Is there a business that does not use software? I can’t think of one.
Software is ubiquitous. Nearly a half trillion dollars in software is purchased every year. Most business acquirers of software select from a few industry leaders that sell pre-packaged products. For most software, purchased for most uses, this approach works well. However, many software projects are best undertaken as a custom project. Bespoke software has a distinct profile that is often not fully explored because of misunderstandings and the marketing power of the canned software industry. Custom software is too often not placed in the decision set when it should be given thoughtful consideration.
About 95% of the code that is used within business is pre-built and ready for use. This makes sense because canned software has distinct advantages. Specifically, it's less expensive and ready to be put to immediate use. The costs of developing, updating and supporting the software are distributed among a multitude of purchasers. And further, any software development project has execution risk.
When faced with the buy versus build decision many decision makers start with cost. I believe that it’s better to start with a determination of whether the software will support a core and differentiated process. A business consists of a set of processes and most all processes are supported by code. By syllogism, the business consists of the software used to support it. If the software is distinctive: the business is also differentiated. The converse is also true, if your core software is canned, your processes are also generic. In an increasingly competitive world, average performance is not sufficient for sustained success.
I find that in conversation the language used to describe the software need often highlights whether the considered application is critical and a source of competitive advantage.
Off-the-shelf will work well if the language used to describe the need sounds like: “All we have to do is . . .”
“This is really simple . . .”
“It's not a value added activity to . . .”
Custom software should be examined if the language used to describe the requirement sounds like:
“It's complicated . . . “
“Our proprietary [technology/process/approach] requires . . .”
“This is directly related to the client experience . . .”
If the software is critical to the success of the business and can offer an opportunity for differentiation, custom software should be considered. When a business can derive a distinctive advantage from custom software, then the investment should be analyzed using classic return on investment (ROI) measures like payback or internal rate of return (IRR).
Of course, the ‘return’ in ROI requires a comprehensive examination of the benefits of the investment. With this in mind, here is a brief survey of the benefits of custom software.
Dovetail fit: Bespoke software is limited only by your ability to imagine what is possible and will completely meet the needs of the business. It can be shaped to fit the contours of your business processes and well-integrated with other systems. In short, it’s a perfect fit.
By definition, off-the-shelf is designed to meet the needs of the masses. The developer will attempt to meet the needs of as many potential buyers as possible.
The important but difficult task is assigning an economic value to software that allows your business to realize its full potential.
Ownership: You own the software and its development path. There are no surprises. You are not dependent on another organization with divergent goals and demanding shareholders. Your level of control is total.
An example of why this is important: Is your data being sold to third parties? You won’t get a clear answer by reading the end user license agreement. Many firms are incredibly crafty with data privacy practices and policies. If you want to direct how your data will be used, owning the application is a solution.
Competitive advantage: You are simply going to have to do things better than your competitors. This is obvious but what is more difficult to grok is how to do this with standardized software. Custom software enables a client experience or operational practices that are different and materially better. And isn’t this the only sustainable way to produce outsized profits?
Sometimes the returns from being different are large enough to be binary. In structured logic: if we are differentiated, then we have a viable business; else, we have a zombie business.
Valuation: Distinctive capabilities and a wide moat drive impressive valuations. If the business is traded in the public or private markets (or hopes to be someday) the lift in profitability can be multiplied by an industry profit multiple, and importantly, the multiple itself can be raised through unique and defendable processes. The accretion can be head spinning when examined in this light.
Sometimes it’s possible to take a middle road and build custom extensions to off the shelf software. Occasionally this works well to produce a composite solution especially when the off the shelf software has been built with potential customization in mind (think ERP systems) but too often customizing existing prepackaged software is the worst of all options. Sometimes a hybrid solution is functional but uninspiring. Have you heard the joke that a camel is a horse made by committee? And worse, many custom integrations and extensions of packaged software place the final deliverable outside the upgrade path. What looked less expensive in the short run is now very expensive in the long run.
Buy versus build software decisions are important junctions on the journey to a healthy growing and strong business. If you would like some assistance with these issues, we stand ready to help.