Software Automation and the Value Chain: Cost Drivers


A key component in analyzing the value chain of your project/enterprise is investigating the cost drivers in the value chain. Meaning, your relative cost position (RCP) in the market is the sum total of the cost of performing all the activities in the value chain. The lower the cost of performing activities, if all organizations in the market perform roughly the same activities, the more value can be realized (not to say that decreasing costs always results in more value), and a possible price advantage can result.

Envisioning each activity in producing your software as a cost driver shows us several things:

  1. Where the resources go

    When you start to break down the total effort required to produce your software, you start to see every activity as a step that should add value to the product. Value is “the reflection of the price a firm’s product commands and the units it can sell” (Porter, Competitive Advantage, p.38). The difference between the total cost drivers and the total value of the product is the margin. Examining the cost drivers in your software project reveals what people on the project team spend time on and where the organization spends money.

  2. Over time, which efforts increase and decrease in cost

    Real value can start to be obtained when you look at your project in a longitudinal way. Certainly, there is worth in looking at cost drivers at a specific moment in time, but, as I’ve learned from analyzing software projects, analysis of trends over time can reveal information static analyses cannot. For example, have you implemented a new feature in the past six months, and, since then, the cost of your development has increased? Maybe that’s due to the development team having to go back and correct defects in the system introduced by this new feature. If this feature is adding value over and above its cost, maybe it’s worth keeping. If it doesn’t add value to your application, it may be something you’ll want to review and remove.

  3. Which activities provide the most value

    Each activity in the production of your software comes at a cost, whether it’s  money, time, or both. Using open-source software, for example, may not include an up-front cost, but may involve spending more time in the beginning getting the tools set up. Whatever the costs are, hopefully these tasks all create value in the software. Examining the cost drivers in the software lifecycle can show you exactly where the value is created, and which activities produce the most value.

  4. Which activities can be cut back while still delivering value

    Often, there are tasks where the amount of resources spent can be decreased without negatively affecting the value produced by those tasks. Additionally, there may be tasks that can be cut back or removed completely without affecting the amount of value created in the value chain. This is where efficiency gains are made.

  5. Which activities can be increased to increase value

Sometimes using more resources on certain tasks can result in even more value being produced. Is there a new tool or process you can utilize that, ultimately, creates a more usable or valuable application?

Software automation can be an integral part of value creation for your organization. Automation provides several benefits:

  • It allows an organization to utilize its resources more effectively. For example, automation can be scheduled to run after the close of business each day. Utilizing tools like Selenium and the Selenium Grid, an automation team can set up their grid to run automated tests on the manual quality assurance team’s computers when the QA team is not in the office, getting more use out of otherwise-unused machines, and also freeing up the manual QA team to perform other duties during working hours.
  • Automation teams can reduce the complexity and costs of coordination between connected activities in the value chain. Automation can be set up to, for example, check the status of a development environment for build failures, and notify the right team member if something isn’t set up correctly. No need for the project team to start working on a development environment, only to find out, one at a time, that there’s a defect preventing the team from working on the application, then deciding how to move forward from there.
  • Automation can be timed effectively to produce valuable data. Most software build systems can trigger an automated testing package, so that, when a new build is started, testing can be an automatic part of the build process, testing the new build for failures as soon as possible.

In the next article, we’ll look at cost drivers individually, and how automation impacts each of them in order to produce value and increase the margin of your software application.

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