What’s Best for Your Business Technology Needs?
Whether to build a custom app or buy a commercial off-the-shelf (OTS) solution has long been a difficult choice for businesses. To find an answer to this perennial question, businesses need to put their requirements against their capability to invest and scale in the long term.
Invariably, each business will have its own budget constraints, which will ultimately drive the decision in favor of a choice. There are compelling reasons to choose custom software development, especially when you want to develop a niche product. However, budgetary constraints might stand as a roadblock. Financial capabilities are thus what it ultimately boils down to.
When operating with a limited budget, building specialized software might seem to be an unnecessary proposition. The doubt that the costs can escalate and surpass the allocated budgets, due to missed deadlines and high resource consumption is enough to prompt you towards a commercial off-the-shelf choice.
Off-the-shelf appears as a real cost saver due to its fixed price feature. But what about all those extra costs that you don’t come to notice directly? I won’t incur additional costs and managing to have software in my budget is like knowing half-truth. Chances are once you have an OTS solution, hidden costs might start surprising you. And what if while paying for this cost, you are also gripped with a realization that the solution is actually not meeting your needs?
“We now know that something between 85 and 90 percent of most software product features is unwanted and unneeded by customers. That is an enormous amount of waste of time and money that ends up on the floor,” once, thus, rightly mentioned by Steve Blank, American entrepreneur, educator, author, and speaker.
To understand the nuances and implications and better equip yourself to make an informed decision, you must delve into the financial perspectives of this conundrum, exploring the benefits and drawbacks of both options.
Cost Is the Real Decider – But What Makes It: An Analysis of Both Cases
With pre-built software, one major advantage is the lower upfront costs. Since the development costs are spread across multiple customers, the price tag for off-the-shelf solutions is often more affordable for businesses with limited budgets. While custom software may require a higher upfront investment.
What is it that causes this difference?
We must investigate the cost elements that differentiate the two choices.
With these cost components, you can perform a comprehensive TCO (total cost of ownership) analysis and understand the long-term financial implications of each choice. It’s not always the question of how much you want to optimize your budget. You might be well capable of investing in IT projects, but keen on having a quality solution. So, despite OTS offering a low investment promise, you will go for custom software that hits the bull’s eye.
Impact Assessment: What All You Need To Consider
In this tedious process of comparison, we finally arrive at a cost-benefit analysis. This is a valuable exercise as it helps weigh the initial investment against long-term returns. Finally, in any software development project, ROI is the focus, and irrespective of if it is a COTS or custom software, you will always associate some ROI with it. A step-by-step approach to conducting a cost-benefit analysis will require you to:
- Identify and Define Requirements: Be clear about the requirements and objectives that the software needs to fulfill. Understand the needs of your organization, stakeholders, and end-users.
- List and Evaluate Costs: We have highlighted costs for each case above. Carefully consider them while evaluating both choices. Estimate the monetary value of each cost item as accurately as possible.
- Evaluate Benefits: Identify the potential benefits that each software option can bring to your organization. Do not ignore intangible benefits. While tangible benefits may include a rise in productivity and cost savings, intangible benefits may include better response from users and improvement in decision-making. A key step is to quantify the benefits by assigning scores or qualitative measures.
- Assign Monetary Value: Assign a monetary value to each benefit identified in the previous step. Tangible benefits can be relatively easier to quantify, such as estimating an increase in revenue. For intangible benefits, attempt to estimate their potential impact on financial metrics.
- Determine Timeframes: Time relates to cost, so consider the timeframes over which costs and benefits will occur for each software option. Benefits can be spread over the software’s lifespan. The timeframe for cost and benefit analysis may range from a few months to years.
- Calculate Net Present Value (NPV): Highly important to judge a choice’s viability, use the concept of NPV to account for the time value of money, and calculate the overall value of each software option. Deduct the total costs from the total benefits for custom software and off-the-shelf software separately, considering the timing of cash flows and applying a discount rate. A positive NPV will indicate that the benefits are outweighing the costs and vice versa.
- Assess Risk and Uncertainty: Consider the risks and uncertainties associated with each software option. Identify potential risks, such as project delays, and cost overruns.
You should arrive at a decision after reviewing the results of the cost-benefit analysis. Evaluate the trade-offs between costs, benefits, and risks for each option, before you take the final decision.
The peculiarities of each project make cost-benefit analysis a tough exercise. Sound business owners thus consider it wise to find a good custom offshore software development services provider to perform the assessment.
As you figure out the best choice, keep applicability to your business and your capacity to invest on top.
Custom applications can potentially generate revenue growth through increased productivity, improved customer experiences, and innovative features. On the other hand, the viability of off-the-shelf solutions cannot be ignored. When you are looking for a generic solution that can easily fit your needs, OTS can lead to cost savings.
So, each option has its advantages to offer in financial terms, as each suits a different context. If custom software is indispensable for your needs, you can seek our assistance. Finoit is a leading custom software development company in USA and has served the world’s renowned enterprises and successful startups that have banked on our capabilities to build custom applications.
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