As we emerge from the recent recession and continued economic turmoil, companies are surveying their operations to determine where they are going to invest in to ensure efficiency and stability for their future. Many are adding back workers to labor forces that were slimmed down to get them through the economic uncertainty of the last few years. Some are looking to make large capital expenditures, now that rates are low and money is cheaper to borrow than it has been in years. Others are looking internally at their operations to see where optimizations can be made to position them for growth.
Companies looking internally to make improvements are looking at every aspect of their business to find where they can leverage technology to create increased capacity, as well as realize operational efficiencies. Information technology is a hot button for many key decision makers — and whether they will admit it or not — they prefer IT to be out of sight and out of mind. At the same time, they expect it to just work, and well as so much of their business depends on it.
The flow of information through a business can be like a supply chain, one that is critical to an organization’s ability to scale. Several business executives I’ve spoken with have told me they are looking to ensure that their employees have the best tools available to be highly productive in their roles. All of them agree their workforces need to have the correct information, at the right time, in order to execute effectively and make daily progress towards achieving their long-term business objectives. To these executives, being successful in business depends upon the performance of those individuals, and those individuals rely on the technology they’ve been given in order to execute.
What many executives are now realizing is that the intelligent use of software can lead to increases in both their team’s productivity, and performance. An abundance of business software has been introduced into the market, but very few products have been able to accomplish two primary objectives for companies to get a solid return on their investment. The first is that it provides a straight-forward workflow — providing a simple interface for the end-user to operate. The second is that it meets all of the business needs it was initially purchased to fulfill in the organization.
The majority of commercial off-the-shelf software (COTS) products have the ability to meet forty to sixty percent of the business needs it was initially purchased to fulfill. The reason being is that these software packages were designed not for a specific business, but to work for the broadest market possible. These software packages are constructed with the lowest common denominator of a target market in mind, and rarely take into account the nuances of individual businesses. Unless your business fits nicely into the box these software providers determined when creating their product, you’re likely to be left with gaps in what these solutions can do for your company.
When it is determined — usually after a gap analysis — what needs the COTS solution can’t fulfill, key decision makers are left trying to creatively piece something together that will work. I’ve come across many of these types of solutions, and none of them are sustainable once the business begins to scale. It actually will end up costing a business more by relying on a solution that was realized this way, then it would to have paid a third-party to do it right initially. The cost of building a custom software solution is in today’s market is very competitive with COTS options, especially when you take into account all the additional licensing costs.
It is important for businesses to address the total cost of ownership (TCO) when exploring a software solution, and there are some distinct benefits to building custom, in relation to purchasing a commercial off-the-shelf software (COTS) package. Let’s look at some of the important factors in understanding the difference between these two solutions, and what the best fit will be for your organization.
COTS software is licensed and not owned. With custom software, you own the source code, and there are no recurring license fees. This has a huge impact on a businesses budget when committing to this type of solution, when an organization is locked into an increase in annual operating expenses. Annual support and maintenance fees are normally not locked in forever. Many companies will give a 1 -3 year period in which the fees cannot be increased. After that period, they can increase the fees.
COTS software cost is typically not limited to the initial up-front licensing fees. Most companies charge around 20 percent of the initial license fee in recurring annual support and maintenance costs. Over a five-year period, that basically doubles the investment they’ve made. For example, if they purchase a $50K license, they will pay $10K per year for an additional $50K over five years and a total cost of $100K over five years. When you look at it that way, the comparison of a $25K custom software project vs. a $50K COTS application looks a lot better when the customer’s investment in actuality is $25K for custom vs. $100K for COTS.
With COTS software, the customer has little or no ability to customize or modify the way the application works. With custom developed software, they own the source code and are in control of what features and functionality they have built into the software. Obviously this comes at a cost for the development work, but offers the customer more cost controls, given the custom development process. It allows for the feature sets to be turned up or down, given the selections that provide the most impact to the organization. These can be rolled out in sequential versions of an application, as a businesses budget allows that cost to be incurred.
Many vendors of COTS software packages only support a limited number of versions. For example, current version and the version prior to the current version. This can force a customer into doing upgrades more frequently than they want to when they have no compelling reason to upgrade, other than the requirement to do so in order to have a supported version. Certain providers have even released a newer version that requires upgrades in the businesses hardware and technology infrastructure.
Ultimately, it makes more sense for businesses to explore building a customized software solution that is tailored to the specific needs of the organization than settling for something that almost fits. If you begin with the end in mind — identifying what business problems a software will solve — it can be built to meet those specific demands. Utilizing a phased approach becomes more cost-effective for the organization over time, and better serves the end-users, as it doesn’t restrict them to working in a contrived way. It will allow an organization to get something up and running within budget, and build onto it based on input sourced internally. Most of the valuable information that will be required when building out future versions of the application will be sourced from end-user feedback after an initial release.