Make or Buy in Software Development

Custom Development or Off-the-Shelf Software? Which One Pays Off?

The decision between off-the-shelf software (Buy) and custom software development (Make) can have far-reaching consequences.

Both approaches have their pros and cons that should be carefully weighed. Developing custom solutions can provide a significant competitive advantage. In this article, we explore how to make the best decision for your business.

Make-or-Buy Software Calculator

This article also includes a Make-or-Buy Calculator that lets you run through different scenarios and use it as a decision-making tool.

What Is the Difference Between Off-the-Shelf and Custom Software?

Off-the-shelf software refers to all programs (desktop applications, online SaaS solutions, etc.) that are readily available and simply need to be purchased. These programs typically address commonly occurring business problems and provide the generally needed functionality to solve them.

Examples of Off-the-Shelf Software

Well-known examples of off-the-shelf software include

• Microsoft Office

• Apple Mail

• Adobe Photoshop

SAP is also often classified as off-the-shelf software, although that is not entirely accurate. Companies using SAP frequently have their SAP applications heavily customized.

Custom Software Is Tailored to the Client's Needs

These solutions are typically created by software development companies, agencies, or internal development teams to support specific business processes.

Through custom development, companies can gain a competitive advantage, as they can design the software precisely according to their own requirements and goals. This can significantly boost efficiency.

Advantages of Off-the-Shelf Software

Off-the-shelf software is often more cost-effective than custom-built solutions. Subscription models (Software as a Service, or SaaS) are becoming increasingly popular for software products, such as Microsoft Office or Adobe Photoshop.

Since off-the-shelf software is already developed and tested, it can typically be implemented faster, as there is no waiting time for initial development. The only challenge lies in learning the software. Therefore, it is important to also consider the quality of documentation before purchasing.

Disadvantages of Off-the-Shelf Software

The nature of off-the-shelf software lies in its focus on a broad audience: it attempts to solve most users' problems. However, for specialized use cases, compromises are inevitable.

Not all features needed for specific business processes or industry requirements can be covered by off-the-shelf software. This can lead to a patchwork of various standard software products on which a company's operations depend.

Advantages of Custom Software Solutions

Custom software solutions offer numerous advantages for businesses. While off-the-shelf software often requires compromises to meet the needs of various users, custom software development enables a tailor-made solution precisely aligned with a company's specific requirements.

Who Owns Custom Software?

With custom-developed software, the intellectual property typically belongs to the company that commissioned the development. Unlike standard solutions, where the rights often remain with the software vendor, companies retain control and ownership over the source code and associated rights with custom software.

The independence that companies gain through custom software development is highly valuable. Custom development frees businesses from external pricing models.

Custom software development often pays for itself quickly. The tailor-made solution streamlines processes, leading to savings in time and resources. Furthermore, improved performance and productivity contribute to a rapid return on investment and create substantial long-term value for the company.

Risks of Custom Development

A key risk lies in the complexity and duration of development. Creating custom software often requires significant time and careful planning. This can lead to longer development cycles and potentially delay the time to market.

There is also the risk of budget overruns. Since custom solutions are specifically tailored to a company's requirements, unexpected challenges can arise during the development process, causing additional costs.

Another factor is the dependency on internal or external development teams. Both internal development teams and external software agencies can face bottlenecks or personnel changes, which can affect the continuity and success of the development project.

Finally, there is the risk that the developed software may not meet expectations or may not function as intended. Even with thorough planning and development, there is always the possibility of issues arising or requirements changing over time, leading to malfunctions or additional development needs.

How We Mitigate Risk

To reduce risk for our clients and partners, we take three measures:

1. We do not accept projects that we cannot confidently deliver. We would rather decline a project or recommend a suitable colleague or agency than take on excessive risk — for both ourselves and the client.

2. We bring in specialized experts for particular deliverables. By engaging professionals with domain-specific expertise, we ensure that even demanding requirements are implemented professionally.

3. We provide a bug-free guarantee (functional guarantee) on our development, taking on the risk rather than passing it on to our clients. This guarantee assures our clients that the software we develop is free of defects and functions as expected. Combined with fixed-price proposals, this significantly reduces risk for clients by providing clear cost transparency and protection against unexpected financial burdens.

The Make-or-Buy Analysis

To make the optimal choice between custom development and purchasing software, several factors should be carefully weighed.

The decision factors include:

• Cost: Initial investment costs as well as long-term costs for maintenance and support.

• Timeline: Speed of implementation and time-to-market.

• Functionality: Alignment of available features with business requirements.

• Longevity: Flexibility of the solution to adapt to changing requirements.

• Support: Availability of technical support and training.

• Maintenance: Effort and cost required to maintain and update the software.

Example of a Make-or-Buy Analysis

To conduct a make-or-buy analysis, we compare the costs and benefits between using an off-the-shelf solution and developing a custom solution over a five-year period. Here are the relevant parameters:

1. Monthly subscription cost for the off-the-shelf solution: EUR 299

2. Additional monthly costs for missing features: EUR 29

3. Number of orders handled monthly with the off-the-shelf solution: 2

4. Duration and cost of custom development: 7 months, EUR 42,000

5. Potential time savings through custom development: 50%

6. Average order value: EUR 15,000

7. Annual maintenance costs for custom development: EUR 1,200

To calculate the costs or savings over a five-year period, we need to consider both monthly and annual costs as well as the potential revenue from handling orders with both solutions.

Cost of the Off-the-Shelf Solution Over 5 Years:

Monthly costs:

• EUR 299 (subscription) + EUR 29 (additional costs) = EUR 328

Annual costs:

• EUR 328 * 12 months = EUR 3,936

Cost over five years:

• EUR 3,936 * 5 years = EUR 19,680

Cost of Custom Development Over 5 Years:

Development costs:

• EUR 42,000 one-time

Maintenance costs over five years (waived in the first year):

• EUR 1,200 * 4 years = EUR 4,800

Total cost of custom development:

• EUR 42,000 + EUR 4,800 = EUR 46,800

Revenue from Orders:

With the off-the-shelf solution:

• 2 orders/month * 5 years * EUR 15,000/order = EUR 1,800,000

With custom development (accounting for the 50% time savings):

• (2 orders/month 5 years * EUR 15,000/order) * 2 = EUR 2,700,000

Conclusion and Break-Even:

The cost of the off-the-shelf solution over 5 years is EUR 19,680, while the cost of custom development is EUR 48,000.

However, the potential revenue from handling orders with the custom development is significantly higher (EUR 2,700,000) compared to using the off-the-shelf solution (EUR 1,800,000).

Thus, custom development is more profitable in the long run despite the higher initial costs.

What If the Make-or-Buy Analysis Is Negative but Off-the-Shelf Solutions Are Inadequate?

If the make-or-buy analysis is negative and custom development would potentially be more expensive than purchasing an off-the-shelf solution, you still have several options:

• Evaluate Alternatives
  It may be worthwhile to explore alternative solutions or vendors that might be a better fit, even if they don't cover the full range of requirements. Alternatives to previously known solutions can pave the way to a hybrid approach.

• Use Hybrid Solutions
  A combination of off-the-shelf solutions and custom development can be a cost-effective way to leverage the advantages of both approaches while meeting specific requirements.

If in doubt, we recommend taking advantage of our free consultation. We can potentially highlight previously unknown alternatives or propose a solution that meets your goals within your intended budget.