Why Custom Software Development Shops Suck at Product Development

We had management board of Netcetera visiting us yesterday. Netcetera is a mid-size custom software development shop from Switzerland and their management board choose Ljubljana for their annual retreat. Since their CEO and founder Andrej Vckovski already knew a bit about Slovenian start-up ecosystem from his previous visits, he found it interesting to induce some start-up mentality into his management team by having them meet a few Slovenian companies trying their luck by developing their own products.

Netcetera is highly successful service business with great rooster of happy clients. Nonetheless Andrej, the CEO, is not happy. While developing custom software for known customers is a lucrative business, it is inherently limited in scale and opportunity. That's why they are investing heavily into product development to balance their service business (where in effect they are selling manpower) with their own products (where in effect they would be selling their wits and ingenuity).

The story of Netceta reminds me very much of the story of Hermes Softlab (now ComTrade), a Slovenian custom software development behemoth, which tried to come up with a successful product for the past 20 years without much success despite huge investments of time and money. Knowing story of Softlab I have little hope that Netcetera will be able to pull their transformation despite the best intentions of Andrej and his team.

Custom software development shops with few hundreds employees or more think that their size, existing customer relationships, and capability to execute are their strong points which will bring them advantage when trying to develop their own product. They are very much mistaken! Product pivot is hard to muster even in an organization with 30 people and close to impossible in a 300 strong team. But without several team, technology, product, and/or customer pivots it is not possible to find the right product since no product is done right the first time around. Existing customer relationships are also more of detriment than an advantage in cases of companies such as Netcetera or ComTrade. These companies are there to serve their customers (hence the moniker service business) while product companies exists to help their customers by developing products their customers need not the ones they explicitly say they want. Finally, the ability of custom software development shops to execute is the biggest roadblock preventing such companies becoming successful product organizations. Namely, such organizations pride very highly their engineering capabilities with technical people having disproportional influence on decision making. Consequently, product management organization is always subdued to engineering which in effect makes product development impotent.