Non-Recurring Engineering

By Daniel Shefer

Non-Recurring Engineering (NRE) is a one time engineering effort by a vendor that is paid for by a customer. What it is, and what it isn't.

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What is Non-Recurring Engineering?

Non-Recurring Engineering (NRE) is a one time engineering effort by a vendor that is paid for by a customer. NRE is driven by a feature or capability that a product lacks and a customer wants enough to pay for.

The fundamental issue that NRE highlights is that the demand for it is triggered because the product doesn’t provide the customer with enough value out of the box.

Non-Recurring Engineering is generally requested by customers under the following circumstances:

  • A customer doesn't like the way the system behaves. This could be a missing feature, a platform that is not supported etc. The customer may look for a way to convince the vendor of the importance of their request. Offering to pay for NRE is one way to do this. A customer’s willingness to pay for NRE is a good indication of how much they want this done. 
  • A customer wishes to move up the priority of an already planned feature into an earlier release. From the vendor’s perspective this is basically a resource scheduling issue. The vendor needs to carefully examine the implications of changing their schedule.
  • The vendor stopped supporting a previous version and the customer is willing to pay for making changes to this version.

“The good news about NREs is that when customers spend money on NRE
they are planning on being a customer for a long time.”

Luke Hohmann
Principal of Enthiosys and author of Beyond Software Architecture

What Non-Recurring Engineering Isn’t

NRE is not a good way to finance core functionality. It should also not be used as a device to stuff things into a product that are not in the vendor’s best interests in the first place.

NRE isn’t a replacement for professional services either. Customization and integration, especially 'one offs' are the domain of professional services, not development. The product architecture needs to support this and there need to be the resources and skill set to pull this off.

NRE is not a way to craft a product strategy. It should not be allowed to drive decisions that are not in the ISVs long-term best interests. If something doesn’t make sense to be a part of the product, NRE shouldn't get it there. If the customer simply demands that it be done, hand them over to professional services or a custom development shop.

The bottom line is that NRE work should not be done for the core product or, on the other hand for something that is not in the path of the company’s strategic direction.

Things to Consider Before Embarking on an Non-Recurring Engineering Project

  • A major issue that is highlighted by requests to do NRE is not knowing when to say “no” to a customer. This has to do with many factors but at the end of the day there has to be someone in the company who has the willingness and authority to refuse to embark on such a project.
  • Beware of an NRE project that is presented by Sales as a “deal closer.” It takes a lot of discipline and skill to vet these “closers” properly. Discipline that Sales may lack. Not to mention that they are not compensated or promoted for holding back.
  • NRE projects have a lot more impact on the product and the development process than meets the eye. Areas that can be impacted by an NRE project include:
  • Revenue. Work that is done on NRE is not being done for the core product. This represents lost revenue. Also, changing the timeline of planned features can affect the willingness of customers to buy or upgrade.
  • Customers’ expectations. Customers can become very upset if features they were promised are postponed.
  • Integration with other modules and products. NRE projects increase the complexity of the product and the resources needed to support and upgrade it in the future.
  • If the ISV’s competitors have a feature that is desired by customers, they will be less inclined to pay for NRE as it is perceived in the vendor’s interests to play catch up. The looming competitive gap is also used by customers as leverage for their demands.

Pricing Non-Recurring Engineering Projects

Now that you’ve decided to embark an NRE project, how do you calculate how much to charge the customer?

In theory, costing an NRE project is easy. Estimate the engineering hours and overhead costs, add a 'fudge' factor for uncertainties and risks and multiply it by your grossed cost rate. The result should then be multiplied by a factor of 5 or so. This is assuming that your company spends 20% of its revenue on R&D.[1]

It is critical to understand the reason for this “5” factor, especially when the NRE takes up a significant portion of engineering’s resources. If engineering costs are around 20% of revenue, an NRE project costing X would have a 5x negative impact on sales. This is because the resources used for the NRE were diverted from producing sale-generating products. This indirect cost must be taken into consideration and not doing so runs the risk of embarking on revenue generating but money losing projects.

A company that is in good financial condition, i.e. not under financial duress, can follow this procedure for costing an NRE projects but a company is on the brink will probably not be able to achieve these premiums.

Support and maintenance costs needs to be priced as well. If the NRE is not incorporated into the product and is available only to the customer who paid for it, support is extra. These costs should be more than the going rate to compensate for the added difficulty of supporting code which is basically a one off. This is because each maintenance release becomes an NRE project in itself.

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