Articles | July 23, 2020

Build Vs. Buy Software: Which is Right For You?

During the COVID-19 pandemic it has become clear that organizations with robust software capabilities were able to sustain and in some cases grow their operations and programs. And the software components that are essential for these efficiencies and better support business continuity will be looked at more closely than ever by business leadership.

When it comes to selecting the best software solution for your business needs, the "build" or "buy" decision may still be relevant. For the past 15-20 years, there has been more motivation to buy rather than build, as a wide variety of commercial off the shelf (COTS) software packages became available in the marketplace. COTS packages were often not only less expensive, but much faster to deploy when compared to the time required to develop a custom application. In recent years, however, new software development tools, software and integration frameworks (allowing integration of more than one application), and the introduction of agile development techniques has reignited the build versus buy debate.

When it comes to determining the best software solution for your organization, how will you decide whether to pick the flexibility of building your own software or selecting a time-tested COTS product? Organizations or businesses that find they have unique requirements or specialized customer needs frequently face this dilemma. While costs may be one criteria for making this decision, it is also critically important to consider efficiency gains, functional capabilities, reliability and support to ultimately find the solution that will be the best overall fit for your organization.

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As part of the decision-making process to buy or to build, consider each of these factors carefully

Most organizations with the mission of serving participants of a benefit plan or membership group are typically not in the software development business. Therefore, before proceeding with a build versus buy analysis you should perform the following market research: 

  • Identify the high-level problem you are trying to solve
  • Post a Request for Information, or contact vendors you may be familiar with in the industry
  • Host multiple demonstrations of COTS products, to fully understand the offerings available in the market

Once these steps have been performed, and the organization isn’t convinced buying a solution is not the best alternative, a full build versus buy analysis should be performed.

The true costs and benefits of a build versus buy decision is not just in the acquisition.  At a minimum, organizations should compare the following items when considering their options:

  • Availability of technical staff and subject matter expertise (normally a key differentiator, as building requires more time and specialized skill)
  • The degree in which requirements are unique in comparison to what is available in the marketplace
  • Likelihood of achieving target business process improvements
  • Customer experience vision and capabilities 
  • Long-term support risk factors related to staffing, tools, and software
  • Viability and longevity of the products available and solution vendors
  • Speed to implementation need
  • Data analytics capabilities
  • Integration capabilities with other enterprise software 
  • Budget and cost – both long and short term
  • Cyber security considerations and risks with each option
  • Solution flexibility and agility to support changing rules

The analyses of the prior list will help guide the decision, but there are unique attributes your organization needs to consider.  Segal has assisted many clients in defining and benchmarking these unique considerations. 

Build vs. buy: advantages and disadvantages

To assist organizations in making this challenging and important decision, we have laid out some of the common advantages and disadvantages associated with each option.  It is important to remember that each situation can be unique based on the current capabilities of vendors servicing the marketplace, and the priorities of each organization. Here are some examples:  

Advantages of building

  • Need for customization and differentiation in the marketplace: One of the biggest advantages of building a custom software solution is that it will meet all of your functional and operational needs. The software will be developed to your unique business model and goals. The business has total control over the developed solution, the features, and the flexibility to adapt when needed. Often, this starts as an agile project prototype and is grown into the desired system through ongoing enhancements in accordance with business priorities and cost commitments. Through the development process, staff will be able to provide input and feedback regarding the features and functionality that are of the highest priorities.
  • Span of control: Through the build option, the organization can be the sole owner of the developed software and therefore has full control over the options, security measures, system updates and workflow decisions. 
  • Integration across your other technology platforms: By choosing the build option, organizations can leverage technologies that already fit within their other enterprise software.  This typically leads to a seamless integration with other tools and back-end systems, and leverages knowledge already in your organization.  

Disadvantages of building

  • Longer project duration: It typically takes more time to build software from scratch versus buying a COTS product.  The organization will need to define its workflow, develop iterations of the software, and continue to optimize them to meet all of the business requirements. The organization will need to make a significant investment in staff time to get the end product to the point where it meets their goals. Often time the long-term vision for the software must be deferred in order to just get a base solution in place. The more time that passes, the more likely the requirements and vision will change leading to a software project that is never truly completed.   
  • Larger initial investment costs: Customizing a framework, or building an application from scratch requires a greater financial investment than buying a COTS solution. COTS vendors have the advantage of scaling costs across many customers and therefore are able to provide a final product at a much lower cost than building from scratch.  

Advantages of buying

  • Speed to market: One of the primary reasons organizations choose to buy COTS products is that they already exist and can be deployed much more quickly.  If an existing COTS product meets most of the business needs, then there is little point taking on the risks, costs, and time to develop a customized software when it can already be purchased in the vendor marketplace. 
  • Typically less initial cost: When costs are a significant factor and there are limited resources to develop software, then the COTS purchased option is usually the best choice. There are typically lower up-front costs to buy a product than to build one from scratch.  
  • Ongoing updates, maintenance, and new features: In order to stay relevant, COTS vendors must maintain a competitive and up-to-date product.  To serve their broad customer base and to be compliant with their software agreements, COTS vendors need to deploy maintenance, enhancements, and support patches quickly. While there are typically long-term costs associated with this ongoing support, transferring that risk and effort to a third party is often a significant advantage for organizations. 

Disadvantages of buying

  • Lack of customization: When your organization requirements are truly unique, and there's a need to have the software perform to your organization’s specific business needs, then COTS solutions can be limited.    
  • Lack of control over the software product: The vendor controls the solution’s updates, functionality, pricing and capabilities. The ongoing decisions on the software’s features, capabilities, ongoing costs and future viability are out of the buyer’s hands.
  • Compatibility and connectivity issues: Some COTS software may not be compatible with your other programs, devices, or products that exist in your current technical environment. And they may not be compatible with future changes to your environment.
  • Long-term cost: Although ready-made software may be cheaper to buy initially, its costs may grow over time. Support and ongoing licensing is often restricted so organizations may need to reinvest costs again over time. And as the organization changes or grows, new license costs may need be incurred. 

These are just a sample of the advantages and disadvantages of each alternative. Organizations often start with the assumption they will need to build, but only after performing a marketplace analysis of COTS products can they make an informed decision.  

How we can help

Your buy versus build decisions will have major long-term impacts on your organization. It is important that all stakeholders understand why and how you arrived at your decision. Segal has invested in research and tools that can help facilitate the decision-making process, including:

  • An understanding of how technologies are changing the landscape of build vs. buy options
  • Pension solution project cost estimator a statistical technique used to estimate costs based on our historical project cost data and cost factors like the number of participants in the plan, number of end users and number of employers
  • Our own database, for comparison of actual project costs inclusive of licensing and support
  • Methods for comparing and contrasting risks and benefits
  • Template RFPs/RFIs that allow you to gather requirements and request competitive pricing
  • Proprietary contract clauses developed over 40 years of helping clients who have chosen the “buy” option
  • Advice from consultants who successfully deliver “build” strategies using agile software development principles

Finding the right consulting partner can help your project and operations run smoothly and enhance member satisfaction.

Our team will work with you to understand your unique needs and will make sure you select an effective strategy. Once you've selected the best alternative, we can assist you with the transition process to ensure everything is in place and meets your expectations.

This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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