I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

Friday, January 31, 2014

The Persistent Imbalance Between Supply and Demand for Software Development Labor

The growth in demand for software has consistently outpaced the growth in the supply of software developers. This has been the case for well over half a century. It's worth looking at why.

Each major expansion in software development - automation (60s), productivity (80s), internet (90s), mobile (00s) - has been additive to the total stock of software in the world. The old stuff doesn't go away: software is still an enabler of labor productivity (office & communications), and a weapon for market share (online customer interaction). Yet we continue to find new applications for software: it is increasingly a product differentiator (embedded systems) or a product category of its own (social networking). While some segments have retrenched (companies license rather than write their payroll systems), the proliferation of new forms of software has more than compensated for consolidation in others. And the more it proliferates, the greater demand for integration, security, and other ancillary software.

Each new wave represents a structural increase in the demand for labor: the old stuff has to be maintained or replaced, while new applications not only bring new demand, they bring new tools and languages which require new skills and capabilities.

From a labor market perspective, the software economy has been expanding for decades. As a result, it marches to the beat of its own drum. Software development is generally counter-cyclical to the broader economy: it does well when the economy is down because software locks in productivity gains desired after layoffs & cutbacks. Software also makes its own opportunities, because it is inherently a business of invention and innovation. There are peaks and valleys: a structural change in demand for labor can sew the seeds of a bubble and its inevitable collapse. But bubbles in tech are bubbles of tech's own making: the video game / home computer bubble (1983), and the Y2K / dot-com bubble (2000) each resulted from irrational expectations and dubious business models created by people within the tech sector itself. The Y2K / dot-com bubble bursting coincided with increased accessibility to a global labor supply of software developers (offshoring was all the rage in the early 00s). Although the US experienced an acute contraction for software development labor, the global labor pool grew, and the regional contraction in the US proved to be short lived. Today, although the software labor market remains inefficient (context still doesn't travel), there are no easy cost savings to be gained (no large labor pools of skilled labor remain untapped). Global supply has been substantially eclipsed by global demand.

We're currently in the midst of another structural increase in the demand for software development labor, this time being driven by analytics and smart devices (the alleged "internet of things", from cars to coffee pots), with the odd halo application (e.g., wearable tech) thrown in for good measure. Every indication is that for the foreseeable future, demand for software developers will continue to increase at a rate faster than the supply of software developers available to develop it.

What does this mean to the business of software?

1. Ambition will outpace capability. Any business plan that comes down to "hire a bunch of smart engineers" - be it developing a new product or rescuing a distressed IT organization - is doomed. There is too much money chasing too few people. A company's labor timeline has to expand: it will take longer to hire experienced engineers, and firms will increasingly need to invest in incubating new developers. Labor scarcity poses a vulnerability to employers: a company known to have capable engineers is wearing a target for recruiters. When jobs outnumber candidates, jobs become commodities to employees. To differentiate from other employers, a firm must be highly attractive to the specific strata of the labor market that it wishes to employ. It does this by developing unique culture and values, and professional and societal aspirations that make it destination employer for those people. Without these things, it can only compete for labor on comp and career. It's difficult for a firm to maintain competitive advantage for labor solely on the price it is willing to pay for it.

2. Employers will pursue labor industrialization over tradecraft. Software development is labor intensive: the productivity enhancers that do exist such as automated testing and automated build are still poorly implemented, when used at all. Plus, the diversity of programming languages and the complexity of environments encourages labor specialization and task management. Still, people investing in software assets will not take "can't find competent people" for an answer. As the old saying goes, if you can't raise the bridge, lower the water. On a person-by-person basis, it is faster, easier, and cheaper to hire, train, and staff industrial workers to work on a software development "factory floor" where they perform coding tasks in an assembly-line like way than it is to recruit, develop and mentor polyskilled software developers. New labor formation will be largely industrial in nature, not tradecraft.

3. The risk of spectacular software failure will increase. The horrific explosion of the oil tank train that devastated Lac-Mégantic in 2012 was in no small part the result of demand exceeding supply. North American oil production has risen dramatically in the past half-decade. All that oil coming out of shale fields will find its way to refineries. Since there aren't pipelines to carry it, it's going by rail. The rail industry was in decline in North America for many years. A sudden uptick in demand can't be quickly satisfied by skilled labor. The net result is that railroads are hauling increasing volumes of a volatile commodity, but their capability to handle it isn't maturing at the same rate. In software, the demand/supply imbalance increases the risk of significant operating or project failure - that is, massive delivery overruns or post-delivery operating problems - as skills fail to mature in step with demand.

4. As the skills brought to bear on any given software investment deteriorate, software asset quality - particularly technical quality - will deteriorate. Industrial labor produces volume, not quality. The glut of software assets being produced will be toxic by technical quality standards. As it happens, it will go largely unnoticed because neither the concept of technical debt nor its commercial ramifications are well understood by the (average) business buyer of software, and because IT governance remains weak in practice. However, poor asset quality will become visible in maintenance and operating costs, and the occasional write-off. Any firm forced to make too many write-offs due to poor technical quality will cause it to see software as disposable rather than durable. That would create deflationary price pressure for labor and increase the demand for industrialization.

As long as the applications for software continue to expand, insufficient numbers of software engineers come into the work force, and software development remains labor intensive, there will be a fundamental supply / demand imbalance. But demand tends to be impatient. Economic and perhaps even political pressure will intensify to industrialize software development. This implies expansion of the secondary labor market, which is less skilled, educated, compensated and mobile than the primary labor market. That would be a lost opportunity: rather than fostering a global wave of knowledge workers, software development will simply bring the next wave of wage workers. We'll look at the reasons for that in the next post.