Tuesday, July 10, 2007

Bad Idea : Outsourcing Intellectual Property

A familiar echo

A colleague of mine has a theory why Vista requires 2GB of RAM and a late-model CPU to run satisfactorily. He believes this is likely the first edition of Microsoft's flagship operating system primarily developed in India rather than Redmond Washington.

Except for press reports of Microsoft's huge investments in China and India, and their outsourcing of development to those countries, I'm unaware of precisely what is being outsourced and what measures Microsoft has taken to insure a quality product. Quality being measured not just in bugs and resilience to breakdown, but the quality experienced programmers know can exist in the code itself. The economy of expression. Elegant algorithms. Brilliant structures and modularization. Unless Microsoft releases Vista's source code, which I think unlikely, we'll never know for sure whether Vista has the hidden qualities Paul Graham describes in his essay, Hackers and Painters.

The shot heard round the boardroom

Our development team was asked by one of our largest investors to visit another company he owned and analyze their software, development methodologies, and testing procedures. No greater compliment could have been paid us. The company in question was on the verge of signing a large contract that had the potential for significant revenue growth and pressure on the existing software platform. Company directors were anxious about the deal because the software was showing significant signs of stress. When we visited there were over 800 bugs listed as critical. Among them were reports that took too long to be usable, some of their customers were able to see other customers' data, and invoicing was broken.

We'll skip the messy details, but there are some red flags that predicted their problems. To protect the innocent and guilty alike we'll call the company Newco.

The good

Newco had a great start. Their innovative web-delivered service was easy to learn and use. They didn't need the overhead of a sales staff because the service was self-enrolled. Membership included newsletters with helpful articles both on using the system and advice from industry professionals. Additionally, because the service required only an internet connection it was priced competitively and easily won business from other providers.

The bad

Curiously, Newco's management had no previous experience in either their product's industry or software development. They created the service and attracted quality investors, but that was pretty much the end of their most valuable contributions.

Neither Newco or their directors realized they were in the software business. True, the service wasn't software related, but the entirety of Newco's intellectual property was invested in the software. The danger of not knowing what business you're in is loss of focus. In this case the loss of focus wasn't a mere distraction, it was completely misdirected. Instead of jealously guarding and nurturing that which defined their company, the software, their attentions were elsewhere. From the beginning, software development was an expense to be minimized rather than aggressively invested in.

The ugly

Newco's management was filled with large-company escapees that approached small-company's software development the same way a large company might: simple project management. All they had to do was to find inexpensive labor, describe the requirements, agree on delivery dates, and hold the developer to them.

Their CTOs were either not experienced developing software or weren't given the opportunity. The last CTO had no experience writing or designing software (or in Newco's industry) but instead had many years experience managing projects at a large IT consulting firm.

They peddled their IP for development to outside contractors across three countries and two continents--none of them domestic. This isn't an indictment of the quality available from overseas developers, but evidence of how far away geographically and culturally they dispatched their company's jewels. All the time they did this they didn't have in-house technical expertise to measure or critique the software's design or engineering.

Ultimately, Newco lost complete control of the software. It's design, it's host operating system, the database, development tools, infrastructure tools, language, and issue tracking. In short, they'd lost their ability to be self-deterministic and had become completely dependent on other parties for their survival. By the time we arrived their own intellectual property was completely foreign to them both literally and figuratively.

The clever bookend

Which brings us back to Redmond. If my colleague's suspicions are true what might that say about the business Microsoft is in? It may be they're perfectly capable of managing off-shore development with greater competence than Newco possessed. Or it may indicate an significant change of direction for Microsoft--demonstrating it's no longer in the software development business as much as it is another business, perhaps the patent and property protection business?

Microsoft is certainly a large company. Perhaps one of the largest. It's certainly exercised its marketing, legal, and acquisition might and expertise with the financial resources to back them up. And now that its head is turned toward other activities unrelated to the actual exercise of writing its own software has created an opportunity for other companies that are focused on writing their own software and jealously guarding it to establish a beach-head that wouldn't have been imaginable not too many years ago.

Can you say Google?

Newco was eventually sold at a discount to a competitor for the only thing it possessed worth paying for--its customer list.

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