Why Software Platforms Make Sense in Risk Reduction in Software Development

Document type: Conference Papers
Peer reviewed: Yes
Author(s): Emil Numminen
Title: Why Software Platforms Make Sense in Risk Reduction in Software Development
Conference name: 4th European Conference on Information Mangement and Evaluation
Year: 2010
Pagination: 282-290
ISBN: 978-1-906638-72-6
Publisher: Academic Conferences Ltd
City: Lisboa
ISI number: 000284262400035
Organization: Blekinge Institute of Technology
Department: School of Management (Sektionen för management)
School of Management S- 371 79 Karlskrona
+46 455 38 50 00
Language: English
Abstract: Software development is generally characterized by risk and uncertainty. The uncertainty can be argued to be of two general types, either a technical uncertainty and/or a market uncertainty. From an economical stand point we view technical uncertainty as the cost uncertainty for developing the software whereas the market uncertainty is the uncertainty regarding the revenues later gained from the sales of the software. A great deal of research has focused on how to overcome these types of uncertainties by developing models for exploring them with the aim of increasing the ability to manage them. This research has shown that reuse of previous software functionalities in the form of software platforms or as components in software product line engineering can reduce the uncertainty of a software investment. Employment of these strategies can also be seen empirically by studying firms in the software industry. This paper adds to that research by developing an underlying model that explains why and how platform based developing strategies for software development reduce market uncertainty. The model also explains why certain types of software functionalities are better combined with other types of software functionalities into software platforms in order to reduce market uncertainty. The developed model is based upon portfolio theory which is a branch of financial economics that deals with uncertainty reduction in investments. The main part of the paper consists of numerical analysis to show why and how the platform strategy reduces the uncertainty in the software development without an equal reduction in the expected return of the investment in the software development. The analysis begins with a decision setting consisting of two types of software functionalities that can be developed. It is shown that different proportions of the two types of functionalities result in different risk and return profiles. It is also shown that the two functionalities should be developed as a platform instead of developing each functionality separately if the market uncertainty is to be reduced. The analysis is then extended and generalized into a decision setting consisting of several types of functionalities that can be developed and added to the platform. The analysis is concluded with a real option based discussion to explain why the market potential is increased with a platform based developing strategy. The paper ends with a discussion about managerial implications and suggestions for further research based on the presented results in this paper.
Subject: Business Administration\Management Control
Keywords: Software platform, uncertainty reduction, portfolio theory, software development, real options