Peter Drucker on Software Management

📖 2 minute read

Well, Peter Drucker didn't write about software management, but he did write about management. In his book Managing in a Time of Great Change he has a chapter called The Five Deadly Business Sins. Here is what Drucker has to say:

The third deadly sin is cost-driven pricing. The only thing that works is price-driven costing. Most American and practically all European companies arrive at their prices by adding up costs and then putting a profit margin on the top.

The only sound way to price is to start out with what the market is willing to pay—and thus, it must be assumed, what the competition will charge—and design to that price specification.

Peter Drucker

How does this apply to software development? Here is how I see the two scenarios in the world of software development:

Cost-Driven Pricing: A Tough Sell

In this scenario the Customer comes with the software product requirements (not quite complete, since they never are). Next the software team goes ahead and figures out how long it is going to take to build it, and tells the Customer what the expected end-date is, thus arriving at a "cost." The Customer is almost always unhappy with the end-date that the team provides. The Customer is also unhappy with the delivered product, since the software team usually does not manage the scope at a fine-grained level. The team thinks that they know what they need to build, and proceed on building it.

Price-Driven Costing: Problem Solving with Constraints

In this scenario the Customer comes with the requirements (never complete), and a target end date in mind: an end-date that fits into the business scenario that they intend to play out. It is now up to the software team to:

  1. Figure out how the product can be built under the given constraints of date and cost, and
  2. Figure out how to "slice & dice" the requirements to meet the Customer's goals.

The software team must deliver to and negotiate with the Customer regularly. To deliver the project the team have to bring their ingenuity to solve the problem.

The Bottom Line: Negotiate with the Customer

Price-Driven Costing applies to the way software teams work. It means that we need to work back from the price or date that the Customer is willing to accept, and then figure out how to deliver the project on that date with that cost. Accepting that delivering successful projects entails a constant negotiation with the customer is quite foreign to many teams. Once they accept this they will deliver successful projects to happy Customers.