The Age-Old Question: To Build Or To Buy Software?

Since SAP launched its first out-of-the-box software, R3 in the 1990s, technology leaders have favored preconfigured solutions for their convenience, time to implement and relative affordability. But as every business became more digital, CIOs found themselves inundated with software. How can they determine the ROI across the entire suite of SaaS tools, many with overlapping use cases?

With budgets constrained, every CIO should be asking which is more cost-effective, build a make-do solution using existing tools or buy a built-for-purpose software? CIOs should also align with other business leaders on departmental-specific software (CFO, Chief Procurement Officer, CMO, etc.). For many operational functions like accounting, it will never make sense to build or significantly customize existing solutions. However, for some legacy software (procurement, for example), the only way to truly innovate is with a new solution that unifies the organization’s needs into one platform.

Take a CRM and project management tool as another key example. If an organization uses Salesforce’s CRM to manage its customers and prospects and to stay organized internally, when is it time to forgo both and opt for an all-in-one tool with more features? Adobe popularized this model when it migrated to Creative Cloud in 2013 and eliminated the sale of individual tools, giving customers access to a suite of applications.

Nearly a decade later, the pandemic exposed a vulnerability that much of the enterprise swept under the rug: the need to establish proper workflows that strengthen collaboration across teams and enable data-backed decision making at a glance rather than on impulse or gut instinct. It can be tempting to invest in customizing existing solutions to fit the unique needs of the business versus buying several smaller tools. But what’s the cost—in time, staffing and lost efficiency—of customizing a workflow solution that was not built for the business’s specific needs but looks appealing because of its unified interface? Let’s break it down.

The Cost: Upfront And Hidden

The reason it’s so challenging to identify the ROI of large-scale IT projects is that—like an iceberg—many of the implementation costs lie below the surface. According to widely-cited research from McKinsey, 45% of large-scale IT projects go significantly over budget. Purchasing one or more software tools to help smooth operations carries a significant cost upfront, but customizing it can mean a months-long investment from IT teams. Further, there is the potential to incur additional expenses in training employees on the new solution. Training may be required for any new tool, but with fewer tools that provide more intuitive processes, complexity will be reduced.

To zero in on the ROI of potential software investments, some experts suggest using a true cost of ownership TCO calculation. This back-of-the-napkin equation takes into consideration initial cost, maintenance costs over five years, the cost of downtime and the remaining value after five years of depreciation. At a glance, this could indicate whether it’s time to build or buy, but one Forbes Council contributor suggests that measuring the software’s impact on business outcomes may be more valuable. To do so, Tim Mitrovich suggests decision makers ask themselves the following questions.

• Is this solution a differentiator?

• Has a specific tool become the limiting factor for the business?

• Does this solution integrate seamlessly across the organization?

The Risk: Can A Custom Software SolutionGrow With You?

Prior to digital transformation, when software was hosted on-prem and maintained by internal IT resources, it was normal to customize solutions to client needs. This meant software providers would have custom patches for certain functionalities and internal IT departments would write their own code to enable functions the software provider did not. These patches made major version upgrades a nightmare, as the new version would have to be regression tested with the previous patches to make sure no functionality was lost.

With the advent of multi-tenant cloud computing, custom patches became (mostly) a thing of the past, but IT departments continue to try and make old solutions meet new requirements. Often, internal business units are made to adopt solutions that don’t meet the necessary requirements. For example, an accounting system may have the capabilities to pay invoices for all of a company’s suppliers, but that does not mean the system can manage supplier contracts or risk.

As regulatory requirements become more complex, it is less likely that modified solutions will be capable of keeping up with business needs. But with costs already invested, it is hard for most organizations to replace what they have with a solution that was built for purpose.

The Benefits: A Perfect-Fit Solution?

An out-of-the-box software solution that was designed to address an industry or vertical’s specific pain points is often the most cost-effective investment. Such solutions are sometimes built by business leaders turned entrepreneurs eager to create a workflow tool that fits naturally within a specific department. This narrow category of out-of-the-box solutions is appealing because of their reliability, increased productivity, and the potential for significant savings over time.

To discover which tools are out there, CIOs should keep an ear to the ground and rely on communities where other leaders are frequently sharing their software discoveries. With new tools coming to market daily, keeping an eye on the trends is important for leaders who have a longer runway to implement a new solution and have time to evaluate what may be a near-perfect fit.

So Build Or Buy Software?

Ultimately, the decision to build a custom solution, buy one that closely aligns with an organization’s specific needs, or make do with the tools already in play will vary for every decision-maker. But what’s clear is that before any decisions can be made, CIOs should understand which business outcomes they play a direct role in pushing forward. Then, they should look for a solution with a track record of success in similar industries or business models. Finally, they should compare the cost of expanding the current solution with onboarding a new one, and acknowledge that there is a learning curve that comes with a change of any size.

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This article was originally published on Forbes.