Effective contract development

By Roman Pakholkov, CEO of Promwad

For the progress of electronics contract development it is necessary, for customers and contract developers, to have similar understanding of its essence. It is going to bring the greatest benefit to the electronics industry and it is going to make a positive impact on the market participants, including those who are not directly engaged in the process of development.

From the history of the issue

1960-1990

Large factories and institutions with a large administrative apparatus, and a large staff of narrowly specialized developers are engaged in electronics industry. The main engine of the industry is the military–industrial complex.

1990-2000

Collapse of the Soviet Union led to a decline of the industry and a significant outflow of specialists abroad. Suppliers of electronic components emerged, small project teams were formed; development was based on good knowledge in the area of the subject, but they had not yet learned to create products for sale.

 2000-2004

Not only providers, but contract manufacturers emerged as well. They implement various business processes including work with customers; they also come to understanding of the product. Large distributors of electronic components establish their own development departments.

2004-2006

Competition in the market grows, and for manufacturers it is not so easy to enter the market: from one hand there are cheap devices from the East, and from other hand there are high quality products from the West. The sector of electronics contract development is emerging and beginning to develop.

Modern requirements for the product

In order to be successful on the market of new developments in the field of electronic devices they have to be designed in the way that meets modern standards:

  • A unique set of features that is different from competitors
  • An attractive enclosure design and user interface
  • Application of high-performance hardware platforms
  • Application of embedded hardware
  • Application of modern technologies

Not all product developers are able to provide an effective implementation of these requirements. Nevertheless creation of modern products requires solving a complex of tasks performed by managers, marketers, system engineers, programmers, designers, engineers and other experts. That is why contract development is topical nowadays.

Features of custom development

Lots of design companies still keep the habit of doing everything on their own, often attracting cheap labor in the form of private executors. As a result, protracted development time is dragged out, and the product turns out to be "raw" and uncompetitive. Nowadays it is possible to settle this problem by placing an order to a contract developer who will take upon himself a full responsibility and tasks to implement the project. 

Table 1. The main differences in the approach of conducting product development by manufacturer and by contract developer  

 

Manufacturer Contract developer
He redistributes income from product sales including the new developments He redistributes income in order to run business with by selling services of product development
Interested in sales and success of the product on the market Interested in selling services of executing custom design and development
He takes 100% of development cost as the costs for wages of several engineers who are able to create a product, since he does not allocate other costs for keeping his staff of developers as a separate expenditure. He takes development cost as the main turnover funds where costs for salaries to pay personnel for their work in the project may be 50% or less.
Spends funds for market research, to identify its needs, and to create new products, promote and sell them Spends funds to increase effectiveness of executing projects by applying modern CADs, measurement and diagnostics equipment and to promote and sell its services
Produces specialized products in its industry, makes a limited range of products Performs a wide profile of projects for various industries and applies its skills there
A Product Manager is responsible for planning, development, manufacture and further sales of the product A Project Manager is responsible for task formalization and execution all works on the project in due time
A limited number of full-time developers have to perform a wide range of tasks The staff of development engineers provide high productivity of task execution in their specializations
Bears the risks for putting the product on the market and for acceptance this product by the market Bears risks for accuracy of estimating its services and for managing a project in general


Contract development as an activity differs significantly from product development by end producer. This is primarily due to the fact that a contract developer does not make profit from the sales of developed products, but it gets profit from development as a service provided. Starting a project, a contract developer takes a number of obligations to implement the products and to develop some of its parts (electronics, circuitry, PCBs, enclosures, interfaces, and software).

The developer shall ensure the timely execution of work and inform the customer about the work progress.

For a contract developer the end of the project is the acceptance of work by his customer. When the project is completed, a contract developer does not have any rights for independent production of completed developments, or their transfer to the third parties. At the same time the developer is not responsible for successful sales of the product since manufacture and promotion of the device in the market is not his task.

At the present time there are a very little number of large companies in Russia which can afford having their own design-houses. For other players in this market cooperation of product manufacturers and contract developers is quite profitable and prospective. From contract developer’s or product manufacturer’s point of view, the approaches to product development, pricing, production cycle are significantly different (see Figure 1).

From the marked fundamental differences in running business by contract manufacturer and by product developer the following conclusions can be made:

  • A manufacturer often underestimates development costs
  • The budget for development directly affects the product quality
  • Contract development decreases the time to create a new product
  • Contract development requires a very clear statement of the task
  • The progress of contract development requires understanding from the customer’s side.

The interaction scheme between a customer and a contract developer is shown in Figure 1.

Contract developers’ problems

Contract development market is now at the stage of formation. It is quite natural that its formation is accompanied by certain difficulties. One of negative features is that most existing contract developers are engaged in sales of their own products along with execution of services on ordered projects. Such approach discredits developer’s services in front of a potential customer, because the presence of his own products hints at the possibility of confidential information leakage.

From other hand this approach of running business is very clear because contract development formed as additional business in electronics industry. Origins of most developers can be classified as follows:

It is necessary to note that in this classification, there are no companies which were intentionally created with the goal of contract development of electronics, and that is caused by the fact of weak understanding of the subject of contract development by most members of the market.

Price formation for the services

A contract developer has to select an effective way of forming the price for his services because from one hand he has so sell his services for a reasonable price and from other hand he has to provide a decent work and business development. A product manufacturer is used to take the cost of development service as the cost price of manpower. But for a contract developer the price is not only  made of direct costs for project execution, it also consists of marketing, advertisements costs, enquiries processing, studying the subject, management of development process, development of IT protected infrastructure, testing, examining and acceptance of work, business trips, engineers training and development of the staff with highly qualified specialists. That is why the cost of his services is incomparable with internal assessments of the product manufacturer.

From other hand, a contract developer is interested in the most effective task solution with least costs. That is exactly the reason why he seeks to apply the most effective solutions based upon balanced set of technologies and methods of development. At the expense of scalable solutions and experience acquired earlier, a contract developer can reduce the cost of his services.

Contract development is very similar to the well-developed software outsourcing industry, where there are approximately similar workflows and pricing

Therefore, when making a decision to the use of contract developer, you can refer to the experience with the area of IT-services.

  • Companies that started with participation of foreign investors. Customer - investors invested their money, and the vast majority of the projects are the products of their interest.
  • Contract development departments of electronic components distributor companies and contract developers. Development is not their main activity since those departments were created to search new markets of electronic components and manufacturing services.
  • Small companies formed by two-three enthusiasts cannot guarantee execution of a project due to their limited resources and they always need to think about additional income sources.

Eliminating risks and examples of contract development

Most problems can be classified in advance and be brought in a single table. Without having claim on completeness of the topic, I will show the most common risks when placing custom development and ways of eliminating those risks. (see Table 2).

In contract development, most risks can be eliminated at the first stages of project execution, and on the opposite, when keeping its own staff of developers; the risks during execution of new and complicated tasks are a lot higher.

Information display controller. A new microprocessor, RDC R8610В, was laid in the project. In spite of all the warnings of the developer, that the chip was raw, the manufacturer insisted on the use of this particular chip because of its low cost. During the project it became clear that there was not enough of technical documentation processor for the chip, and technical support from the manufacturer was virtually absent. The project was completed by bringing staff experts of a contract developer who an extensive engineering experience with such chips.

Control panel of special equipment. A manufacturer of membrane keyboards decided to enter new markets and with his products, reach agricultural machinery manufacturers. The High demands for reliability and a lack of appropriate in-house expertise forced them to address to a contract developer. The result was a circuit with protection from against negative impacts which successfully passed certification and field trials.

Onboard computer. An integrated product that requires full implementation of all design stages: a concept, comparison with counterparts, interface development, industrial design, and electronics design. The customer did not have those positions in his staff, and a contract developer completed all design stages with high quality. The result of that work was a reliable product, and one of the key advantages was a tested simple easy-to-use graphical interface.

A wireless barcode scanner. A contract developer received an enquiry to develop a customized barcode scanner. A multilateral evaluation of the project with an indication to the method of its implementation, final cost of the product during production of various batches, development cost and its specific component per unit - all that allowed making a decision that development of the product would be inappropriate.

Effective contract development

Proper use of contract development services can provide a new level of products and reduce time to enter the market. In many cases, for a manufacturer, it is much more profitable to pass product development to a contract developer, and focus his efforts on market research and product promotion. The effectiveness of contract development is explained by an ability to attract highly qualified specialists, transparency of the budget and development time, and to use solutions proven in other projects and industries.

Joining the efforts of the product manufacturers and contract developers will benefit the entire market of electronics industry.

Table 2. Risks and the ways of elimination


Risk Description Solution
Schedule overrun Many projects cannot be carried out in time, and a contract development is no exception. The project can be tightened due to the fault of both the developer and the customer Formation of dedicated development teams. Project management with a product manager on the customer’s side and a project manager on the side of the developer. Streamlined business processes according to modern methods of IT-industry
Budget overruns Any project cannot meet not only the time frame, but the allotted budget as well Splitting the project into manageable stages and separately paid stages. Description of the prior behavior scenarios, if the project goes beyond a specific budget
No result A risk of time- and money loss spent on development. As a result, a wrong product can be obtained, or a product which is not marketable Reconciliation and formation of the Requirements specification, as a separate design stage. Product prototypes development. Susceptibility testing of the market with the prototypes
Exceeding the cost of the product The product cost exceeds the planned cost of the production, as a consequence, there is a loss of profitability of the product The product cost exceeds the planned cost of the production, as a consequence, there is a loss of profitability of the product
Emergence of new requirements During product development stage, new requirements and recommendations emerge which lead to re-scheduling and budget changes of the project Collection of functional and technical requirements before the project start, an in-depth description of the project and individual implementation stages. An iterative approach to development
Fear of "piracy" In an imperfect copyright legislation there is a risk of project theft A contract developer which makes its earnings exclusively on development, cherishes its name and reputation. Creation of a secure IT-infrastructure