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Ask HN: How do custom software dev firms make money?

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Re: Ask HN: How do custom software dev firms make money?

#61

Post by Silhouette »

daniellarusso wrote: post #42
g00gler wrote: post #26

Earlier quoted context omitted.

That’s really interesting. I’m coming at this from 2 angles —- I run a small “shop”, me and 1 or 2 other guys part time; I also work for a company who has contracted an agency for creating a design system for us. Do you estimate there will be X hours of bug fixing and add that to the price of billable hours? How do you take into account client requests after a billing period is complete or during a billing period? IM…

I have done this both ways. The most success I have had with per project pricing is having a discovery phase to actually scope out the work. There is a decent amount of up-front work, but it really ensures everyone is on the same page. This is usually a series of 4 meetings, anywhere from 30 minutes to an hour. From there, I can write a spec/contract, I present that, which is another meeting (I don’t just email it).…

The most success I have had with per project pricing is having a discovery phase to actually scope out the work.

I concur. Also, the discovery phase itself can be flexible on time allotted and billed in time increments, even if the main project won't be. You might well not know up-front whether you need a day, a week or a month to pin down the spec and all the other details, so a self-contained "getting to know you" phase before anyone makes big commitments has a lot of upsides for all parties.

Also, regarding the problem of vague requirements and differing interpretations, getting a complete set of acceptance tests agreed early-on has a lot of upsides for both parties too.

Re: Ask HN: How do custom software dev firms make money?

#62

Post by Radim »

gadders wrote: post #27
user5994461 wrote: post #7

1) Clients come to you because they have a painpoint and they wand to build something to help it. 2) You discuss with the clients what's their needs. 3) Figure out what you can do and agree with the client on the billing/project. (how many people? of what skills? how long? what to build? for how much?) 4) Do the work. Projects could be anywhere from weeks to years. 5) Long time goes bye. 6) Done. There's two ways to…

There is also value-based billing. A lot of people talk about it, but never seen in the wild. EG A business has a manual process that costs them £2m/year to run. Instead of calculating how long it would take you fix, you price based on what it is worth to the business to fix the issue (obviously this needs to be larger than what you would charge on a time and materials basis). Brennan Dunn was a big advocate of this,…

1) Are you doing something innovative? By definition there's no clear value to baseline against. Clients don't know what's even possible, much less how much $$$ it might bring them. So the value in "value-based" is correlated with some internal strategy / personal / brand politics. Good luck quantifying that as an external SW dev firm.

2) Doing something run-of-the-mill? Improving a process that's already in place? The client may have an idea about its ultimate specs & ROI. Even if they're able to articulate those to you – why would they?

In practice, value-based pricing comes down to "charge as much as they're willing to pay". Which is fine, that's the essence of sales. But more to do with social skills & play-it-by-ear, rather than some objective numbers you might hope to extract from a client.

Re: Ask HN: How do custom software dev firms make money?

#63

Post by larrik »

Cancan82 wrote: post #50
chairmanwow1 wrote: post #37

>> “Hey HN, I'm working on a project for school and need to learn a bit more about the revenue model of custom software dev firms.” I used this trick A LOT in college to get secrets from companies. My friends and I would call some people and tell them we were trying to understand something for a report. It was amazing how much secret information people were willing to share. One of the most powerful assets you have a…

This is 100% true. Almost everyone loves the interested student, but the moment you get a work email address the cold phone calls and emails receive less warm receptions. Take advantage of it while you can.

Mostly because salespeople will use the same tricks to sell you stuff after you open up.

Re: Ask HN: How do custom software dev firms make money?

#64

Post by Silhouette »

user5994461 wrote: post #16
Aaargh20318 wrote: post #10

Earlier quoted context omitted.

A third option is to bill per sprint. You define the goals for a single sprint, which should be relatively easy (compared to defining the entire project) and bill when the sprint is completed. The advantage is that you have clearly defined goals, but the client can still change direction of they need to (by adjusting the next sprint).

Arf I didn't cover "when" the client is billed. For short projects (weeks), usually a percentage before and a percentage afterwards, maybe a percentage in the middle. It's all negotiable, welcome to consulting! For long projects (years), you will need to agree on a billing schedule from the moment you draft and sign the contract up to the delivery. There should be periodic billings and milestones. Definitely do not w…

Long story short you always end up billing by time, except for some short specialized work you're very confident you can handle.

Or the other end of the spectrum, where you're talking about year-plus projects with year-plus-sized price tags, and it may be worth the overheads for both sides to agree a starting spec, timescales and milestones up-front. You do need to make sure you also have a clear change management process in place, including a shared understanding that any changes are subject to approval by the developer and will increase the bill and timescales.

Re: Ask HN: How do custom software dev firms make money?

#65

Post by larrik »

robocat wrote: post #51
jvilalta wrote: post #8

I'll add one more that I have run across. It's a revenue/savings share agreement, where the company writing the software gets an X% of the revenue (or savings) generated by the project.

I saw a small company do all their work this way, where their pitch was more a marketing company with software skills. Projects were successful, but it folded a few years later due to other reasons. One problem is that clients hate it, even when success was very measurable. I suspect due to our natural tendency for zero-sum thinking. Note that usually the projects were limited to ones where there was a directly measu…

My theory:

1) They generally don't make enough profit to save up and then cover the investment period of developing new unproven software (which can be years).

2) If it's too similar to work they've done, former customers may be able to claim some ownership and eliminate the profit.

3) If it's too dissimilar to work they've done, then it's just a shitty startup with no funding.

4) Even if all that worked out, it's wildly impractical to work on client projects and your own projects with the same staff at the same time. So you either need to do one or the other.

Re: Ask HN: How do custom software dev firms make money?

#66

Post by tootie »

user5994461 wrote: post #31
g00gler wrote: post #26

Earlier quoted context omitted.

That’s really interesting. I’m coming at this from 2 angles —- I run a small “shop”, me and 1 or 2 other guys part time; I also work for a company who has contracted an agency for creating a design system for us. Do you estimate there will be X hours of bug fixing and add that to the price of billable hours? How do you take into account client requests after a billing period is complete or during a billing period? IM…

I think you need to think hard what is a bug. Need to update the URL to the outlook API because microsoft is changing it every now and then? Need to send a new icon/logo because reasons and the client doesn't know how to update an icon himself? These are dumb things that can be easily sorted out. On the other hand it's super risky because you don't control the environment of the client (dude can't open a firewall por…

I put defect severity definitions right in the contract. Critical, major, minor, cosmetic. Then put like a 24-hour SLA on critical and major only. Maybe 2 business days on a minor or cosmetic. And a max of 30 days post delivery after which we require a change order to address further issues.

Re: Ask HN: How do custom software dev firms make money?

#67

Post by edanm »

gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

I also founded, grew and sold a boutique software services co., and am now running a new one.

I agree with all of the above.

The only major note I'd add is: some of the above really depends on who your clients are.

For example, we work with mostly technical customers, taking on things that are not their core strength. But only customers who already have internal dev teams. The way we phrase is internally is "we want our deliverable to be a git repo, and only work with clients who know what to do with that".

This implies a bunch of stuff - for example, ongoing server maintenance etc. is seldom a problem, since our clients already have their own devops teams.

Other dev shops can target the other way - non technical clients, for whom the dev shop becomes their entire technical staff. Those contracts are often quite different, and just to continue with the example above, often will include some kind of ongoing devops work (which may be more of a profit generator than the actual project itself!).

Re: Ask HN: How do custom software dev firms make money?

#68

Post by edanm »

I highly recommend you look into the field called "Professional Services". A custom software dev firm is one example of a professional services firm, but far from the only one. Another common example is a Legal firm.

There's a lot of theory about professional services, and almost all of it applies to software dev firms.

Re: Ask HN: How do custom software dev firms make money?

#69

Post by mooreds »

gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

> Ongoing maintenance revenue - maybe, maybe not. Wise customers will want to learn how to maintain their own software and include training as part of the contract - or even embed their resources in the team. This isn't quite like sales of a big enterprise software platform in that regard.

I've seen several services businesses seek scalable, recurring revenue. Depending on what you deliver, hosting is a great one, as long as you have employees with the skillset and willing to have a pager.

Productized consulting is one I've read about but not yet seen delivered.

Re: Ask HN: How do custom software dev firms make money?

#70

Post by femto113 »

In my experience maintenance is included only reluctantly. Much like any contract organization the owners of the companies make all their money on the margin between what they charge the customer and what they pay their laborers. For the laborers the upside tends to be high paying but comparatively short duration jobs within their chosen specialty. In my firm that largely sorts out to people between "permanent" positions or those who are semi-retired and don't want to work year round. On both sides of this equation you have people who generally prefer concentrated development (say a team of 3-5 people working 40-50 hour weeks for 6 months) than a longer duration but less intense maintenance effort (1-2 people working 10 hours a week for years).
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