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Investment in Custom Software: Substantial Returns in the Long Run

How an Upfront Investment in Custom Software Can Lead to Substantial Returns in the Long Run

Published on6 Jan 2020

Introduction

When many business owners hear the term “custom software,” their first instinct is that it’s an exorbitant expense and a complex undertaking with little reward. Most assume that an off-the-shelf, one-size-fits-all solution will do the trick and save some cash. But in reality, especially for large and rapidly growing businesses, that upfront investment in custom software will lead to a better ROI and enable more long-term growth than a DIY network of off-the-shelf solutions. Because in reality, one size doesn’t fit all.

We’re going to take a look at how an investment in custom software can ultimately be a huge money saver and growth driver and how to determine whether it’s the right choice for your organization. But first, let’s take a step back and be sure we’re all on the same page about what we’re talking about when we talk about “off-the-shelf” versus “custom” software.

Off-the-Shelf versus Custom Software: An Introduction

Every business today relies on software of some kind to run efficiently. This could include inventory trackers, customer relationship management systems, e-commerce platforms, mobile applications, and much more. But the question is, should businesses be buying or building these software platforms? And, even then, what’s the difference?

Off-the-shelf software is designed and built to be sold as a “plug-and-play” system that automates a discrete set of key business operations. The idea is that most businesses in a given industry will have the same business problems that can be solved with one particular piece of software. These applications are generally sold on a subscription basis. On the one hand, that means saving money in the short-term and the vendor will be responsible for maintenance, bug fixes and upgrades. On the other hand, there is usually little opportunity for customization, and it’s likely the software won’t quite meet all your needs.

Compare off-the-shelf software to renting a home: you’re saving money upfront by not forking over a down payment, and you’ve got a landlord to call when your roof springs a leak or you start finding bugs in your kitchen, but there’s a limit to how much you can really customize your rental home, and it may require some MacGyvering to really make it work for you and your family.

Additionally, with off-the-shelf software, as with renting, you’re not building equity, since ready-made solutions don’t belong to the companies using them. Owning your software systems can dramatically increase your business’s valuation.

Purchasing a home, on the other hand, requires more upfront investments in money and time — your down payments, closing costs, and any initial renovations, for a start — but the end result is a fully customized home that you own. It fits your needs perfectly, and ideally, you’re building equity even as you’re paying the mortgage.

So, Is Custom Software Right for Your Business?

All that said, though we’re clearly biased, custom software may not be the right choice for everyone. Let’s take a more detailed look at the pros and cons of custom software, and then we’ll work through a series of questions to help you determine whether custom software is the right choice for your business.

Pros of Custom Software

  • When your software is tailor-made for your business, it will be much more effective at improving your operations and optimizing internal processes. These improvements will trickle out into external processes, improving your relationship with customers and your business’s reputation. While off-the-shelf software may meet 75 percent of your needs, custom solutions will address every nook and cranny.
  • Customized software is built with your future in mind. It meets your needs today, and it’s scalable, so it will grow with you, empowering every step of the way.
  • You have complete ownership over your custom platform, with none of the royalties, subscriptions, or hidden costs of off-the-shelf products. That means you can make any changes you want, whenever you want, or even, eventually, white label it as another revenue stream.
  • And most importantly, custom software is, completely customizable. It can be tailored to meet any internal or external needs and integrated seamlessly with other platforms your business uses. You can install the functionality, interfaces, and technology you want — and leave out anything you don’t. You can integrate specific functions, application program interfaces (APIs), third-party platforms, and technology that you want, while easily foregoing the ones you don’t need. This makes your software — and in turn, your business — more streamlined and efficient.

Cons of Custom Software

  • Like a down payment versus rent, customized software has higher upfront costs than ready-made solutions. So, if you’re a small company or a bootstrapped startup with fairly simple technology needs, the lower barrier of entry may make off-the-shelf software more accessible. Just remember that you’ll be paying those third-party subscription fees as long as you’re using the platform, and if you use it long enough those fees will eventually outstrip the upfront costs of a custom solution. Be sure you’re ready to make the long-term investment when the time is right.
  • While off-the-shelf software can be implemented fairly quickly, custom software can take up to a year to develop and launch. Businesses that invest in custom software will also need to dedicate significant time to working with their software development partners to ideate and iterate on the product. Of course, this time-to-launch can be mitigated with proper planning, and like the monetary investment, the investment in time will pay off in the end.
  • It’s not always easy to choose the right vendor for custom software development. There are countless vendors out there competing for your business, and you have to sift through them to find a partner who is willing to understand your business and its needs — and work with you to create the right solution for your organization. You and your vendor will both need to be dedicated to managing the project efficiently and continuously assessing progress versus goals. Only by partnering with the right vendor for your business can you avoid becoming one of too many failed software development projects. (Of course, there’s always the option to build your software in-house, but the benefits of outsourcing will almost always outweigh the attraction of DIY.)
  • Finally, it’s not always easy to determine the cost of a custom software project on the outset. There may be surprises that lead to increased costs and protracted timelines. Careful planning and dedication to a minimum viable product can mitigate these risks, but there will always be some level of uncertainty.

4 Questions to Determine Whether Custom Software Is Right for Your Organization

Now that you understand the pros and cons, ask yourself these four questions to determine whether custom software is right for you:

  • Does our budget allow for a sizeable investment in digital transformation?
  • How will this investment help my business? What would happen if we didn’t implement a custom solution, this year or five years from now?
  • Is there an off-the-shelf platform that can meet my business’s needs?
  • Will a custom solution be more successful and/or cost-effective in the long-run? A vendor works toward a specific scope, but with no commitment to a specific budget.

Custom software may truly be a waste of time and resources if you’re simply reinventing the wheel. For some of your business processes, there may be a perfectly suited off-the-shelf solution. Take QuickBooks, for example. To recreate QuickBooks would take a decade and millions of dollars if not hundreds of millions. But for generic tasks like accounting — even complex accounting — QuickBooks is a perfect solution. So why invest in recreating something that already meets your needs?

That said, there may be other business operations that QuickBooks can’t handle — such as complex billing needs. In cases like this, it may be practical to build a custom solution that integrates with QuickBooks to fill in the gaps.

Ultimately, your decision will come down to the results of your cost/benefit analysis. Will your investment pay off in a reasonable amount of time? And what (if any) consequences would you incur by skipping this investment? After all, in some cases, failing to invest in new technologies may actually shorten the life of your business.

If the economy of scale just isn’t there, or if your company is fairly small and planning to stay that way, a big upfront investment may not be feasible, making an off-the-shelf solution the right choice.

But if carefully considering these four questions leads you to the conclusion that custom software is a smart choice for your business, you can rest assured the investment will pay off exponentially in the long run.

Contributor
  • Timour Procopovich
    Timour Procopovich
    linkedExecutive Vice President
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