Build or Buy
- Details
- Created on 22 February 2016
- Written by Steve Burrows
One of the perennial, and often most difficult, questions faced by organisations when considering new software to automate business processes is whether to buy off the shelf, or build their own. It is rare that off the shelf software functionality is a perfect match for business needs so the temptation to commission a bespoke package, either developed in-house or by a third party, is common.
Of course, once upon a time all software was bespoke, but those days are long gone and there are many commercial off the shelf (“COTS”) software packages claiming to address most business needs. What factors should you be taking into account when making the decision of which is best for your organisation?
BUSINESS FIT: The most obvious consideration is whether a commercial package will suit your business. For most businesses the answer should, ostensibly, be yes - because this is after all what the software vendor is trying to achieve, a product which is all things to all men. Surely your needs can be met by something off the shelf?
What’s your business strategy? Taking Porter’s Generic Strategies, you’re either into Cost Leadership or Differentiation. You may Focus on a narrow market segment within either of these, therefore Focus is a form of Differentiation. If your business strategy is based upon Differentiation why would you assume that an off the shelf package will meet your needs? The off the shelf package is by its nature unlikely to support aggressive Differentiation because if you’re doing something different the market for software that supports your Differentiation is implicitly small. One of your first questions must be whether the software will be involved in supporting the business functions which establish your differentiation or not - if you want a package to do standard things like stock control or accounts then the answer may well be no, but if the software is expected to do things that are distinctive to your business offering - perhaps you offer a unique form of rental agreement, or a very specialised approach to aftermarket customer service, or you have a distinctive marketing strategy - then it will be less than likely that an off the shelf package will fit your needs whatever the software vendor claims. If your activities to be automated by the package are “industry standard” then a standard package should be out there waiting for you somewhere.
TOTAL COST OF OWNERSHIP: So you’ve weighed the options, and found an off the shelf package that will cost you £100K to buy, but it’s not perfect so you’ve got estimates for a bespoke development which will cost you £300K. Almost a no-brainer, right? The off the shelf package will do 95% of what you need for 33% of the cost. Unfortunately it’s not so simple. In addition to the £100K for the off the shelf package there will probably be implementation costs - installation, configuration, training, integration with your other systems etc. that will bulk out the bill. The likelihood is that the off the shelf package will cost you 50% more than the sticker price, maybe even 100% more if you decide to have a little bespoke work done to cover the 5% functionality gap.
It is still cheaper however, until you take into account the support and maintenance. Annual support & maintenance fees for commercial off the shelf software are commonly 20% - 25% of the retail license price, so you will pay again for the package every four or five years - sooner if you got a hefty discount. Add in the implementation costs and suddenly the expensive bespoke development doesn’t look so unattractive, it will be right first time and because it’s your software you won’t have to pay support and maintenance. Actually that’s not true either, because if your business is dynamic your needs will change over time and the bespoke package will need maintaining and enhancing accordingly whereas the off the shelf package will be more flexible out of the box.
The key lesson here is to not be distracted by the differential in sticker price between off the shelf and bespoke options. Do the analysis carefully, very often the difference in Total Cost of Ownership (“TCO”) between packaged and bespoke software is very little when considered over 5 years, and sometimes bespoke is much cheaper in the long run.
PRODUCT STRATEGY: Theirs, not yours. You have decided on the off the shelf option, it’s a good fit for your business - at the moment. As noted above your business needs will likely change over time, you will differentiate to secure your position in the market, or you will streamline operations to reduce costs. If you do the latter then the chances are that you’re on the path towards industry standard practices which will be supported by the packaged software, but if you differentiate there is a risk that the evolution of the package over time won’t support your new business model. Worse, there is a risk that the package provider, who has a need for continuous refresh of his product to introduce new features and follow market trends, will diverge from your path.
The longer you have the package and the more dynamic your business the higher the risk of divergence unless you follow industry trends, so in the future the package provider might focus the functionality on digital interaction with customers whilst your strategy remains resolutely to provide personal service, or they might move towards future editions of the product being cloud “Software as a Service” whilst you desire to keep your precious customer data locked up in-house.
If you commit to an off the shelf package you should do your best to understand where the provider is going to go with it in the future, the answer may be in the wrong direction or nowhere at all - if the package has reached the end of its product roadmap the provider may simply not bother with further enhancements, meaning that as new processes, methods or regulations are introduced your ownership of the package will become increasingly frustrating.
HYBRID APPROACH: If all that sounds very down on off the shelf “packaged” software, it’s not meant to. It’s just a reflection of the need for software to continue to support your business over time. Many pundits, me included, will argue that a pure “Buy” approach to acquiring enterprise software only really works if you have a boring “me too” business. For many organisations the best approach to the Build or Buy problem is a hybrid. Buy the boring stuff off the shelf - do you really need to do stock control or accounting differently to everyone else? - and focus on building that which differentiates you, including integrating the custom built software with the off the shelf packages so that you create an end to end business process in your systems even though the systems have many components.
The hybrid approach is instinctively unappealing to many executives because it seems complex - a bit of this, a bit of that etc., surely there ought to be an all-in-one solution - but the reality is that most sophisticated businesses have complex processes. IT systems are correspondingly complex whether they are off the shelf or custom made. Some software vendors recognise this and create systems which are designed to be customised, these are always in the mid to high end of the price spectrum for any given class of package, but they’re almost always worth the extra expense.
Build, Buy or Hybrid is one of the fundamental IT decisions which executives have to make on a periodic basis. Assuming that the answer is build or hybrid, the decision is then whether to build in house or go to an external software developer. By the time the decision is taken that custom software is needed the company should also have an understanding of how big and dynamic the custom element will be - and the bigger and more dynamic it is the more sense it makes to have an in-house development capability.
There is no correct answer to the Build or Buy question, it always depends upon the context of the individual business. The key to getting the right answer is to understand how your business works, its strategy and direction for the future, and the factors in choosing between Build, Buy or Hybrid models. Some businesses make the Buy option work very well; they change their business processes to suit the software and live within its capabilities, but it has to be said that they’re a minority. Most businesses either wind up with some custom software, or they fill the gaps in the software with good old-fashioned and expensive manual labour.
