Custom Software: Expectations vs Reality for Businesses (Pt. 3)

Concerning software, Total Cost of Ownership, TCO, is typically the all-in costs for licensing, implementation, infrastructure, and maintenance over a five (5) or ten (10) year period. TCO is typically used to evaluate the financial viability of a technology solution to allow you to compare options fairly.

What is the Total Cost of Ownership?

By considering all financial costs over five to ten years, you can account for solutions that may have a low upfront cost and high ongoing cost versus a solution with a high upfront cost and a low ongoing cost. Another thing to consider is that if a solution is advertised as free licensing it does not mean that there are no other costs associated with it. For example, you may decide to use an Open-Source licensed web-based application. While there are no license fees associated with this, you will still have implementation costs, ongoing hosting costs, and potentially ongoing consulting fees for assistance.

Custom Development TCO

When it comes to Custom Development, the associated costs are sometimes not apparent. Depending on the development firm you are using, you may have some or all the following costs to consider:

• Upfront Costs
• Software Design and Scoping
• Software Development
• Including developers, user experience design, business analysis, etc.
• Graphic Design & Branding
• Copywriting
• Quality Assurance Testing
• Project Management
• User Acceptance Testing
• Bug Fixing
• Go-live Migration
• Ongoing Costs
• Framework and Library Licenses
• App Store Developer Accounts
• Payment Processing Fees (if you process payments)
• Web Hosting (for developer, testing, and production environments)
• Bug Fixing
• Feature Enhancements
• Maintenance & Support Agreements

Commercial Software TCO

For Commercial Software, the costs associated are more clearly defined. Depending on the vendor and the licensing model they are using, you may have some or all the following costs to consider:

• Upfront Costs
• Perpetual License Fees
• Implementation Costs
• Consulting Fees
• Training Fees
• Customized COTS
• Development Costs
• Increased Licensing Fees (in come cases)
• Ongoing Costs
• SaaS License Fees
• Web Hosting
• Maintenance & Support Agreements
• Consulting Fees
• Ad-hoc Support Costs
• Customized COTS
• Bug Fixing
• Updating Customizations to Support New COTS Versions

Comparing TCO’s

Custom developed software has a very high upfront cost when compared to commercial software counterparts. While ongoing costs are typically much lower, that is not always the case. The exception to this is Customized COTS solutions which can have both higher upfront costs and higher ongoing costs. To make sure you are truly comparing “apples to apples'', ensure you capture all costs involved. The key when comparing solutions from a cost perspective is to ensure you are comparing over a five (5) or ten (10) year period. This will give you a proper long-term comparison of costs. If you only compare year one costs, you may not be including larger recurring costs that could greatly affect your decision.

In addition to hard costs that are easily definable, you may want to include soft costs. These are less definable but can have a large influence on your costing decision. For example, you may want to consider the cost saving from automating a previously manual process. Such an automation would  free up user(s) for other revenue generating tasks. The potential cost implications from this can be twofold: 1) higher productivity, and 2) generating more revenue. 

Pros and Cons

Conclusion: Deciding Your Path

The decision between a Custom and COTS solution is one that can have broad consequences that are experienced years later. When making such a decision, it is vital to consider your specific business requirements and each software system will need to be evaluated individually. If you need something you can plug in and use right away and are comfortable changing your processes to match that of the solution, then you should choose COTS software. If, however, you find that your requirements are very unique, have the time to implement, and the budget to accommodate, then you should choose custom software development. When making this decision, try not to let the cost be the only factor you consider if wavering between both options, choose wisely. Once you decide to commit to a product, it will be a very large effort and expense to change to something else afterwards.

One of the best ways to be successful is to find a great partner, and we have experience and expertise on both forks in this path. We're here to help you assess, decide, and get started down the path to that bright future regardless of the complexity in front of you today. Get in touch, we'd love to talk with you!

About the author

Chad Ross is a Senior Business Analyst with our User Experience & Design practice and is based in Edmonton, Alberta. He is a seasoned professional with 17+ years of IT related experience and has knowledge in both the technical and business aspects of technology. He is an avid science fiction fan and enjoys seeing how sci-fi has introduced new technologies which have also become realities. From Star Trek communicators (mobile phones) to Artificial Intelligence, he is excited to see what advancements are yet to come. Connect with him on LinkedIn!

About the artist

Jennifer Forth is a freelance Illustrator from Edmonton, Alberta. She works mainly digitally but enjoys working in a traditional art medium from time to time. Her work is generally of the fantasy genre and she enjoys seeing where her imagination will take her.

For this piece she writes, "For this piece I played with a few ideas but ultimately decided to keep it simple and work it like a conclusion to the other two pieces.The character’s work is complete and so is mine."