Making the Build vs. Buy Software Decision

Whether to build or buy is generally a question asked by companies that have in-house IT or are already partnered with an external software development company. Either way, you’ll need programming expertise to make the solution fit the need.

In this article, we go over the difference between custom software development, out-of-the-box solutions, and internally developed software. We will look at a few different scenarios and look at the best solutions for each.

Questions to Ask

The first question to ask is, what are you looking to change, implement, or build?

Do you want to:

• Add functionality to software that already exists?
• Replace your entire legacy system?
• Create an entirely new offering or service?

Other things to consider at the outset:

• How large is the project?
• How complex is the project?
• How specific does the result need to be?

The speed of technological developments moves exponentially. It is easy not to realize how outdated your systems are and how many other options are available to you.

Next, decide who will be responsible for choosing the new solution and where responsibility will lie when it comes to implementation. Keep an eye out for biases against other options just because “we’ve always done it this way.”

If you have a sneaking suspicion that parts of your team are biased toward particular products, consider consulting. Hiring a consulting firm can be expensive, but it may be well worth the dollars compared to the expense of having to “fix” things later.

In a black and white world, deciding whether to buy or build is simple. If you are looking to address a niche need unmet existing software, you build. If you are looking for a system widely used among different types of companies, you buy.

Scenario 1: R-Fuel

R-Fuel is a medium-sized company that turns used plastics into recycled fuels. R-Fuel has an in-house IT team and the money to have software developed externally.

An engineer developed a new process that will save them millions of dollars a year. They already have the equipment to implement the new process, but the software to run and analyze it does not yet exist. In other words, R-Fuel will not find an off-the-shelf solution for what they need.

R-Fuel’s IT team is just large enough to keep up with maintenance and the operation’s daily needs. They do not have dedicated R&D technology experts.

Therefore, the company has three basic choices:

• Temporarily or permanently hire developers specific to their R&D needs.
• Temporarily or permanently hire IT staff and dedicate current staff to take care of the problem.
• Hire a team outside of the company to develop the new software.

R-Fuel should first identify if they will continually need developers to be working on new processing implementations. They should also consider:

• How long will it take to train new people to develop this software for them?
• How long will it take to get new IT staff up to speed with IT’s current responsibilities?
• Will the IT team be able to integrate software developed outside of the company?

Cost of Building

The upfront costs of building will be high. The company requires resources to get the job done. They will need to hire temporary IT staff to fill their day-to-day needs and educate the staff they plan to dedicate to the job.

R-Fuel also risks paying an opportunity cost because new software development will slow operations for a time.

Cost of Outsourcing

The cost of paying a third party will be much less than building it in-house. Once the software is integrated into the systems they have in place, new hires would not be necessary. This saves the company money in terms of taking on new people and opens them up to the possibility of gaining technology they had not been using or using correctly.

Time

Time is not so much a factor here; newly dedicated employees should be able to turn out a product just as fast as a team outside of the company. R-Fuel risks being hit with opportunity costs from both ends. The new process will allow them to save money, but they will need to shuffle people around and could be missing valuable insight from a group that understands new technology in the space.

Upkeep and Long-Term Costs

Maintenance of the new system, as well as data acquisition and analysis, will be similar to processes that are already in place. If R-Fuel fully purchases the software rights and keeps the systems they already have in place, they will save money in the long run by paying a third party to develop the software for them.

For a company in R-Fuel’s position, buying a prototype and working it into their system makes a lot of sense. This is an example where buying and building are required to fully meet the needs of the company.

This is just one speck in the large spectrum of the “build it or buy it” scenario. Let’s look at a company with outdated technology looking to move into the digital age.

Scenario 2: Elder Health

Elder Health, an assisted living facility, recently had a group of doctoral students running an experiment for a publication they were working on. The residents and others that visited the facility loved what the students had done and petitioned the facility to make an app that would monitor residents of the facility and outpatients in the same way the students had.

The IT team at Elder Health created the app in a couple of weeks, but it would not integrate well with the legacy system they had in place. Elder Health has stumbled across a major problem: their legacy system is out of date and cannot handle new technology.

This is a problem many large organizations run into. They need new technology to be integrated, but the structure they have in place is simply unable to support it. Rather than overhaul the entire system, companies patch things together until they finally break. Much of the time, they do it to save money upfront, but in the long run, it can be costly.

Elder Health has some decisions to make. They want to keep long-term costs down but are willing to pay upfront to modernize.

As things currently stand:

• All data is stored in-house.
• They do not use cloud computing.
• The IT team is large enough to take care of daily operations.
• Most of the in-house equipment has not been updated in over 15 years.
• Their data is siloed and not always easy to access from every application that uses it.

Elder Health faces a choice. Should they build a new system on their own or have it done by a third party? They already have a new application ready for when the new system is up and running.

Benefits to Building the System on Their Own

It can be tailored exactly the way they want it. This is not to say that a third party would be unable to deliver what is needed. In fact, much of the system will contain software that has already been developed and widely tested. Elder Health will be able to build and scale it in real-time while being sure that the system meets its needs.

They will have full authority over the solution. Elder Health will have total control over any implementations created by the IT team and can do whatever they please with them. If they stumble on a new solution that can be used in the healthcare industry, they will have the right to distribute the software. This could give them a competitive edge.

Disadvantages to Building the System on Their Own

The cost will be high. Having the IT team build an entire legacy system on their own will cost a lot of money. Additionally, they must be sure that the team understands what products will work best for the organization. A poorly informed team could end up costing a lot more than the time and equipment to create a new system.

It will take time. It will undoubtedly take more time for the team in place to design and implement a new system than a third party that specializes in modernizing legacy systems.

Benefits of a Custom-built Product

The cost will be lower. The labor and opportunity costs will be lower if Elder Health finds a firm specializing in modernizing systems. The organization could offload some on the day-to-day IT work and future maintenance by using a firm that will host and manage the bulk of the system. Doing this could help them save money in the future.

The work will be completed faster. Offloading the work to another company specializing in what Elder Health needs will ensure the speedy delivery of the final product.

The product will be better maintained. Using a product supported by someone else ensures that you are not responsible when things break down. The supported product will also be updated as new software hits the market.

Disadvantages of a Custom-built Product

They will have less control. Elder Health may have less control over updating and changing features within the software. They might need to rely on the third-party company for this work.

Long-term costs could increase. The longer-term costs could increase with contract renewals and additional subscriptions.

There may be compatibility issues in the future. New products or solutions will have to be configured to run on the new system.

What is a good game plan for Elder Health?

Elder Health needs a new solution now, and they have the resources to service it themselves once it is running. A business in this situation with some money and a knowledgeable IT team would benefit the most from consultation and initial implementation from a third party.

This way, Elder Health gets the solution they need fast, and they are able to retain control of their systems over the long run. In this case, it would be best to consider intermittent consulting from IT professionals in the space. This will help ensure their technology is always up to date, and they will not run into problems like this again.

Scenario 3: Bow-Wow Chow

After a decade of retail-only distribution, the CEO of Bow-Wow Chow dog food realized that direct-to-consumer would be a much better fit for his brand.

He came up with a great new idea for an application connected to a smart dog dish that lets the owner know when his puppies need to be fed and how much. The dish comes with an attachment that will also feed the dogs for the owner if desired. He has a grand vision for a flagship store displaying his amazing new dog dish.

Currently, Bow-Wow chow has no IT, and R&D is limited to the CEO and his dog. The company employs about 20 people and interacts with distributors and vendors of all sorts. With no IT team, this company needs to decide if they want to take on that expense at this point.

Right off the bat, the CEO’s dream of worldwide distribution of his Hungry Puppy app and dishes becomes almost unreachable. He can barely keep up with his QuickBooks entries to stay on top of the accounting, let alone learn how to make a smartphone application to integrate with his dog dish.

Bow-Wow Chow would greatly benefit from utilizing a third-party IT and development team. The benefits in this situation are clear. The CEO can have his application built and managed by a third party.

If the application becomes hugely popular, Mr. Bow-Wow plans to make an arrangement where he will have all the rights to the software and can hire an IT team to service the product. As long as he retains his rights, using a third party to develop his app is the cheapest way for him to test it out on the world’s hungry puppies.

Final Breakdown

As we can see from these three scenarios, there are great reasons to both build in-house and have software custom-built. Here are the benefits and drawbacks of building in-house and buying.

Benefits of Building

Control: When you build, you will have complete control of what goes into the software and how it functions. Any design implementations that you wish to make can be made the moment you envision them. Not only that, but you have full ownership of what has been created and can do anything you please.

Design: You have 100% control of the design. You can customize the software to any end. You will also be able to add new functions and features when and how you want. You will also ensure that future implementations and designs will be compatible with what you have developed.

Competitive Advantage: By developing your highly customized software, you could be giving yourself an edge over your competitors. If your competitors are utilizing off-the-shelf solutions that provide less efficiency, you will be putting yourself at an advantage.

Drawbacks of Building

Costs: When building your own systems or software, you must dedicate employees to the task. This could take away from them being able to perform their daily duties or cause you to need additional help. It will be important to weigh these costs along with the cost of maintenance and upkeep you could incur by hiring a third party.

Opportunity Cost: Depending on what your business is primarily focused on, the cost of building software solutions could be seen in lost revenues. This will happen when employee attention is focused on building solutions rather than products. Oher opportunity costs arise when IT teams are not fully educated in the solutions you are looking to implement. If your team is good at what they do but doesn’t know a whole lot about developing your solution, you could lose money by developing something that is high-quality.

Time: If the software you need is a pain point for customers, then you need a solution now. Understanding the workflow and designing a new solution in-house could be much more time-consuming than if you hire a dedicated team to do it for you.

Benefits of Custom Software Development

Cost: Your upfront costs will be lower using a third party. A third party with experience in your industry will already have modern solutions they can personalize and provide to you.

Time: A dedicated third party will be able to develop your solution rapidly. They should also be able to tailor it to your needs depending on what that solution is.

Maintenance: If you are replacing a legacy system or looking for external IT services, your maintenance and updates will be taken care of. If this is a solution that the third party provides industry-wide, you will receive updates and service for as long as you hold a contract with the firm.

Drawbacks of Custom Software Development

Long-Term Costs: Contract maintenance costs can change from contract to contract. You could also be charged for updates, and if you expand the product in any way, you can expect to pay more.

Control: Or lack thereof. Depending on how the agreement is written, you could have less control over your new software’s functionality and what can be done with it in the future. Make sure you review any contracts closely.

Which is best?

To determine your best course of action, evaluate the scope of your project. Are you looking to add one or two new features, or are you looking to overhaul your system entirely? Then consider the following questions:

• Are you going to want the rights to the finished product?
• Will you need an external company to service the software or system in the future?

If you have the money and employees to build the solution in-house, consider engaging a consultant for an unbiased view of your team’s capabilities compared to the demands of the project.

If you don’t have the in-house talent or the team doesn’t have the bandwidth to build the solution fast enough, a third-party custom software development company may be the best choice.