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Decision Revision

When you need a software solution, should you build or should you buy?

By Jeff Phillips and Beth Kujawski, DoculabsFor Insurance & Technology Online, October 2002

Every day, IT leaders are confronted with a tough decision when asked to enhance a business process with technology: Is it better to build or buy a software solution?

A mere 10 years ago, the answer was simple: Build. Back then, it was commonplace for large companies to build their own large-scale business applications and database systems. Finding a commercial package to serve the exact needs of an organization was difficult if not impossible. Systems such as sales management, accounting, and HR systems often provided insufficient functionality, so companies that purchased such solutions faced daunting customization and implementation costs. Often, these applications offered a mere 10 or 20 percent of the functionality required, or were simply a framework upon which the final application could be created. A company had to rely on its internal IS group to design, architect, program, and implement the other 80 percent, or it had to hire an integrator to finish the job.

But times have changed. Today, the scenario is often reversed. Major vendors of enterprise applications now claim 80 percent - or greater - functionality that most organizations require, right out of the box.

So the answer today is "buy," right? Not so fast. There are situations in which "build" still makes more sense. In a sluggish economy, many organizations with frozen IT budgets will automatically err on the side of building, without assessing the risks and costs involved.

So how do you know which approach is right for your business? At Doculabs, we advise our clients to take a good look at their requirements and their level of specialization, and weigh these against their internal resources, expertise, and tolerance for risk.

Don't Reinvent the Wheel

If your application needs are highly specific to your industry or your company, building may make sense. But for basic business processes, such as accounting, sales management, marketing automation, document management, and customer relationship management, don't presume your needs are all that unique. In many technology categories, there are hundreds of readily available solutions to choose from, each with varying levels of flexibility and integration options that make a good fit likely.

Consider your Risks

Statistics show that a large portion of custom-built software initiatives fail. Reasons vary: emerging standards, changes in scope, and changes in corporate objectives all affect the success of your project. But one thing is sure: The longer the project's development cycle, the greater the risk of complications.

That said, commercial products don't guarantee success. Choosing a commercial product means having little or no control over a product's development, potentially little say in what features may be included in future releases, no choice of technologies a vendor will support, or worst of all, no guarantee that the vendor will remain in business - and therefore continue to provide support for you - for the long haul.

Assess your Resources

Do you have the staff to dedicate to a custom-built application? During tight economic times, it may be necessary for your IT staff to be assigned to other initiatives or issues, creating an interruption in momentum and completion of the project at hand.

When customizing a commercial application, your internal IT staff may need to learn new programming languages or specifications. While many IT groups may have plentiful resources in legacy technology, developing modern applications requires comprehensive skill in emerging technologies such as Java and XML. Whether customizing and extending commercial software or developing applications from scratch, fluency in today's technologies is a must. If you determine that there are areas where you lack appropriate talent, be sure to budget for temporary technical staff to assist the existing the IT team.

Either way, be sure you have sufficient staff resources to dedicate to the project, and that they have the skills required to build a custom application or customize a commercial package.

Beware of Hidden Costs

Many factors are often overlooked when planning a custom development and can add significantly to a project's bottom line. While training, documentation, implementation support, code management, testing and fixing bugs, and upgrades may be wrapped into the cost of most commercial applications, they may be overlooked in a custom build.

And don't forget about research and development. In a custom situation, you'll be absorbing 100 percent of the system's R&D expenses. In a commercial package, the cost of R&D is diluted across all of the vendor's customers.

But there are hidden costs in a commercial product, too. Let's say you have $500,000 to spend on a new application. The price tag on a solution itself may be $450,000. Will the remaining $50,000 be enough to cover the costs of customizing and integrating the product? Also, consider the cost of training of the development staff, end users, and help-desk employees. This very necessary expense is commonly overlooked.

Gather Requirements Carefully

Obviously, building a custom application gives you complete control over its functionality and features. You can assess your organization's core needs and address them specifically.

Commercial application vendors often sell "bells-and-whistles," without much careful consideration of your organization's specific needs. Realize that your employees will only use the features they need, regardless of how many extras are included in the solution.

Before you start talking to vendors, clearly define your organization's needs. Doculabs begins almost all of its consulting engagements with an organizational needs assessment. You don't want to cast blindly and hope to hook the perfect solution. You want to narrow the list of vendors and fish in a barrel. As you map commercial products' abilities to your requirements, consider the costs associated with integrating and extending the solution to make up for any functionality it lacks out of the box.

Research Market Trends

Even if you're convinced you can build a better solution than you can buy, take the time to talk with vendors about the long-term plans for their solutions. You may be surprised to discover information about upcoming versions and technologies in development that may be better than what you could build. Or, your conversation may yield a revelation that technology trends are veering far from your current path.

Examine your Competition

One of the most important factors to consider when deciding to build or buy a solution is whether or not the technology will provide a competitive advantage for your organization.

Build a system if doing so will set you apart from your competition and drive your business. Allocating resources to build a content management application for your intranet, for example, may not increase your ability to provide better customer service, but those same dollars could reap great rewards invested into other initiatives that may increase sales, market share, or brand awareness.

Build-versus-buy decisions are made with more than ROI numbers. It is important to consider the direct benefit any technology will have in your organization. If it will differentiate you from your competitors, or if customization costs of a commercial application would exceed the price of creating an application in-house, it's probably prudent to build.

Leaning toward "Buy"

In the last few years, software applications vendors have vastly expanded their offerings, improved their products with a greater emphasis on providing an open architecture, ease of customization, better integration options, and lower costs. As a result, many companies choose to purchase these systems as opposed to taking the risks associated with a custom-built solution.

Your IT managers know their department's capabilities and resources and hold one of the keys to making the right build-versus-buy decision for your organization. It's critical to develop an intimate understanding of what commercial vendors offer and then compare those offerings to your abilities and resources.

The authors are analysts with Doculabs, a research and consulting firm that helps organizations plan for, select, and optimize technology for their business strategies. (312) 433-7793, [email protected],

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