Build vs Buy - The Cost Equation
“Build” vs “Buying a Product” for Enterprise Software Solutions - The Cost Equation
The age old debate over enterprise software “build or buy” has many considerations, in this article we concentrate on cost. Cost estimates in our experience tend to be over simplified and as a result introduce huge potential downside risk to decision making.
Why?
Trying to determine the resource effort, all the hardware and software costs, and change needs over the life-span of a solution is tricky at the best of times. More often than not it is an exercise that is avoided in preference for one of two common approaches:
- A simple traditional cost formula supplemented with past personal experiences. Typically vendors sell solutions based on an equation of upfront costs and a “% of upfront costs” per year. So the cost of product and configuration is $X upfront plus a multiple of $X for services for the initial purchase, followed by a % of $X per year for reoccurring fees for the life-span of its use.
- A rule of thumb view that ignores costs, the view being that if a product matches your need by at least 90% and for the 10% that does not you are prepared to adapt your enterprise to the product then you must choose product irrespective of cost.
What to do?
We believe costs need to be measured according to the life-cycle phases of the enterprise software solution, namely: Take-on, Operational and Decommission. Each phase is then weighted by a number of key cost factors and adjusted by a stability cost measure (the factor of change expected) for the solution and extrapolated out by the life-span in years.
Based on our experience we have built our own estimation model technique which works for both a product purchase and for custom software developments, called the IMSX Balanced View Cost Estimator.
The cost estimate is structured as follows.
Take-on Phase
The initial acquisition or build is a very intensive period of time, especially in the case of custom software developments, we weight our calculations accordingly. In the case of a product purchase and configuration, the license costs are also significant factor of determining of overall cost. The cylinders below show the emphasis / weighting placed on key elements in the cost equation.
Operational Phase
During the normal operation of the enterprise software solution many of the factors that make custom software development more expensive in the initial take-on balance out over time. The exceptions are maintenance and upgrade which are weighted depending on the measure of stability (the factor of change). We adjust our costs accordingly.
Decommission Phase
Finally the costs associated with “removing” or “discontinuing” an enterprise software solution is rarely thought of, in our approach it is an important part of the equation.
IMSX’s Balanced View Cost Estimator Example
Take an enterprise product purchase which costs $100,000 dollars in initial license fees and will be used for 5 years.
Using the traditional cost formula as a baseline we apply our estimation approach with the same initial details but introduce a stability measure of 50%, meaning that we feel that there will be moderate changes required to the enterprise software solution over its life-span.
The cost estimate results are:
* 2 times multiple for services and 20% reoccurring fees.
With a variance of nearly $200,000 or 49% over the baseline is in our view one of the key issues in why many enterprise software solutions are more expensive than anticipated. Part of the problem lies in the estimation even before the take-on of the solution!
Now the key consideration in the “build” vs “buy” debate around cost can be considered. In the example above our calculations estimate that the equivalent custom software development will cost just under double or 71% more.
Based on this information it is now possible to put a price on the benefit of having your exact needs matched, or the cost of having a differentiator, both of which are the key benefits of building versus buying.
Summary
It is our recommendation that you apply a similar approach to all software cost estimation processes even in cases where the build versus buy debate is not a factor.
If you need any advice or help in this area please contact us, we offer a range of services to help define requirements and provide detailed cost estimates in a quantifiable manner to allow for informed decision making.