The Investment

Businesspeople often have skewed perceptions about the cost of software.  A few months ago I talked with a group of reasonably tech-savvy people who wanted to build a fully functioning social networking website on a $10,000 budget – and to have it designed, architected, and developed essentially from scratch by a team of highly experienced experts.  Fortunately, these folks were reasonable, and when they began to grasp the scope of what they looking for, they realized it would be necessary to recalibrate their plans and their funding sources.

There are a lot of alternatives out there for companies that want to accomplish a lot on a limited budget.  Various packages and applications, or cloud and Software-as-a-Service plans, may meet 90% of a business’s objectives at a low cost.  Businesses can often adapt to the idiosyncrasies and limitations in these systems because they are cost-effective overall.

However, when a business requires very specialized software, they are looking at custom development of some sort or other.  If you look around you, you are surrounded by a world of custom software.  Most websites involve customization, whether there are weekend warrior coders who keep them up, or large, dedicated development teams.  Don’t forget that all the applications, packages, and subscription services out there are themselves natively custom built.

Some companies look to outsourcing overseas to reduce the costs of software development.  This is a very mixed bag.  Yes, there is tremendous talent overseas that can be hired at much lower costs than can be found in North America and Europe.  This can work well with dedicated management, which small companies cannot provide unless they themselves are software companies.  There are communications and cultural issues, not to mention time zones.  At one point in my career I did telephone interviews for an H1 Visa program to bring software developers to the US, mostly from India.  What I found was that most of the candidates submitted to us by the overseas agencies were very bright, but very inexperienced.  At the time I got a strong sense of caveat emptor.

My suggestion for companies looking into custom work would be to avoid a knee-jerk reaction to the up-front costs.  Recognize that custom software is an investment.  The returns over time can be enormous, many times the cost.  Custom software can enable companies to carve out new territories, and to develop distinctive competitive edges.  I know one small company in a real estate niche that made a substantial investment in custom software in the mid-2000s.  Yes, it was expensive, and beyond what most similar-sized businesses would even consider.  They were very brave and forward-thinking.  However, once the system was finished, they started reaping the rewards immediately, experiencing a huge boost in closed business, a reduction in costly errors, and an efficiency that permitted them to enlarge their operations.  Moreover, they survived the Great Recession and are now thriving, while most of their competitors folded several years ago.  Was their investment worth it?  The business owners certainly think it was.

If you have serious objectives, be realistic.  You probably won’t be happy if you cheap out.  Some companies do well by figuring out ways to “pay as you go” – by bringing in revenues from another area to invest in the software.  This can be creative, and is quite practical if the software can be designed so that it starts yielding benefits even while it is being developed.  For example, one firm was able effectively to bill out a portion of its software costs to a client.  This was a fair and equitable arrangement, because the software availed superior results to the client at standard pricing, while the company used the partially developed software to save time and effort.

Regardless of how you work it out, understand that custom software is an investment, and should be evaluated in terms of its business case.  If your company is simply not able or willing to make such an investment, then limit your explorations to the packages and services that most closely meet your needs.  Look for flexibility based on sophisticated configuration capabilities, which you can do yourself without customization.

Copyright © 2012 Patrick D. Russell
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