- A General System
- Detail Complexity Versus Systems Complexity
- Throughput Accounting for General Systems
- A System of Software Development
- A More Complex Software Development System
- The System Goal
- Financial Metrics for General Business Systems
- Financial Metrics for Software Development Systems
- Predicting the Future
- Framing the Problem
- Understanding Software Production in the Value Chain
- Throughput Accounting Versus Cost Accounting
Predicting the Future
It is easy to run a business with hindsight. Reporting the past is useful for describing what actually happened, but it is more useful to be able to predict the future and to make decisions to influence the future outcomes of the business. The real question to be answered isn't "How well did we do last quarter?" but "Which decisions should we make in order to do better next quarter?"
The problem with trying to predict the profitability of a software business is the unpredictability of the OE figure. OE is hard to predict because estimation of software projects is notoriously poor. If it is not possible to estimate how much time it will take and how many resources are needed to complete a software project, it is impossible to calculate a figure for OE. It is bad enough that marketing departments can only forecast sales, but without a firm grasp of OE, both variables are unknown and unpredictable. Hence, the profit prediction could look more like this:
Calculating an expected return on investment for a future software product has been next to impossible. If profit is hard to predict, then ROI presents a problem with three unpredictable variables. Sales, and hence T is almost impossible to predict. OE is difficult to calculate. In addition, the cost of acquiring the requirements is also unknown. Calculating a cost of input to create requirements has been notoriously difficult because organizations don't try to measure it—When was the last time you saw a marketing manager fill out a time sheet? Accounting departments have been unaware that it is important and hence haven't been focused on recording the investment made in ideas for new software. However, unless the true cost for I is known, it is impossible to calculate an ROI. Management must start to gather data on the cost of acquisition of the ideas being input into the software development system.