Custom Software: Expectations vs Reality for Businesses (pt. 3)
Previously in Part I and Part II of this series we discussed the differences between Commercial Off the Shelf Software, or COTS, and Custom Developed Software. Now, we will dive into the financial implications of your choice. We will also explore factors like time period, and total cost of ownership.
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 some 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.
Commercial Software Pros & Cons
Pros:
- Meets general needs of business
- Typically, lower upfront investment
- Typically, very configurable
- Shorter implementation timelines
- Easier to research based on other user experiences
Cons:
- Sometimes requires changing business processes
- Limited to no customization capabilities
- Customized COTS has long implementation timelines
- Customized COTS can have high upfront investment
- Ongoing licensing costs
- Dependent on software vendor for enhancements/new features
- Highly configurable solutions typically have high upfront consultation and implementation costs
Custom Software Pros & Cons
Pros:
- Meets exact needs of business
- Highly customizable
- You own the source code (no licensing)
- You can work with any developer/firm
- Provides a competitive advantage due to uniqueness
Cons:
- Typically, higher upfront investment
- Longer implementation timelines when not compared to Customized COTS
- Configuration capabilities can increase TCO
- Scope can easily creep and expand
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.