Thinking Beyond Total Cost Of Ownership

Founder and CEO of Artisan, an innovation consultancy supporting global leaders with technology strategy and solution services.

It’s a common misconception that buying software is cheaper than building it. In reality, the true TCO (total cost of ownership) for a software solution—whether custom-built or out of the box—depends on many factors. While capital investment is an important consideration, it often ends up as a wash when considering all components of a build-versus-buy decision. Ultimately, business value (more than TCO) should drive technology investment decisions.

Gartner predicts that enterprise software spending will exceed $570 billion worldwide this year. The percentage of that capital spent on custom versus pre-packaged solutions is largely irrelevant. What matters is whether the technology solutions requiring such significant investments are driving business value or hindering it.

Off-the-shelf solutions may require less initial setup but can involve hefty licensing fees. Often software providers advertise the long-term cost savings of their solution and point to the fact that they maintain the product. There is no need for a dedicated team to manage upgrades, feature enhancements or bug fixes—so they say.

The problem is that most successful businesses thrive because they differentiate themselves. This means smart organizations typically need to customize pre-packed solutions to fit their unique business needs. After a few years and multiple layers of varnished customizations and work-around integrations, the solution becomes so complicated and nuanced that it requires an internal team to maintain it anyway.

Businesses that choose not to tailor off-the-shelf solutions may avoid the complexity and cost of an internal support team. Still, in exchange, they force their business users to become “human APIs” in a sea of SaaS services. To compensate for the lack of integration, users toggle between multiple screens, copy-and-pasting into spreadsheets as a workaround. Factor inefficiency and limited access to data into a TCO equation and it quickly tips in favor of customization.

That said, a completely customized solution is not always a silver bullet. Businesses that pursue the “build” route face a generally higher upfront price tag and longer ramp-up times. They also may need to take on the long-term commitment of employing a dedicated team to support the new product. The benefits are that they create a solution tailored to their organization’s specific needs. Every feature is utilized because each one was commissioned for the unique business needs of the users. There is very little waste. And in ideal cases, the solution is thoughtfully integrated with the rest of the organization’s core technologies and data to ensure maximum user adoption and increased efficiencies that ultimately impact the bottom line.

Whatever path you choose, it must bring tangible value to your company. Yet, what ultimately drives business value for each organization is nuanced. Following are a few questions I recommend all business leaders ask when making the build-versus-buy decision:

1. Is this solution a differentiator?

The ability to differentiate yourself from competitors is critical in today’s fast-moving market. If creating a customized solution allows you to stand out from the crowd or provide an exceptional customer experience, it’s likely a worthwhile investment. For example, customer e-commerce platforms that enable seamless integrations or a warehouse management platform that streamlines supply chain issues can make a significant difference for the customer.

Conversely, commoditized solutions that already fit your organization’s needs don’t need to be customized. Go ahead and buy a proven off-the-shelf ERP or workforce management tool. If customizing won’t drive new revenue or move the needle on cost or time savings, don’t waste your time reinventing the wheel.

2. Has a specific tool become the limiting factor for your business?

If a legacy tool or system has become a limiting factor, it is likely a sign that you need to explore custom solutions. Out-of-the-box solutions are built for the average organization. When your company starts outgrowing the core product offering, you’ve likely been forced to create workarounds and adapted solutions. Technology should be an extension of your business, never the harness holding you back. If your current technology encumbers your growth, it’s probably time to build something new.

3. Does this solution integrate seamlessly across the organization?

Today, access to real-time data is critical. When utilized quickly and wisely, it can inform catalytic decisions and drive growth. But when data across systems is ignored or siloed, the results can be catastrophic. Building a custom solution could be the better choice if an out-of-the-box technology tool is hindering synergy across the business or requiring cumbersome manual effort to integrate.

The Bottom Line

Over the next few months, I plan to dig deeper into these questions with follow-up articles. The decision to build or buy is complicated and looks different for each organization, so each topic deserves a deeper dive. The bottom line is: Whatever path you choose, the business value should drive your route forward.


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