of software?'  That's a crock.  There are still and pretty much 
always will be clothing, food, transportation.  More folks are buying 
more cars as well.  With software, there's the computers that are 
required and all the other hardware associated with this fact.

> Some fundamental truths do hold for both the old and the new economy.
> The goal of all business is to make a sustainable profit, and there's
> only one legal way to do so: sell some goods or services for more
> money than it costs you to make or acquire them. It follows that you
> have two ways to increase your profitability: reduce costs or
> increase revenues. Reducing costs worked best in the old economy.
> Increasing revenue works much better in the new economy.
> 
> Software products consume no raw materials and have no manufacturing
> and transportation costs. They require no welding, hammering, or
> painting. The information age involves little or no variable cost,
> whereas variable cost was the dominant factor in the late industrial
> age. The absence of variable cost is what makes this a new economy.

The variable cost associated with software is primarily the developer 
and the primary cost associated with software is primarily the 
developer, so there is still a huge variable cost associated with this 
process.  It's no different then getting raw materials for a better price...

> One hour of programming isn't related directly to one product sale;
> you can sell the same code repeatedly, so it's not a variable cost.

Bullshit, it's still variable.

> However, it's not a fixed cost either.

Okay, it's not fixed it's not variable, what is it?

Writing software is an
> ongoing, revenue-generating operation-not the same as constructing a
> factory. Some might suggest that programming is research and
> development; the comparison works, but traditional accounting
> separates R&D from revenue-generating operations, so this doesn't fit
> either. You'd be wrong to discount this little terminology mismatch
> as a minor quibble for bean counters to debate. It has a huge effect
> on how software is funded, managed, and-most significantly-regarded 
> by senior executives.
> 
> You and I create software, and business executives create revenue
> streams and profit centers. You and I measure our success by the
> product's quality, and business executives measure their success by
> their investments' profitability. They do this by applying the
> language of business mathematics, which recognizes fixed costs,
> variable costs, corporate overhead, and R&D, but, unfortunately, has
> no model appropriate for software or programming.

I would agree with this statement.

Accounting is the
> basic language of business, and its categories are so fundamental to
> all business measurement and communication that contemporary
> executives have internalized them completely. They see programming as
> another corporate expense to fit into an existing category. Most
> simply treat programming as a manufacturing effort-a variable cost. 
> This is the worst possible choice because it prejudices their
> business decision-making hopelessly.

Why?  It is a variable cost.

> 
> The key advantage of the industrial age was that products could be
> made available to the masses at affordable prices. Companies competed
> on the basis of their sales prices, which were related directly to
> their variable costs. It's taken for granted in the information age
> that products are available at affordable prices to everyone:
> Software can be copied and distributed to any number of customers for
> essentially no cost and with little or no human effort.

Agreed.

> 
> Reducing costs was simple and effective in the old manufacturing
> economy, and it was the preferred tactic. When today's executives
> regard programming the same as manufacturing, they imagine that
> reducing the cost of programming is similarly simple and effective.
> Unfortunately, these rules don't apply anymore.

I would agree.  But by talking about reducing the cost of programming, 
he's saying it's a variable cost..

> 
> Software production has relatively insignificant variable costs, so
> little business advantage results from reducing them. Reducing
> programming's cost isn't the same as reducing manufacturing's cost.

Agreed.

> Programmers' salaries appear to be a variable cost from an
> accountant's viewpoint, but they are much more like a long-term
> investment-a fixed cost.

Hardly.  Companies are no longer interested in the long term investment 
of employees, much less programming employees.

> 
> The only available economic upside comes from making your product
> more desirable by improving its quality, and you can't do that by
> reducing the money you spend designing or programming it. You must
> invest more time and money on the research, thinking, planning, and
> design to make your product better suited to your customer's needs.

Agreed.

> Instead of reducing what they spend to build each object, software
> companies must increase what they spend to build all objects. This is
> the essence of the real new economy. The intangible but extremely
> complicated patterns of thought are that software has value only when
> it's accompanied by the programmers who write it. No company can
> treat programmers the same as a factory because programmers demand
> continuous attention and support well beyond any factory.

Okay...

> 
> Architecture-the human-design part of programming that studies users,
>  defines use scenarios, designs interaction, determines form, and
> describes behavior-is the part of the software-construction process
> businesses dispense with most frequently as a cost-saving measure.
> Although it's certainly possible to do too much design, there is no
> advantage in reducing it. Your product becomes highly desirable when
> you invest a sufficient amount of competent design, so it makes more
> money for you. Its desirability establishes your brand, increases
> your ability to raise prices, generates customer loyalty, and gives
> the product a longer, stronger lifespan. There's no advantage in cost
> reduction, but there's big advantage in quality enhancement.
> Ironically, the best way to increase profitability in the information
> age is to spend more.

But by building a good product, you do reduce cost.  Support and such.

> The dotcom boom was populated with companies whose entire business
> model consisted of the reduction of variable costs. Their complete
> and spectacular failure demonstrates beyond doubt that the
> information age's economic rules are different from those in the
> industrial age. Business success in the new economy depends on adding
> something new and better for the consumer. The actual quality of
> every part of the transaction-from browsing to comparison shopping to
> comprehensiveness-must be noticeably better for the end user. Simply
> lowering costs for the vendor doesn't guarantee success today.

I believe there were a number of reasons the dotcom busted.  Many of 
these companies had just plain stupid products.  The willingness for 
people to accept change is another.  Expecting the overnight stock gains 
was another huge one.

> 
> When Pets.com sold dog food over the Internet, it didn't offer better
> dog food, a customer experience better than you could get at the
> local brick-and-mortar pet store, or any better information,
> intelligence, or confidence. All it offered was cheaper shipping,
> stocking, and selling-variable costs all-for Pets.com. It was a
> classic industrial-age-economy tactic of cost reduction that ignored
> the new economy's fundamental principles. Far from being the first
> breath of a new economy, it was the last gasp of the old.

But this solution still involved a huge amount of the variable cost he's 
saying has gone away.  The product itself.

> 
> I'm convinced you can sell anything on the Internet profitably and 
> successfully. The trick is your online store must offer a measurably
> greater degree of shopper satisfaction than any competing retail
> medium. There's only one way to accomplish this: You must architect
> your system to deliver the highest possible end-user satisfaction.

I agree.

> Treating any aspect of software design and construction as if it were
> a manufacturing process courts failure.

I disagree.  You can't outright discount tried and true processes.  You 
may well have to adapt them, but that's happened in the past.

> Software design and
> programming are simply not viable targets for conventional
> cost-reduction methods. It's certainly possible to spend too much
> time and money on building software, but the danger of spending too 
> little is far greater.

I agree.

> Such danger is probably not shocking or unfamiliar to you, but it's
> nearly inconceivable to most big companies' senior business
> executives. They're still using accounting models popular in the age
> of steam, yet every aspect of their companies are fully dependent on
> software for operations, decision-making, communications, and
> finance. The terms and concepts these executives use simply are not
> cognizant of the unique nature of doing business in an era when the
> tools and products of commerce are intangible arrangements of bits
> instead of railroad carloads of iron. The sock puppets were cool,
> though.

I do agree with this paragraph.

-- 
Until later: Geoffrey		esoteric at 3times25.net

The latest, most widespread virus?  Microsoft end user agreement.
Think about it...