When I was growing up, my dad used to take me fishing. Sometimes we'd fish with a line, usually for cod or snapper. As is the way with fishing, we'd often catch other, less-desirable fish and have to throw them back. But some of them, even though we didn't consider edible for us, were good enough for other fish, so we'd chop them up and use them for bait. They were a useful by-product.
Other times we'd fish with a net—either actively trawling or leaving the net in a channel overnight. Just like with line fishing, we didn't want a lot of the fish we caught. Starfish, I recall, we're a real pain to untangle from the net, but not as bad as the crabs—they had sharp, snappy bits. It took ages to untangle them and then, for all our effort, we had to chuck them back.
One day, long after I'd left home for university, mum and dad discovered that cooked crabs taste delicious. They discovered this when some of the local fishermen started selling cooked crabs near the local wharf. It seems strange, considering that we lived in a fishing community, that no one had ever cooked crabs before and that they generally were considered a waste. It wasn't until the more valuable fish stock started to shrink that commercial fishermen started looking elsewhere. It turns out that the crabs are not only delicious but also a profitable by-product.
According to Wikipedia, a "by-product" is a secondary or incidental product deriving from a manufacturing process, a chemical reaction, or a biochemical pathway and is not the primary product or service being produced. A by-product can be useful and marketable, or it can be considered waste. Jason and David from 37signals have a blog entry about sell your by-products. They turned that blog entry and dozens of others into their book Rework, a delightfully short and provocative book. The book is a by-product of their blog (and where I "borrowed" this idea from). Ruby on Rails is another by-product of their work at 37signals, where they sell a few popular and profitable products.
One example they give in their book is that Henry Ford learned of a process for turning wood scraps from the production of Model Ts into charcoal briquettes. He built a charcoal plant and Ford Charcoal was created (later renamed Kingsford Charcoal). Today, Kingsford is still the leading manufacturer of charcoal in America.
Other examples include straw, which is a by-product of grain harvesting. In the old days, that straw used to get fed to cows that produced primary products of milk, meat, and leather. My parents and their parents used one of the cows' better known by-products to fertilize their gardens.
My wife recently started throwing broken-up egg shells—a by-product of breakfast—onto her vegetable garden because, apparently, they are an environmentally friendly way of deterring snails. Working in the garden and mowing the lawn also have a useful by-product of using up calories. I write a blog, which is largely a by-product of the research I do for my consulting and writing work. Some people say that it could also be used metaphorically to fertilize a garden.
So, back to software development. What do you currently produce that you consider waste, but which could be used as a useful—perhaps even profitable—by-product? It's not such an easy question to answer, is it? If the answer were obvious, then you'd already have done it.