Article

The Three Factors That Fuel Software Development Excellence

Companies that beat the Rule of 40 make smart choices about spending, priorities, and portfolio management.

By Jay Bhatnagar, Rakesh Mehrotra, and Bill Radzevych

min read


Today, software engineering is a strategic imperative in industries as varied as retail, automotive manufacturing, healthcare, and financial services. Though companies are spending more on software development every year, many see an inconsistent return on investment. Far too many CEOs are disappointed with the results of their R&D expenditures. Executives can stop this cycle and get better R&D outcomes. We have identified three main reasons why companies don’t achieve consistent, valuable results from their software development investments. Often, one or several of these problems will frustrate companies that are otherwise doing everything right: Black box spending. Companies lack visibility into exactly what their technology investments are accomplishing. Confusion about priorities. Companies lack effective prioritization methods, losing sight of what matters most to customers. Weak portfolio management. Companies don’t define standard roles, responsibilities, and processes for deploying and focusing engineering talent. The good news is that leaders can address these problems. Plenty of best-in-class companies have developed methods to align their engineering investments to corporate strategy, including a wide range of companies that we’ve helped through our Software Development Excellence solution. Beating the Rule of 40 Strong R&D practices can impact profit and growth. The three factors identified above are closely tied to a metric that increasingly guides tech companies and their investors—the Rule of 40. It is the principle that a company’s revenue growth rate plus its profit margin should exceed 40%. Companies that meet this threshold yearly are usually able to create lasting value for their shareholders. Rule of 40 performance Rule of 40 performance Companies that score in the top quartile on the three factors of software development excellence—spending allocation, prioritization methods, and clear decision roles—are 60+% more likely to exceed the Rule of 40 threshold. 63 more likely to exceed the Rule of 40 Clearly, if you want to be a top performer in tech (or in any other software-enabled industry), you need to understand how your company performs in these three areas. To do that, it helps to take a scientific approach, using foundational data to accurately measure what's working and what's not. A data-driven approach Over the past few years, we have surveyed executives at more than 400 companies across industries about their firms’ software product development capabilities. Analyzing the data we collected and their observations, we identified more than 50 critical characteristics of a mature software engineering program. These characteristics span areas like portfolio management, resource and talent management, decision effectiveness, and engineering execution effectiveness. This proprietary database lets us measure any company’s relative performance and diagnose key challenges. Combined with our deep software industry expertise, this helps us design customized solutions that have enabled our clients to overcome their challenges. Using this framework, we help executive teams align on key investment areas and prioritization methods. What was once a time-intensive and laborious process to gather this data has become much quicker thanks to our partnership with the Jellyfish Engineering Management Platform. We deploy Jellyfish solutions on engagements to generate these insights in just a few short weeks. Our Software Development Excellence solution can help any company significantly step up its performance. We’ve used it to help companies design and implement robust portfolio management processes or revitalize their talent operating models so they can attract, maintain, and develop strong product management and engineering teams.

Today, software engineering is a strategic imperative in industries as varied as retail, automotive manufacturing, healthcare, and financial services. Though companies are spending more on software development every year, many see an inconsistent return on investment. Far too many CEOs are disappointed with the results of their R&D expenditures.

Executives can stop this cycle and get better R&D outcomes. We have identified three main reasons why companies don’t achieve consistent, valuable results from their software development investments. Often, one or several of these problems will frustrate companies that are otherwise doing everything right:

Black box spending. Companies lack visibility into exactly what their technology investments are accomplishing.
Confusion about priorities. Companies lack effective prioritization methods, losing sight of what matters most to customers.
Weak portfolio management. Companies don’t define standard roles, responsibilities, and processes for deploying and focusing engineering talent.

The good news is that leaders can address these problems. Plenty of best-in-class companies have developed methods to align their engineering investments to corporate strategy, including a wide range of companies that we’ve helped through our Software Development Excellence solution.

Beating the Rule of 40

Strong R&D practices can impact profit and growth. The three factors identified above are closely tied to a metric that increasingly guides tech companies and their investors—the Rule of 40. It is the principle that a company’s revenue growth rate plus its profit margin should exceed 40%. Companies that meet this threshold yearly are usually able to create lasting value for their shareholders.

Rule of 40 performance

Companies that score in the top quartile on the three factors of software development excellence—spending allocation, prioritization methods, and clear decision roles—are 60+% more likely to exceed the Rule of 40 threshold.

more likely to exceed the Rule of 40

Clearly, if you want to be a top performer in tech (or in any other software-enabled industry), you need to understand how your company performs in these three areas. To do that, it helps to take a scientific approach, using foundational data to accurately measure what's working and what's not.

A data-driven approach

Over the past few years, we have surveyed executives at more than 400 companies across industries about their firms’ software product development capabilities. Analyzing the data we collected and their observations, we identified more than 50 critical characteristics of a mature software engineering program. These characteristics span areas like portfolio management, resource and talent management, decision effectiveness, and engineering execution effectiveness.

This proprietary database lets us measure any company’s relative performance and diagnose key challenges. Combined with our deep software industry expertise, this helps us design customized solutions that have enabled our clients to overcome their challenges.

Using this framework, we help executive teams align on key investment areas and prioritization methods. What was once a time-intensive and laborious process to gather this data has become much quicker thanks to our partnership with the Jellyfish Engineering Management Platform. We deploy Jellyfish solutions on engagements to generate these insights in just a few short weeks.

Our Software Development Excellence solution can help any company significantly step up its performance. We’ve used it to help companies design and implement robust portfolio management processes or revitalize their talent operating models so they can attract, maintain, and develop strong product management and engineering teams.