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When to Build vs Buy Enterprise Software: 7 Considerations



Digital disruptions are growing by leaps and bounds. Enterprises need to strategize and accelerate digital transformation initiatives to stay ahead of the curve. The first step towards this change is to invest in software that solidifies your value proposition and solves your everyday problems smartly and effectively.

It is not only about developing software but about developing quality software irrespective of what industry you operate in. The first path towards quality delivery is to decide between — Build vs Buy software.

  • Build (in-house or outsource) custom software (bespoke) that is an exact reflection of how you want it to look, feel, and perform.

or,

  • Buy from already available software in the market that solve your most common problem/s instantly.

The tradeoff is real, and it can be overwhelming to make the right and well-informed decision.

Where some enterprises decide to build software, some choose to invest in off-the-shelf software. How to strategically eliminate the biases between the two?

Here’s a 7-point checklist to help you conclude — should you build or should you buy software?

7- Point Build vs Buy Checklist

Here’s a build vs buy framework revolving around the key factors for helping you make an informed decision.

1. Unique Problem vs Common Problem

What is a Unique Problem?

A unique problem is exclusive to your organization. There is no third-party software to solve it, which raises the urgency to custom build it.

What is a Common Problem?

A common problem is mutually faced across the industry. Usually, you can find an off-the-shelf software that can solve the problem effectively for you.

a. Unique Problem

Build your own software if you have a unique problem or a unique solution for solving a prevalent problem. Creating a PoC (proof of concept) is essential in this case to validate the technical feasibility of the idea followed by a strategic product roadmap. You can either go for an in-house team or can even choose to outsource the project.

What to Ask?

  • What unique problem are you solving?
  • Do your competitors face the same problem?
  • Is the problem urgent and needs a solution immediately?
  • Does the problem affect your business critically?

b. Common Problem

You can easily find off-the-shelf software for common problems that your business is facing. The team can look for the best off-the-shelf software available and weigh its pros and cons and requirement satisfaction level before zeroing in on one.

What to Ask?

  • What are some of the best available software to solve the problem?
  • What software do your competitors use?
  • Does the feature set of COTS satisfy your business and functional requirements?
  • What are the different pricing plans for the available options?
  • Does the overall product and pricing plan suit your business size?

Example:

Build vs Buy: What do we Recommend?

When to Build? When to Buy?

Take the decision to build if the problem is unique to you, or

You have an out-of-the-box solution for an existing problem

The problem is common, and software is readily available

You plan on licensing the software to other businesses in future

The available vendors can meet your requirements by up to 80%

The problem and its solution contribute to your businesses’ secret sauce

The pricing plan and the features complement your business size

2. Build TCO vs Buy TCO

What is TCO (Total Cost of Ownership)?

TCO is the sum total of the direct and indirect costs related to the software throughout its life cycle.

a. TCO of Build

The cost drivers for calculating TCO of bespoke software include — staffing, MVP development, full-scale development, licensing, cloud infrastructure, user and admin support, cybersecurity, software maintenance, and patches and upgrades.

It is believed that at scale, owning is cheaper. It is not always true as you have to up your ante for building, maintaining, and expanding custom software.

b. TCO of Buy

The cost drivers for calculating TCO of off-the-shelf software include — upfront cost for licensing, subscription fee (monthly/annual), data migration, API integration, training, or even customization costs (if required).

Buying off-the-shelf software is cheaper than building. However, what seems cheaper initially can cost millions if it does not fulfill your requirements or is a half-baked solution.

Build vs Buy Tool: Baremetrics allows comparing TCO of building vs TCO of buying

Build vs Buy: What do we Recommend?

When to Build? When to Buy?

If the problem is unique to you

If the problem is common and a solution is readily available

Long-term TCO of the build < long-term TCO of buy

The TCO of vendor < Bespoke TCO

Scaling your operations is your business strength as the aggregate cost of maintaining software decreases with economies of scale

If you are fine with paying thousands of dollars for server licensing fee, which are likely to increase with scaling

3. API vs No API

What is an API?

An API (Application Programming Interface) is an interface that enables communication between two software applications and exchanging of data. (API integration hels drive digital transformation across enterprises.

a. API Integration

Enterprises that have been in the industry for a long time require software that can smoothly integrate with existing legacy software (irrespective of how old it is). To enable such integrations — you will have to undergo legacy software modernization using the API-first approach.

b. No API

Legacy software running across the enterprise for years is less likely to support API integrations yet cannot be unplugged due to its mission-critical status. If the new software cannot communicate with the legacy software, the cost of manual upgrades and forceful data migrations is likely to increase.

FedNow example for IT modernization and API integration

Build vs Buy: What do we Recommend?

When to Build? When to Buy?

If off-the-shelf software does not support API integrations

API integration with traditional systems is possible, or they can customize that for you

The cost of manual integrations is high, and there is no roadmap for its implementation

You have access to a tech team to enable integrations across the software suite

Development of business-specific (customized) APIs is required

You have run PoC (proof of concept) for API integration capability as a part of the demo

4. Opportunity Cost of Build vs Opportunity Cost of Buy

What is Opportunity Cost?

The loss of economic benefits when one alternative is chosen over another. When deciding between two options (A or B), opportunity cost refers to — what best thing you could have done instead if you did not choose option A, or vice-versa.

a. Opportunity Cost of Build

The opportunity cost of building software can be high, especially when your team can use the development time on managing better tasks. Do not waste your internal resources on building software, instead, utilize the “big brain” of your business to focus on research and development, operations, data management, automating processes, managing technology and support for clients, etc.

Note: If you wish to minimize the opportunity cost but still require to build custom software, the best resort is to look for the best software development companies and outsource development.

b. Opportunity Cost of Buy

The opportunity cost of buying software is comparatively low. You can instantly gain access to the best off-the-shelf software that complies with your business and functional requirements. The IT team can spend time and money on shipping code faster and managing the code’s integration, deployment, and delivery.

Note: If your business model revolves around COTS or SaaS, your core activity is building and managing that software. In that case, building (in-house or outsource) is a hobson’s choice.

Build vs Buy: What do we Recommend?

When to Build? When to Buy?

You have clarity around what you’re building

You want to take opportunity cost out of the equation

You have access to the best software engineering team to outsource development

The off-the-shelf software solves your major business problems

You are a product-based company

You are a service-based company wanting software for internal use

5. Competitive Advantage vs Competitive Parity

What is Competitive Advantage?

When you invest in software that allows you to disrupt the market and stay ahead of the competition, you achieve competitive advantage.

What is Competitive Parity?

When you invest in software that allows you to obtain same results as that of your competitors, you achieve competitive parity.

a. Competitive Advantage

You can achieve a competitive advantage when you build a software solution that can perform better and differentiates you from your competitors. You can unlock differentiation by investing in custom software that revolves around your USP, your secret sauce.

b. Competitive Parity

You can achieve competitive parity by investing in the same software that your competitors are investing in to win deals. You can achieve competitive parity by copying your competitors and investing in a COTS solution similar to theirs. However, the competitive parity is likely to leave you in a vendor lock-in trap.

Example:

We created a Power BI Solution for a Giant eCommerce Brand (for ranking high on competitive advantage).

Our goal was to:

  • Build an intelligent inventory management system
  • Leverage data visualization by processing vast amounts of transactional data
  • Build highly tailored BI parameters and trend analysis report

For an in-depth insight into their requirements and our process, here’s the complete case study.

Build vs Buy: What do we Recommend?

When to Build? When to Buy?

You wish to gain a competitive advantage. This could be by building an entirely out-of-the-box solution or replicating software with added value

You wish to achieve competitive parity that helps you gain the same results as that of your competitors

You are solving a unique problem that needs a custom software

You are solving a common problem that can be solved by available COTS solutions

You are keen to disrupt the market and emerge as a leader

When you are in no position to take risks and have no bandwidth to afford software development failures

You wish to be free from the vendor lock-in

If the vendor allows customizations to the software

6. Scalable vs Unscalable

What is Scalability?

Scalability refers to the capability of a business to handle the growing sales given they have all the resources they need.

a. Scalability

An enterprise will never prefer to tradeoff scalability for cost savings. Scalability is a virtue that is entrenched across these large-scale organizations. If an enterprise narrows down on, let’s say, two off-the-shelf software solutions that can solve their everyday problems, but neither of them ranks on scalability, both the options lose their relevance.

b. Unscalable

If off-the-shelf software is not scalable, the vendor sometimes promises to meet the needs of the enterprise through SLAs or SLOs to facilitate customizations. However, when a vendor meddles with software’s architecture and code — often the performance, availability, and upgrading capacity takes a backseat while piling up on technical debt.

Build vs Buy: What do we Recommend?

When to Build? When to Buy?
None of the narrowed down COTS solutions are scalable The COTS solution holds proof that they can handle scalability like a breeze
You are in a solid opinion to build a clean code with minimal technical debt The vendor understands the technicality behind the customizations you are requesting
Build from ground-up if you measure scalability with respect to feature additions, performance, customer experience, and storage capacity If the vendor can manage scalability test based on the following parameters:

Response time

Network usage

Request execution/second

Screen transitions

User expansion

Easy Integrations

7. Agile Methodology vs Traditional Methodology

What is Agile Methodology?

It is an approach to developing software that introduces flexibility and speed. Agile follows iterative and incremental development and promotes working in cross-functional setups.

What is Traditional Methodology?

It is approach to developing software that follows a linear model. In traditional methodology, a particular development stage needs to be completed before moving on with the next stage. Waterfall development is a prominent example of traditional methodology.

a. Agile Methodology

According to the 14th State of Agile Report, it becomes clear that organizations are leaning towards Agile development methodology. However, there is still time to gain maturity with the Agile processes. If an enterprise is fully Agile, it helps accelerate time to market and ensures quality delivery.

b. Traditional Methodology

According to the 14th State of Agile report, 30% of respondents believe that their pervasiveness towards traditional development methods hinders scaling development efforts. If an organization continues building using traditional software development methodologies — budget and project timelines are likely to exceed considering the engineering complexities involved.

Net Solutions helped IMG, a multi-billion dollar leader in brand licensing, build a workflow management system using Agile methodology. Initially, IMG supported a legacy system with an aging tech stack that was in need for modernization.

The objective of the project was to create a modern architecture that was both robust and scalable. The Agile development team rewired the entire architecture of the application from ground up.

For an in-depth overview of the process, here’s our case study.

IMG case study for agile development

Build vs Buy: What do we Recommend?

When to Build? When to Buy?

If you have access to a trusted software development outsourcing partner that has experience with Agile development methodology

The vendor offers a continuous stream of value through fast bug fixtures and frequent upgrade releases

Your development team has Agile maturity and have rightly pulled off projects in the past

If the vendor can deliver customizations while ensuring its faster time to market and quality delivery

Your requirements are mostly constant and documented beforehand you can go ahead with in-house waterfall development

The vendor prioritizes innovation and is quick to adopt newer technologies

Build, Buy, or Both? Unraveling the Best Path Forward

Enterprises often find them on the fence when it comes to choosing to build or buy. Should you build software in-house or outsource development? Or should you buy from vendors in the market? If you find it challenging to come to a consensus, here’s a best of both world’s scenario:

Hedge your bets! You can build, and you can buy. All you need to figure out is what to build and what to buy. Take these parameters into consideration when planning to build and buy:

Build Software that:

  • Revolves around your core business and contributes to your secret sauce
  • Complements your blue-sky thinking
  • Allow you to achieve a competitive advantage

Buy Software that:

  • Revolves around basic everyday activities such as emails, data analytics, HR system, marketing, etc
  • Matches to your features set requirements (at least 70-80%)
  • Allows you to achieve competitive parity

Divya Kaushal

About the Author

Divya is a Senior Business Analyst at Net Solutions. Her interest and experience lie in on-demand and digital education applications. The most crucial part of her work is managing key client relationships and consulting the prospects. She holds expertise in SDLC, Agile processes, user stories, creating prototypes, and testing end-to-end business flows.

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