Apr 022012

Hello Product Cost Management Aficionados!

I just read a great post by Jim Brown over at Tech Clarity called “Software Intensive Product Survey says More Software in Products means More Problems.”  It heralds another of Jim’s excellent research reports.   This one discusses the role of software in products.  As we all know, electronics (and now software) are making up an increasingly large amount of product cost… and an even larger amount of R&D costs.   I was interested, so I read the full report called Developing Software-Intensive Products: Addressing the Innovation-Complexity Conundrum.

Software Costs More in R&D Costs

What I found really interesting was Figure 5 in Jim’s report which shows the “Negative Business Impacts of Developing Software Intensive Products”.   And, of course what jumped out at me was, you guessed it, COST.  The report shows that 48% of companies integrating more software in products, found that software INCREASES overall Product Development (R&D) costs.   How prevalent is software becoming?  According to page 4 of the report:

“Some people say 60% of innovation in a car is software and others say 90%,.  I am not sure which is true, but it is a high percentage.” — Andre Radon, VP IT Competence Center Engineering Applications, Continental

This made my head bob up and down while laughing.  I was working in product development Ford Motor Company in the late 1990’s and did a rotation in Explorer Calibration.   Ford calls the writing of software “strategy” and the specification of the numbers in the data tables that the software uses “Calibration.”  I am not sure why we didn’t just call it “logic/code” and “data.”  At the time, the Calibrators were setting around 13,000! data points to control the engine computer.  I wonder if it’s double that or more now?    The thing that I remember regarding product software at Ford (both in Calibration and my other assignments) was the question:

“Can we calibrate around that?” — John Q PD Manager, Automotive OEM

Translation:  “Can we write SOFTWARE or change the data tables to get around the problem that we are seeing in analysis or testing, rather than adding or changing HARDWARE?”   This was the default first question to EVERY problem, especially in NVH (noise vibration and harshness).  But, according to Jim’s paper (with which I wholeheartedly agree), software INCREASES product development cost.  So why would Ford managers prudently ask the question above?  That’s simple; it’s because…

Hardware Costs MORE Than Software

How can I know that?  Well, if we look at a Ward’s Auto Report and Ford’s Annual Report, as a % of Automotive Sales in 2009:

COGS vs. RnD and Engineering Focus in Product Cost Management Hiller Associates

Click to share! Product Cost vs. R&D Cost and the Focus on Each

  • 4.7% of Sales spent on R&D
  •  95.2% of Sales Spent on COGS (Cost of Goods Sold, which is ~= to Product Cost)

Product cost is over 20x more important to Ford than R&D cost!

So why didn’t the managers answering Jim’s survey think about the effect of software on Product Cost, not just R&D cost?  To be fair, Jim did call this out on page 6, saying that companies increase software to “Reduce product Cost.”  However, on the next page, there is a chart with the top eight reasons that companies use software in products. (I reproduced that data here for your viewing to highlight)  NONE of the catagories say Product Cost, although Jim shrewdly points out that “Enable Platform Design” and “Improve Re-use of Mechanical/Electrical Components” (reasons 6 and 8 respectively) theoretically “can reduce [product] cost.”    I agree, but it’s not a direct correlation and these things, which are often are done for other reasons, and Product Cost.  The telling thing to me is that “Reduce Product Cost” was not explicitly called out in ANY of the top eight reasons.
Product Strategies Driving Software in Product Cost Management Hiller Associates

Click to Share! Prod Strategies Driving Software in Products

I would have like to seen an investigation of this relation between:

  1. Software intensity in a product
  2. R&D cost
  3. Product Cost
I think it would have been very interesting to see a couple questions about the how software drives down product.  Or, is it that at the end of the day, most engineering teams use software in lieu of hardware for other non-product cost reasons… or maybe that they don’t really perceive a strong relation between the use of software in products and the reduction of product cost?  But, we did at Ford, right?
I don’t know, but I look forward to Jim’s next report!


  4 Responses to “Pennies vs. Pounds (Software drives R&D cost… what about Product Cost)”

  1. Is Jim’s report industry specific or is he make broad stoke generalizations? Not having read the referenced article, could you be comparing apples to oranges, or bananas to roller skates?

    • I’ll leave it to you to read Jim’s study, but this is not his opinion (personally, necessarily). He is only interpreting the data that he received in the survey from whence the report arose. Jim had 100 respondents and says in the detailed demographic data at the end “The responding companies …including High-tech and Electronics (25%), Automotive (20%), Life Sciences (20%), Aerospace and Defense (19%), Machinery and Industrial (19%), Consumer Products (11%), and others including federal government. Note that these numbers add up to greater than 100% because some companies indicated that they are active in more than one industry.” So, yes he is comparing many industries, but it is still interesting data.

      But, to your point about product cost exceeding the cost of software R&D, that’s what I am saying, as well. Jim does not claim the opposite; he simply just didn’t ask the questions in the survey that would allow us to compare the two.

      I would conjecture that people are obsessed with R&D costs, because they see them (1) upfront (2) immediately and (3) VPs and Managers have targets on headcount and R&D spend to which their bosses sadly hold them more accountable than they do to a product cost target.


  2. MODERATOR — posting this comment from Linked-in which did not post back:
    Original Discussion here: http://www.linkedin.com/groupItem?view=&gid=2263672&type=member&item=105003128&commentID=76196754&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_76196754

    RON FERRO • Companies where I have worked, R&D did not come under the control of local administration, but had different reporting than Operation. Their budgets went through a different review than the other business units, and based on long and short-term product development and innovations. Those what were part of the revenue stream again where treaded separate for the “bread-and-butter” product. This structure takes the burden off Operational management, whose focus remain with gaining market share, and reducing product and fixed cost.

  3. @Ron – That does seem like a better way to do it. I am saying R&D generically, so you still have the problem of the cost of the projects to engineer the “bread-and-butter” product, as you say above. I wonder if this starts to bleed over into our discussion on the we are having on another post regarding the Average Lifetime cost of a product??


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