You can dye your stuff anywhere in the process you want. when depends on what your making, a stamped or tooled wallet for example has to be tooled first or you don't know whereto put the colors but an untooled wallet could be dyed first or last. Then there are different ways to dye your piece also, dip dying, block dying, air brush to name a few and all can be done at different times. On the shrinkage i have not really noticed it because when i wet form i shape the leather the way i want it usually over a form or mold. I use an air brush to dye it so it doesn't really get wet enough to shrink, Your leather will stretch also when tooled most folks glue it to some heavy paper to minimize that. softening can be done with any number of products depending somewhat on the end use of the leather piece. Neats foot oil in small quantities is one of the traditional methods.