To Buy or To Build - Comparing Costs

Managers choosing the build option often take a very short term view of software costs.  It is not unusual for most to believe that initial design and programming make up the majority of those costs.   

In Perspectives on Software Engineering, Marvin Zelkowitz from the Institute for Computer Sciences and Technology, National Bureau of Standards, Washington, D.C reports on extensive research findings on the costs associated with custom development.  He identifies several categories of cost.  Only 5 % of the costs are in the initial design, and only 7 % in the initial program coding.  On the other hand, 15 % of the overall cost is spent on testing, and a significant 67 % of the costs occur after the testing cycle is completed.

Mark Lutchen, former CIO of PricewaterhouseCoopers, makes this point as well.  He indicates that when evaluating whether to buy or build, it’s critical to thoroughly understand the total development costs.  This step is important, says Lutchen, because 70 percent of software costs occur after implementation. (InfoWorld, February, 2006).

Most managers are inclined to believe that once a software application has been built and delivered they can begin seeing a return on their investment and costs should go down.  In fact, less than one third of the time spent and costs incurred have been completed on the day the application has finished the testing cycle.  For the next 7 to 8 years, they can continue to watch their costs climb to well beyond a more capable application from an established vendor.

In addition, during those several years, software technology will continue to advance at an incredible pace.  This makes it very likely that custom projects will require a redesign, starting over again with the expensive design, development, and maintenance cycle.

The lifetime cost of a built application can easily exceed twice that of a comparable application from an established vendor for several reasons. 

• Economies of scale - With the buy approach, an established vendor has already spread development costs among a much wider audience nationwide or even worldwide, possibly for many years.  In addition, they continue to do so.  A consultant or internal IT department cannot say the same about the build option.

• More experience to start with - The build option starts at a serious disadvantage.  An established vendor has already incorporated time saving capabilities and ease of use, all available on the day of your installation.  A custom built application, which draws on a much smaller design team over a much shorter time span, will be missing many of these important features.

The limitations of user specifications in a custom build project partly explains why such a large portion of overall costs occur after installation.  After installation, the developer continues to make unanticipated software adjustments, correcting weaknesses and performance issues, and adding significantly to costs.

• Technology is changing rapidly - Microsoft estimates a ten fold advance in software technology every 18 months!  It is very difficult for any custom built application to  keep up with this rate of change.   With these rapid advances, custom projects inevitably require a redesign, starting over again with the expensive design, development, and maintenance cycle.  These factors combine to increase costs well beyond expectations. 

Not only are custom projects more costly, they generally lead to costs that cannot be anticipated, and therefore are not planned into the budget.

As every good manager knows, these are the most difficult of all expenses to manage.  Year after year, the ongoing maintenance of custom systems is very difficult to budget.  This is made even more difficult as technology continues to advance at such a rapid pace.

Ultimately, it is fairly common to see a custom system gradually decay, becoming less effective and efficient due to under funding from year to year.  Much of the initial investment is lost, and the expensive custom cycle will often need to begin again.

A built application can also include a number of hidden costs. In particular, with 70 % of the cost of the application occurring after delivery, a build approach will take some time before it can provide a significant return on your investment.  During this time, a solution from an established vendor could be saving you tens of thousands in staff time. 

In addition, if the developers of a custom application decide to rely on IT departments for support, they are seriously underestimating IT costs.  One look at IT salaries makes it clear that IT staff time is very expensive, and usually spread very thin.  The cost of IT time, and the cost of response delays and the disruption in services when busy IT staff are used for support, are potential costs often overlooked with the build option.  (For more on Costs, click here.)

For anyone considering building a case management system, or modifying an existing system that was built from scratch, we strongly recommend you read the article in detail and review the references provided. 

Key Points:

Highest costs in development - The largest portion of the cost of a custom built application does not occur in design or programming costs, but after the application has been installed.

Higher costs overall - The lifetime cost of a custom built application can easily exceed twice the cost of a commercial application.