Correlation of High Development Costs with Under-Resourced Sales and Marketing

I was recently invited to sit down with a senior executive stakeholder of a business I consult for to discuss, among other things, the high productivity one of the product-development teams I’m leading has achieved. I explained the process that we have collaboratively undertaken to recognize the productivity gains (see the post Everything as a Contract for more details on this process).

During the conversation, the senior executive, like any good executive is wont to do, challenged me by mentioning that my team has some of the highest development costs per revenue dollar than any other team supporting the various other businesses in our portfolio.

In the moment, I accepted this news as an evident truth that did not require deeper investigation. Some of this has to do with the career longevity of most of the developers on the team, many of whom have been in their position for more than 5 years. However, as with most “facts”, I realized that this statement was likely misleading, and I found myself intently thinking about the problem later that evening.

Revenue equals profits minus losses. Development costs* fall under the “losses” category of this equation. The work that developers complete would ideally translate directly to profits, however, as product managers, we know that a large portion of development is inevitably focused on reducing technical debt - inefficiencies in either compute costs for running code or operational processes (human or otherwise) that support the business in some way. Reduction of technical debt typically falls under a larger class of work known as Keep the Lights On, or KTLO. Another way to express this idea is that capital is being spent on reducing the cost of future capital.

Generally speaking, the possibility of making a dollar in the future is worth less than a dollar currently in-hand. Therefore, the benefit of completing KTLO work will be less than, say, introducing a new feature or service to market that generates dollars today. In many cases, product-development teams are incentivized to complete KTLO work over introducing net-new services due to the lower risk profile associated with projects that reduce operational costs. The lower the risk, the lower the reward. It should also be noted that, as development team efficiency increases, so will the short-term relative cost of development due to higher number of hours billed back to the business from the increased effort (higher number of story points completed). This higher cost has a ceiling, simply because there are only so many people-hours in a given week. The same reasons govern why an individual can’t scale a business past a certain point.

In part because of the perceived high relative cost of development for our team, executive stakeholders for our team have looked at alternative ways to reduce costs, namely by reducing sales and marketing resources contributing to the business that we support. This approach unfortunately creates a value trap, a low price to earnings ratio with low growth potential, that prevents further expansion of the business due to perceived ballooning costs that, in actuality, have a ceiling.

The better solution to this problem is somewhat counterintuitive. Increase investing in marketing and sales while simultaneously facilitating automation of commercialization strategies where possible to help tame operational expenditures. This approach will increase the pool of qualified customers in marketing and sales pipelines, thereby increasing the likelihood of recognizing revenue in the short term. Increasing short-term revenue while keeping costs roughly the same will ultimately result in higher profits.

*Footnote: consideration of costs in this example is occurring in a vacuum and does not account for other things that impact costs, such as depreciation, amortization, and other related expenses.