- Posted by Gerhard Pramhas
- On 15. May 2018
The highest expenditure items in technology companies tend to be personnel costs (as in every other company), but a large proportion of budget needs to be invested in product development. On this subject, my customers often put this question to me: How can you save money in development work? Does it make any sense to save money in development? To answer this question for you, I would like to introduce a practical example to you.
Lighthouse project – Airbus A380
As an extreme example, let’s take the development of the A380 at Airbus. Wikipedia suggests that the development costs amounted to about EUR 12 billion. Is that a lot, or only a little? It is of course a great deal of money, but this figure in isolation does not paint the whole picture. The fact that a high proportion of that figure was financed by public sector funding is mentioned only in passing.
At the end of the day, the only decisive question is this: How much can Airbus earn with this product? Moreover, it is also legitimate for the company to consider that it is launching a ‘Lighthouse project’, one that, alongside product success can also deliver a high public profile for the company. What can be expected from this is that through the achieved public presence the other products can (once again) sell better. With Airbus, this is precisely what happened. Despite the fact that the A380 product has yet to achieve profitability, since its market launch, company profits have been rising.
‘Low-cost’ product development – a myth?
As a businessman, you will face the following questions time after time:
- How high will the development costs be for this planned project?
- How long will the development last?
- Will the new product be a success?
- By when will the development costs be amortised?
- When will the entire product enter the profit zone?
- How long is the product life cycle?
Finally, you will establish: It is all only about money. At which points can you tweak the structure to get the finance to make sense for you? That is an easy question to answer: On the development time. You are evidently prepared to finance a development department. Now it is all about efficiency. How good are your engineers? How quickly do you get your products to market? For how long do you need to provide front-end finance and for how long do your existing products need to carry your new development?
Support from external project management
With all of these questions, project management has a key supporting role to play. It determines the throughput times for product development, the actual development lead time and coordination of the team for suitable activities etc. What focus do you place on external project management or, to put it differently, what would make financial sense to you? EUR 50 000.- or EUR 100 000.-? Is that expensive?
Yes, it is expensive because these amounts must be pre-financed, as do the salaries of your engineers. If as a result you get to market three months sooner, and achieve EUR 3 000 000.- more by way of sales revenues, with an average profit margin of ten percent, is this external form of help still expensive?
That last question is one that only you can answer. If the answer is ‘no’, please contact me: By phone at +43 676 9560164 or send me an e-mail to email@example.com.