Software Automation and the Value Chain: Cost Drivers

The Takeaway: Automation can help lower the costs associated with your software project, resulting in more value and a price advantage in the marketplace

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.

Automation’s Place in the Value Chain

The Takeaway: Automation adds value to your DevOps/SDLC process and can be a large part of your project’s success in the marketplace.

I feel that management theory is not only necessary for understanding a individual’s place on a team, a team’s place in an organization, and an organization’s place in the market. Not only that, but I like reading and talking management theory.

While I do recommend Michael Porter’s Competitive Strategy and Competitive Advantage to anyone wanting to know how to better understand how businesses compete in the market or how their business affects and is affected by internal and external forces, I also understand these books are a bit hard to read through with understanding.

Value Chain

“…strategically relevant activities [disaggregated] in order to understand the behavior of costs and the existing and potential sources of differentiation.”  (Porter, Competitive Advantage, p. 33). 

The way you stay in business is by doing things either cheaper and/or better than its competition. Once you separate and examine each individual activity in your collection of activities performed to design, produce, market, deliver, and support the thing you make, you start to gain an understanding of where the resources go. Where do we spend time that we can cut out? Where do we spending money that makes our product better than our competitors’? This is the (basic) idea behind the aglie manifesto, right? Cut out the things that cost time and money unnecessarily

  • processes and tools
  • comprehensive documentation
  • over contract negotiation
  • following a plan,

and focus on the valuable things

  • individuals and interactions
  • working software
  • customer collaboration
  • responding to change.

Focus resources on the things that matter, and you’re a step ahead of competitors that don’t.

Michael Porter's Value Chain
Michael Porter’s Value Chain

Value Activities + Margin = Value Chain

The total Value Chain is comprised of Value Activities and Margin:

Value Activities

“…physically and technologically distinct activities a firm performs… building blocks by which a firm creates a product valuable to its buyers…” (Porter, Competitive Advantage, p. 38).

There are Primary and Secondary (Support) activities. We’ll focus on support just to keep things simple.

The typical primary value activities do not apply across all industries equally. Manufacturing, for example, relies much more heavily on inbound and outbound logistics than software development, for example. For our purposes, I’ll rely on a classical approach to software value chains provided by Boehm and Papaccio (1987, NTRS), and state that the majority of software development falls under the Operations and Service value activities. 

Operations: Transforming inputs into the final product form (requirements into an application)

Service: Providing service to enhance and maintain the product’s value

Margin

“…the difference between total value and collective cost of performing the value activities…”(Porter, Competitive Advantage, p. 38). 

Margin depends upon the efforts placed in the value chain that add value to a product over and above the costs incurred in the value activities. 

What Automation has to Do With The Value Chain

The good news for automation engineers, is that automation can be a crucial part of the value chain. For any task that can be automated effectively, the cost of that activity decreases significantly. For testing, as an example, instead of using three resources for a week to regression test your application, you can do it overnight, and view the results the next morning. Certainly, there are resources required to develop and maintain the regression testing suite, where the value obtained form those efforts starts small, but will increase over time. However, proper planning and execution can help ensure that value is delivered as quick as possible.

Additionally, automation is helpful in the detection, reporting, and verification of defects. A system defect drives down the “worthwhile-ness” of any product. Good automation efforts discover defects before your customers do, and can, if executed correctly, discover them before manual testing efforts. 

The important thing is to start thinking of any repeated task as something that can be automated. Not every repeatable task should be automated, so discernment is required in order to ensure that the right things are automated. But, progression of automation efforts has been shown to increase the value of the activities you perform in your software development life cycle.

As we continue this series, we’ll delve further into aspects of automation that help deliver value over its costs, how you can implement automation to achieve these goals, and what to look for in order to be successful with software automation.