software development companies frequently have a problem 542839

Role of Cost Information in Software Development

Software development companies frequently have a problem: When is “good enough” good enough? How many hours should be devoted to developing a new product? The industry’s rule of thumb is that developing and shipping new software takes six to nine months. To be the first to market, a company must develop and ship products much more quickly than the industry norm. One performance measure that is used to answer the “good enough” question is a calculation based on the economic value (not cost) of what a company’s developers create. The computation takes the estimated current market valuation of a firm and divides it by the number of product developers in the firm, to arrive at the market value created per developer. Some companies refine this calculation further to determine the value that each developer creates per workday. One company has estimated this value to be $10,000. Thus, for one software development company, “good enough” focuses on whether a new product’s potential justifies an investment of time by someone who is worth $10,000 per day.

The salary cost of the company’s developers is not used in the “good enough” calculation. Why is that cost not relevant?