In 2018, we conducted research for the second Software Product Engineering Services Blueprint, which examines how the ecosystem has developed since 2016. This research process involved interviewing a wide variety of ISV, enterprise, and internet company leaders on their core motivations, challenges, successes, and experiences around platform and product engineering. This report is a compilation of the candid and insightful feedback that fueled this research.

An ISV leader we recently spoke to describe the challenge of outsourcing in this space as finding the right partner with a product engineering mindset. Typically, ISVs and enterprise companies outsourced limited modules, retaining core product innovation and a majority of the development work in-house. As advanced digital technologies are transforming the software product engineering space and the competition is increasing (particularly due to emerging start-up companies), we have observed more willingness to outsource over the years.

However, the challenge for service providers is to invest in artificial intelligence, automation, and other technologies to develop a solutions portfolio, build resource capability in next-generation technologies, and create a robust partnership ecosystem.

A lot has changed since the first Software Product Engineering Services Blueprint—ISVs and internet companies are transforming their product and services portfolio with emerging digital technologies. Enterprises are also building their own digital platforms. This transformation is shaping the future technology landscape of software product engineering, opening up opportunities, and posing new challenges. Clients are becoming more cost conscious and renegotiating rates with expected quality services as well. The requirement of onshore resources is increasing, in part due to less time-to-market for products and implementation of emerging technologies. This has increased the cost burden of the service providers and started to impact margins.

Study scope and demographics

The scope of the Software Product Engineering Services Blueprint is described in the value chain (see Exhibit 1). We spoke with more than 30 clients to understand their experiences working with service providers to deploy and support software product engineering projects (see Exhibit 2). Refer to the HFS Blueprint Report: Software Product Engineering Services 2018 for a detailed analysis of the capabilities and vision of software product engineering service providers.

Exhibit 1: Scope of software product engineering services market across the value chain

       Source: HFS Research, 2018

Exhibit 2: Study demographics

Sample set: 30 client interviews

Source: HFS Research, 2018 

The services portfolio, client relationships, and delivery capability are the main reasons for service provider selection

ISVs and internet companies are transforming their product and services portfolio with emerging digital technologies. Enterprises are also building their own digital platforms. This transformation is shaping the future technology landscape of software product engineering, opening up opportunities, and posing new challenges. Exhibit 3 outlines the main reasons the referenced clients selected their software product engineering service provider.

Exhibit 3: How did you select your software product engineering service provider? 

Sample set: 30 client interviews

Source: HFS Research, 2018

Deeper conversations with the referenced clients highlighted that these were the criteria used to identify the service providers they would consider in the RFP phase of a project. Clients often made their final service provider selection based on strong service offerings across the value chain. Clients appreciated good account management and delivery capability for engagements. They were also interested in resource quality, pricing flexibility and competitiveness, and a provider’s capability of emerging technologies. Historical relationships and project references have also played a vital part in software product engineering outsourcing.

Clients rated software product engineering service providers highest for their quality of relationship management, delivery capability, and project-specific services portfolio. They rated the service providers lowest for their ability to provide services based on location proximity and emerging technologies adaption (see Exhibit 4). Clients expect threshold industry knowledge and more horizontal technology expertise from service providers. Service providers need to increase their domain knowledge to improve their customer experience.

Exhibit 4: Client satisfaction with software product engineering services 

Sample set: 30 client interviews

Source: HFS Research, 2018

Capability, execution, and pricing are the keys for software product engineering services

We also asked software product engineering services clients to identify the main strengths and challenges of their providers. Exhibit 5 presents the top 10 strengths and service provider opportunities mentioned by these clients. These are listed in order of client mentions.

Exhibit 5: Software product engineering services market—strengths and development opportunities

Sample set: 30 client interviews

Source: HFS Research, 2018

The top three strengths noted were the services portfolio, client relationships, and delivery capability. A client who highlighted customer focus as a strength said, “We want a partner that has strong software product engineering expertise and can take the product ownership including development, testing, maintenance, and customer support,” which demonstrates the service provider’s execution as well as innovation capabilities.

Clients also highlighted that pricing flexibility and client proximity are software product engineering requirements. They seek to maximize their investment value by increasing product portfolio penetration into new geographies and adjacent markets. This requires product re-engineering, localization, regulatory compliance (like GDPR), value engineering, and other product enhancing services. As software product engineering services projects are facing requirement uncertainties, stringent go-to-market timelines, and cost pressure, technology competency combined with a flexible approach to deals is one of the key factors for winning new customers for service providers.

Several clients mentioned that they prefer service delivery at a location very close to them for better execution and shorter time to market. Also, we have observed high onshore and nearshore presence of service providers for software product engineering services.

Several clients mentioned that service providers need to have expertise in both legacy technologies and emerging areas. They expect that service providers should reduce cost overhead with flexible and competitive pricing. One client explained, “The expectation is threefold: emerging area expertise, pricing, and innovation. The service provider should be flexible enough to provide competitive pricing for our legacy products and competent enough in emerging technologies to be a strong partner for future products and applications.” As the SaaS model is cannibalizing customers’ traditional product license and revenue channels, they are more becoming more inclined to use nonlinear pricing models.

According to clients, having both the capability to execute IP sustenance deals and digital engineering expertise is also very important for the engagements. In some cases, clients expect service providers to take full ownership of IP and invest on modernization and enhancements. Deep domain knowledge is the differentiating factor in software product engineering services. This is sometimes related to “industry context,” which is experience in enterprise tools and platform development. With the advent of cloud computing, micro-services, and mobility, deep knowledge in business processes can be a unique differentiator—not only from the business point of view but also from a technology perspective. Vertical knowledge is also a critical piece of the puzzle in addressing the vertical ISV segment.

Overall satisfaction often relied heavily on the specific team assigned to the engagement. In a few cases, referenced clients from the same service provider provided inconsistent feedback in areas such as the level of delivery performance, technical expertise, innovation capability, pricing, and flexibility of the service provider team.

Bottom line: Stakes are high in software product engineering—service providers need to invest in emerging technologies and build close relationships with clients

New technology areas such as DevOps, agile development, and other digital technologies are influencing different areas of software product engineering for better business outcomes including less time-to-market, cost reduction, and better customer experience. Many software product engineering customers are looking for service providers that can provide service delivery at a location very close to them for better execution. The implementation of DevOps and agile development across the engagement also demands client proximity in few cases. Also, clients are increasingly looking for strategic partnerships for more close collaboration. The service providers need to build capabilities including a strong solutions portfolio in emerging technology areas and strategic partnership model to get more involved in growth initiatives and future roadmap of their clients.

To finish off, here are our top three tips for service providers and buyers to make sure they get the most out of their engagements:

Three things service providers need to do:

Develop expertise in emerging areas: The major software product engineering influencing technologies are artificial intelligence, cloud computing, IoT, and analytics. Based on our discussions with buyers and our understanding of the software product engineering landscape, service providers need to build capabilities that include a strong solutions portfolio in these emerging technology areas.

Build a robust partnership ecosystem: Service providers have partnerships with diverse technology companies for different technology areas. As the digital technologies become differentiators in the software product engineering space, service providers need to leverage their partnerships and collaborate more with their own digital team to develop joint solutions, collaborative pricing models, and proofs of concept specific to client needs.

Invest in domain knowledge: In software product engineering services, domain-specific business process knowledge is of paramount importance. Buyers expect threshold industry knowledge and more horizontal technology expertise from service providers. Service providers need to increase their domain knowledge to improve their customer experience.

Three things buyers need to do:

Select service providers that can support the entire value chain: We selected most of the participants for this Blueprint for their ability to support end-to-end software product engineering value chain activities. Every software product engineering service provider covered is capable of meeting buyers’ broad needs, although capabilities differ significantly across the value chain and different customer segments. Therefore, buyers are advised to match carefully the service providers’ skills and take analysis to the appropriate level before shortlisting a service provider for an RFP.

Leverage commercial models for the engagements: Buyers should try nonlinear pricing models, such as outcome-based or risk-reward pricing, to get the maximum out of the service providers, particularly for the non-core product portfolio. Fixed-price and time-and-material (T&M) are already the most popular, and outcome-based models have started showing up more frequently in the service providers’ pricing mix as well. We recommend buyers engage with service providers for end-to-end business processes, such as from the design phase to the product sustenance phase, enabling service providers to plan and invest according to buyers’ needs. In this way, buyers can get the best out of their service providers.

Keep an eye on project management: Buyers have confirmed that most of their engagements are part of broad digital transformation agenda implemented across the product portfolio. There is a lot of uncertainty about requirements, leading to delays in delivery, late resource onboarding, and other factors that impact the product launch time line. Buyers need to be more proactive about tracking deliverable progress.