During the past 30 years the world went through a very dynamic technological transformation. In retrospective, it can be stated without exaggeration that the emergence of electronic devices and the Internet have greatly impacted daily life as well as managerial practice to an unforeseen extent. The computerization of multiple business processes and the creation of large scale databases, among many other radical technological advances, have lead to enormous cost savings and quality improvements over the years. The interconnection of financial markets through electronic means and the worldwide adoption of the Internet have greatly reduced transaction and communication costs and brought nations and cultures closer to one another than ever imaginable. Computers are now fundamental tools in almost all businesses around the world and their application and adaptation to specific business problems in the form of software development is a practice that many companies perform on their own. In the past, such computerization and automation efforts were very costly and therefore only practiced by large corporations. Over the years, however, the software industry emerged to offer off-the-shelf solutions and services to smaller companies. Today, having survived the massive dotcom crash of the year 2000, software development businesses established themselves as strong players in the technology industry.

The emergence of numerous computer standards and technologies has created many challenges and opportunities. One of the main opportunities provided by the software sector is relatively low entry barrier. Since the software business is not capital intensive, successful market entry largely depends on know-how and specific industry domain knowledge. Entrepreneurs with the right skills can relatively easily compete with large corporations and thereby pose a considerable threat to other, much larger organizations. Companies, on the other hand, need to find ways to reduce turnover and protect their intellectual property; hence, the strong knowledge dependence combined with the relatively short lifespan of computer technologies makes knowledge workers very important to the organization. Knowledge workers in this industry therefore enjoy stronger bargaining power and require a different management style and work environment than in other sectors, especially those industries that have higher market entry capital requirements. This relatively strong position of software personnel challenges human resource strategies in organizations and it also raises concerns about the protection of intellectual property.

The relatively young industry is blessed with sheer endless new opportunities, such as the ability of companies to cooperate with other organizations around the globe without interruption and incur practically no communication costs. In addition, no import tariffs exist making the transfer of software across borders very efficient; however, the industry with its craft-like professions suffers from lack of standards and quality problems. The successful management of such dynamic organizations challenges today’s managers as well as contemporary management science because traditional management styles, such as Weberian bureaucracies, seem to be unable to cope with unstable environments.

Challenges in the Software Industry

Many studies indicate that present-day software development practices are highly inefficient and wasteful (Flitman, 2003). On average, projects are only 62% efficient, which translates to a waste of 37 %. The typical software development project has the following distribution of work effort: 12% planning, 10% specification, 42% quality control, 17% implementation, and 19% software building (2003). There are many possible interpretations of the nature of this distribution of resources. First, the extraordinarily high share of 42% for quality control purposes can indicate a lack of standards and standardized work practices. This large waste of effort may also be the result of inefficient planning and specification processes. Because the share of 19% for software building is a function of software complexity, hardware, and tools used, there is a chance to reduce it by carefully managing and standardizing internal work processes. The disappointing share of only 17% for implementation, however, should be alarming to business owners, since implementation activities are the main activity that results in revenue. The relatively low productivity level reported by Flitman (2003) seems to be also reflected in the fact that the average U.S. programmer produces approximately 7,700 lines of code per year, which translates to just 33 per workday (Slavova, 2000). Considering that a large software project, such as Microsoft Word, is reported by Microsoft to require 2 to 3 million lines of code, it becomes obvious how costly such projects can become and that productivity and quality management are major concerns to today’s software businesses. The challenge for contemporary software managers is to find the root of the productivity problem and a remedy in the form of a management practice.

A plethora of recent studies addresses software development productivity and quality concerns. Elliott, Dawson, and Edwards (2007) conclude that there is a lack of quality skills in current organizations. Furthermore, the researchers put partial blame on prevailing organizational cultures, which can lead to counterproductive work habits. Of the main problems identified, project documentation was found to be lacking because documents are deficient in detail and not updated frequent enough. Quality control in the form of software testing is not practiced as often and there seems to be a lack of quality assurance processes to ensure that software is built with quality in mind from the beginning. Organizational culture was found to be deficient in companies were workers tend to avoid confrontation and therefore avoid product tests altogether (2007).

Since knowledge workers are the main drive in software organizations, creating a fruitful and efficient organizational culture constitutes a main challenge to today’s managers. The relationship between organizational culture and quality and productivity in software businesses was recently investigated by Mathew (2007). Software organizations tend to be people-centered and their dependency on knowledge workers is also reflected by the enormous spending remuneration and benefits of more than 50% of revenue. As the industry matures and grows further, the challenge to organizations is that larger number of employees need to be managed which brings culture to the focus of management. Mathew (2007) found that the most important influence on productivity was achieved by creating an environment of mutual trust. Higher levels of trust lead to greater employee autonomy and empowerment, which strengthened the existing management view that trust and organizational effectiveness are highly related. Those companies with higher trust and empowerment levels benefitted from more intensive employee involvement and thereby achieved better quality products (2007).

Product quality, however, depends on other factors as well that reach beyond the discussion of work processes. Relatively high employee turnover was found to have a detrimental effect on product quality and organizational culture (Hamid & Tarek, 1992). Constant turnover and succession increase project completion costs, cause considerable delays, and expose organization to higher risks because their development processes can be severely disrupted. While human resources strategies should help find ways to retain key personnel in the company, organizations need to nevertheless be prepared for turnovers and minimize their risks. One of the greatest risks for people-centered, knowledge worker organizations is the loss of knowledge when employees leave.

Knowledge management has evolved into a relatively new discipline in the last two decades but is mostly practiced by large, global organizations only (Mehta, 2008). As corporations realized the importance of knowledge management activities to mitigate the risk of know-how loss within their organizations, they started employing chief knowledge officers and crews with the goal of collecting and organizing information. By building custom knowledge management platforms, companies can benefit from increased transfer, storage, and availability of critical business information. Such activities can help companies innovate and build knowledge capital over time (2008). The challenge remains, however, to set up such systems and to elicit employee support for knowledge management systems. In addition, these systems leave another critical question open. What happens when top performers take all the knowledge with them when they leave?

Another crucial variable affecting software product and service quality is top management involvement. Projects in the software industry commonly fail due to one or a combination of the following three major causes: poor project planning, a weak business case, and lack of top management support and involvement (Zwikael, 2008). Software projects are similar to projects in other industries by focusing on timely project completion, budget, and compliance to specifications, the industry requires specific support processes from top management to facilitate projects. These processes are summarized in Table 1. Key support processes, such as the appropriate assignment of project managers and the existence of project success measurement, indicate that successful companies demonstrate a higher level of project progress control than others; however, Zwikael acknowledges that top managers rarely focus on these key processes and instead prefer to deal with those processes that are easier for them to work on personally.

Table 1

The ten most critical top management support processes in the software sector (Zwikael, 2008). Those processes marked with an asterisk (*) were found to be the most important.

Support Process

Appropriate project manager assignment *

Refreshing project procedures

Involvement of the project manager during initiation stage

Communication between the project manager and the organization *

Existence of project success measurement *

Supportive project organizational structure

Existence of interactive interdepartmental project groups *

Organizational projects resource planning

Project management office involvement

Use of standard project management software *

Opportunities in the Software Industry

The advent of low cost communication via the Internet and the diversification of the software industry into many different branches brought a multitude of new market opportunities. Some of the main opportunities are rooted in the low costs of communication, while others originated from the possibility of geographic diversification and international collaboration.

One major opportunity which especially larger organizations seek to seize is geographic diversification in the form of globally distributed software development. Kotlarsky, Oshri, van Hillegersberg, and Kumar (2007) have researched this source of opportunities that is mainly practiced by multinational companies; however, an increasing number of small companies is also reported to be benefitting from dispersed software development across national boundaries. The study revealed that software companies can achieve significantly higher levels of productivity by creating reusable software components and reducing task interdependencies. By reducing interdependence, the produced modules are more likely to become useful in future projects on their own; furthermore, this reduction of intertwined computer code also has a positive effect on project teams. Teams in companies that globally distribute their developments benefit from increased autonomy and reduced communication requirements. The authors point out, however, that the prerequisites to distributing software development are not only good project planning but also the standardization of tools and development procedures. Without such prearrangements it may become almost impossible to manage and consolidate the various distributed team activities (2007). Especially for teams working across countries away from one another, it may pay off to deploy video or other Internet-based conferencing technologies and exploit huge savings potentials. But are these means of communication effective?

In the last decade a new form of organization has emerged that has taken the most advantage of the Internet. Virtual organizations exist entirely in cyberspace and their team members communicate mostly, if not exclusively, via the Internet using webcams and messaging software. The challenge for managers in virtual organizations is to exploit the new technology but also to find ways to motivate and direct the workforce and work processes. A study by Andres (2002) compared virtual software development teams with face-to-face teams and identified several challenges and opportunities for virtual managers. Managing work from a different time zone can be problematic due to the lack of physical presence. Communication will need to be asynchronous or can only occur at work hours that overlap in both time zones. Virtual teams facilitate this process by using email and voice/text messaging but more importantly by reducing the interdependency of tasks. Andres (2002) suggested that these types of communication have lower “social presence” meaning that humans have a need and ability to feel the presence of others in the group. The problem with many computerized communication channels is that visual clues, utterances, body language clues and clues from the person’s voice are missing. When placed on a social presence continuum, the various communication types rank as follows from the lowest to the highest: email, phone, video conferencing, and face-to-face meetings. Andres’ comparison between development teams using video-conferencing versus face-to-face meetings revealed that the latter group was far more efficient and productive, even though the video-conferencing team benefitted from reduced travel costs and time.

The study conducted in 2002, however, has several shortcomings. First, it is already seven years old and Internet costs have dropped and speeds have improved significantly since then. Considering the improvements in video quality and availability and computer speeds, this form of communication became more feasible recently. In addition, today’s managers are just now starting to learn how to use these means of communication efficiently. For example, even though email technology has been around for two decades now, many managers still find that emails can create a lot of ambiguity. The challenge to future generations of managers will be to change their writing style to match the limitations of email and other text messaging technologies. Another important factor to consider is that written communication may be stored indefinitely and have legal consequences; hence, more often than not, managers may intentionally prefer to avoid such communication channels for political or legal reasons. The study by Andres (2002), however, resulted in a negative view of video conferencing probably because the technology was not yet matured and the team members were not yet comfortable with it.

For video conferencing to work well, all participants need to be knowledgeable of the peculiar characteristics of that technology and adjust their communication style and speech accordingly. Regardless of meeting type, another important factor is preparation. What could be researched in conjunction with Andres’ study in the future is the degree of preparation of the group. Do team members invest enough time in preparing questions and answers for their teammates before coming to the meeting? Video conferences may require more preparation than face-to-face meetings in some circumstances.

Another opportunity for software businesses and challenge for managers worldwide is outsourcing. In the year 2007, $70 billion were spent globally for outsourced software development (Scott, 2007). Given the extreme shortage of IT skills in the U.S. and Europe, many companies take advantage of globalization by choosing international suppliers for their software development tasks. Outsourcing, however, requires elaborate coordination between the organization and its many supplier groups. The idea is that in total, coordination costs and problems are less costly than in-house development; however, this goal is not always achieved. While outsourcing, when it is deployed and coordinated correctly, can result in 24 hour development worldwide and thereby provide continuous services to the organization around the clock, it may result in the loss of intellectual property. While mechanic parts are patentable in most countries that support intellectual property rights, software is not patentable in most countries outside North America.

In addition to the challenge of managing outsourcing, software organizations exploit technologies in various ways to save costs, for example by offering remote access, telecommuting, and service-oriented architectures (SOA) (Scott, 2007). Remote access and telecommuting has increased six-fold between 1997 and 2005 and resulted in $300 million annual savings due to a reduction of office space (2007). SOA is a similar concept and involves a software rental for customers. Instead of buying, installing, and maintaining software and servers, customers can rent a service online and reduce the total cost of ownership because these activities are no longer required on the customer side. Gradually the virtualization of the software business opens new horizons and provides further opportunities but it also presents managers with endless challenges.

Some of the strengths and weaknesses of offshore and virtual team development were studied by Slavova (2000). In the year 2000, India and Ireland were the largest offshore software development locations. Offshore companies can offer up to 60% cost reduction, a faster completion of development tasks by distributing them around the globe, and specific domain knowledge which they acquired over the years providing similar services to other customers. The integration of work from external sources, however, constitutes a major hurdle. Furthermore, language and cultural issues can cause serious communication problems that put the project at risk, especially when misunderstandings cause misinterpretations of project specification documents. Slavova (2000) found that the most common remedy and strategy avoiding problems with offshore suppliers is to visit them frequently face-to-face; however, this tactic results in higher travel costs and disruptions of the managers’ workflows and hence may offset the benefits gained for outsourcing altogether. Managers in the software business need therefore to balance the risks and opportunity potentials before engaging in outsourcing because for many companies this strategy failed to pay off in the end.

A huge opportunity that emerged in the last decade is online innovation. The collective innovation effort of many individuals and companies is generally known as open-source on the Internet and it has lead to many advances in the computer technology, such as the free Linux operating system. At first businesses felt threatened by this wave of developments on the market because the businesses perceived that open-source solutions were in competition with their products. In many cases this was and still is in fact true; however, a couple of companies, including IBM, are exploiting this new way of innovation for their own and for a common benefit (Vujovic & Ulhøi, 2008). Because software companies operate in an increasingly instable environment, they struggle to create continuously new and better products. By exposing the computer code to the public on the Internet, companies can benefit from ideas submitted by the public, especially other companies. Furthermore, companies benefit from free bug finding and testing by external users but one of the primary reasons for “going open-source” is the quick adoption and spread of the company’s technology at a relatively little or no cost. The spread of IBM’s open-source technology, for example, is also free marketing for the company. But how can companies make money by offering something for free?

The closed innovation model (the traditional model of providing software without revealing the software code) can be combined with open-source, so the company can charge for the product. In other cases, the company can reveal the technological platform on the Internet for free and then sell specialized tools which utilize the new platform. The big money savers are obviously the shared development, testing, and maintenance costs since many interested parties work on the same project.

The knowledge-sharing model of open-source is nothing new, however. The philosophy and the benefits of open innovation models have been already realized in the third quarter of the nineteenth century. Back then, open innovation was practiced in the UK iron and

US steel industry. The cooperation of many industry players ended the domination of proprietary technologies for which costly royalties were due (Vujovic & Ulhøi, 2008). Given the dynamic environment of the IT industry and the short lifespan of computer technologies, the adoption of open innovation models gained much more popularity. By analyzing the largest open-source players in the market, Vujovic and Ulhøi put together a list of supportive strategies, which is shown in Table 2. Several of these strategies are quite relevant from a top management perspective as well, such as deploying open-source to block a competitor and using the open model as a gateway for greater market share.

Table 2

Strategies for adopting the open-source approach (Vujovic & Ulhøi, 2008).

Business Strategy

Obtaining higher market share

Obtaining market power

Better adoption of a product and thereby establishing standards

Shifting competitive advantage to another architectural layer

Making the product more ubiquitous

Delivering faster time-to-market

Spurring innovation

Complementing a revenue core stream

Blocking a competitor

Conclusion

Reviewing the rather recent emergence of the IT industry and the software industry in particular, several parallels can be drawn to management history. While Taylor’s scientific management was a highlight in the evolution of management science (Wren, 2005), the software industry seems to be lagging behind such great advancement. Due to its high level of complexity, the software development discipline is still plagued with quality problems stemming from a lack of standardization. Similar to Taylor’s efforts, managers need to analyze software development processes and develop industry-wide standards and measures. Once such measures and procedures exist, this will help make software projects much more predictable.

Much of today’s software industry practices would have been a déjà vu for Taylor, if he was still alive. In addition, the anomie and social disorganization concerns during the social person era apply today more dramatically than in the past. Mayo described in the 1940s how managers overemphasized on technical problems in the hope of raising efficiency ignoring the human social element (p. 296). The same situation is now evident to a larger degree in the computer industry. The rapid technological advances have created many opportunities and changed the work environment drastically. At the same time, however, management was unable to prepare for these dramatic shifts technology would bring to the workplace. At best, managers are simply reacting to technological advances because the consequences are mostly unpredictable given the complexity of human nature. For example, email brought several benefits such as low cost and simple asynchronous communication; however, many email messages are misunderstood because they are not written appropriately. Moreover, IT knowledge workers are struggling to keep up with the vast number of messages received per day as they constitute a severe disruption of the daily workflow.

As knowledge workers are becoming more and more essential to an organization’s survival and as organizations in this industry mature and require greater headcounts, the span of control is becoming an issue for managers to handle correctly. As discussed in Wren (2005), as the team size increases, the number of interrelations to be managed rises astronomically (p. 353). Managing larger teams poses a great problem because the sheer number of interrelations makes it also more difficult to develop trust within the team. Motivating large groups of knowledge workers can hence be tricky, especially because creative tasks can require a large degree of collaboration. Work design is hence a major hurdle for future managers to overcome. Much emphasis has been on hygiene factors and not on motivators of the workforce. Flexible hours, telecommuting, empowerment, and increased responsibility may help in the short-term but for the long-term management will need to find new strategies for retaining knowledge workers.

Product quality remains a big issue. Deming’s ideas are good but quality assurance in the software world is difficult to implement due to the lack of standards and measures. The open-source innovation model may provide some relief in this respect because the greater involvement of external developers can help improve overall quality. On the other hand, however, open-source projects are hard to manage for the same reason. Since open-source projects are self-directed and not owned by anyone in particular, those projects sometimes suffer from uncontrolled, tumorlike growth.

Several of Deming’s deadly sins (Wren, 2005, p. 463) apply directly to the software industry. Most products are made from scratch rather than from components and there is little standardization in software organizations. Since software developers have a tendency to see their job as a craft they defy standards and procedures. In addition, the rather complex environment with its dynamic requirements and the push for meeting deadlines make it easy for practitioners to lose sight of quality improvements through the preparation of organizational standards. High turnover and individual performance measures continue to be industry practice, even though many scientists, such as Deming, have argued for long that such measures are counterproductive.

Future managers need to find ways to compensate for the high turnover, if they cannot find a way to avoid it. The division of labor might work well for the company but it is not well perceived by the workforce which tends to require constant challenge. Top performers disfavor mundane tasks and prefer to walk away with all their knowledge. IBM has successfully deployed job enlargement for some time to combat this phenomenon (Wren, 2005, p.332). Unfortunately, this strategy might not work for every company and it can only be used within certain boundaries of the organization. Given the developments of the last two decades, managers will need to confront the discipline of knowledge worker management and find a workable solution for their organization.

The integration of management science with the advances in psychology and sociology may provide a route towards the solution of the knowledge worker management problem. It is crucial for managers to have an accurate understanding of the motivational drives for this particular group of the workforce. These employees enjoy higher income, greater flexibility and freedom, and greater bargain power. This puts them in a gray zone between the traditional, lower skilled employee and an owner in the company because knowledge workers create intellectual capital in the company. Because most of this capital is lost and remains with the employees when they decide to leave the organization, turnover can be much more damaging than with traditional workers. Managers can therefore not simply apply conventional strategies to this dissimilar group of employees; rather, they need to seek for more creative incentives for motivating and retaining knowledge workers.