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Software development and the Nascar Business Model

I had an interesting meeting with a company called TopCoder the other day. The premise is actually quite simple: conduct contests with monetary prizes given to the software developer who writes the best programs. What started out as an academic exercise has evolved into an intriguing software company.

The idea behind the company is to leverage the social networking concept to build a software company based on the notion of component based development. Thus far the company has built a catalog of 900 components. So, what’s a component? It is an individually packaged piece of code written in Java, .net, Flash, Flex, or Ajax.

What makes this process intriguing is that TopCoder uses its network of 132,000 members in over 200 countries to vet quality of code. In essence, there is a peer rating process to determine which code is the best. The company has developed algorithms that are the secret sauce that determines which code is architected and written in the most efficient and innovative way.

How does the company make money? In essence, the company offers consulting services to its clients including companies like AOL, Fidelity.com, ESPN, Versign, and Google — to name a few. The project architect works with the client to spec out the project and breaks the tasks down into component parts. It is then put out to the network of developers. Each developer that is part of this social network has a history with the company based on how many times the developer has “won” an engagement and how complex the specific task was to accomplish. The methodology also takes into account the number of times a developer has been one of the top three finalists in a project. The winner gets paid for the code; in addition, the runners up also get some cash. The approach to paying developers is based on a complex algorithm that rewards not just one winner but the individuals that consistently do a good job. According to Mike Morris, senior vice president at TopCoder, the company borrowed ideas from the Nascar business model. He pointed out to me that often the same Nascar teams were winning every week. So, to keep things more exciting and to keep the runners up from leaving, they started rewarding the teams that placed fourth and fifth in races — after all, it isn’t much fun to watch only a couple of cars race. Therefore, Nascar created a point system so that everyone wins! TopCoder has done a similar thing. It creates a pool of $450,000 that it gives away every quarter in what it calls the “Digital Run”. When developers participate and do well in various coding tasks, they accumulate points and win money. This seems to add the incentives needed to keep the network of developers engaged.

The company’s business model is intriguing. They license their catalog of components, sell consulting services, engage in development projects that leverage this social network — without having to worry about salaries for the developers. They are also working on some intriguing new business models for next year that will leverage their IP even further.

The company’s founder and chairman, Jack Hughes had started a company called Tallan, a professional services company that was sold to CMGI for $920 million in 2000. Many of the members of the management team were part of the original Talon team. Armed with some cash, the company has the luxury of being self-funding.

I was intrigued by the business model. I think that this approach has real potential for the future of team collaboration and competition. This model also fits beautifully into the world of a service oriented architecture. I asked Mike about what the components in the catalog were like. He said that most of them were small grain components. I predict that before long the company will create a marketplace for larger grained business services.

I couldn’t resist asking about who these mysterious developers are that participate in the social network. The winner is Eastern Europe (Russia, Poland, and the Ukraine), China, followed by the United States and Canada.

I plan to continue to watch this innovative company as it grows. I think it has the potential to shake up the software development world.


  1. JXB
    January 6, 2008 at 4:12 am

    Judith, I have been an occasional competitor at TopCoder for a couple of years now, and I have also been impressed as I have watched the company grow.

    I believe one of the most intriguing consequences of their business is that they have developed a way to measure the talent level of individual programmers on a consistent basis around the world, using their rating systems.

    As I’m sure you know, one of the problems most tech companies have in recruiting comes from trying to determine how talented a potential hire really is, and how effectively he or she works on a team. Now there will be a simple way for a programmer to demonstrate his/her qualifications.

    In the long term, programming talent might become more like, say, investment banking or athletic or sales talent…because there are objective measures of performance, the more talented individuals will be able to capture differentially higher compensation.

  2. January 25, 2008 at 1:00 am

    This is a pretty cool blog, I’ll check back later!

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