Whitepaper on a CIO's decision criteria for building or buying software applications

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BUILD OR BUY: WHAT MAKES SENSE FOR THE
CIO

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Table of Contents
2 Executive Summary..........................................................................................................................................................3
3 Introduction.....................................................................................................................................................................3
3.1 Custom Software Solutions ......................................................................................................................................4
3.2 Hybrid Solutions ......................................................................................................................................................4
4 Factors to Consider Before Investing on Custom Software ..............................................................................................5
4.1 Off-the-Shelf Software are Usually Rigid..................................................................................................................5
4.2 Off-the-Shelf Software May have Compatibility Issues with Other Programs...........................................................5
4.3 Every Need Cannot be addressed by Custom Software ............................................................................................5
5 Benefits of Using Custom Software..................................................................................................................................5
6 When Should a Company Use Generic Software? ............................................................................................................6
7 CIOs Dilemma- Buy versus build.....................................................................................................................................6
7.1 Time to Market ........................................................................................................................................................6
7.2 Features and Functions ............................................................................................................................................6
7.3 Total Cost of Ownership..........................................................................................................................................6
8 Guidelines to Make a Sound Buy/build Decision .............................................................................................................8
9 Conclusion.......................................................................................................................................................................9
10 Abbreviations.................................................................................................................................................................10

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Executive Summary
The CIO’s role in the present day organization has evolved from the earlier technical role to a strategic role. Consumer and
enterprise technologies are becoming pervasive, scalable and interoperable and thus the demarcation between strategic and
operational applications is gradually getting blurred. The increasing business value of the CIO’s decision makes it necessary for
them to have a collaborative approach in most of their decision making. The technology leader has to consider the strategic
implications of his decisions before deciding on in-house software development or on buying off-the-shelf software solutions.
The buy versus build decision depends on combined factors like strategy, timing, desired functionality and affordability. The
rule of the thumb is one builds when it offers competitive advantage or else one buys. A rational build versus buy decision can
be taken by putting in place well defined requirements and matching one’s choice of software solution with the business needs.
The build versus buy decision is unique to each organization, industry and application. Each solution have their own set of
advantages. Off-the-shelf software solutions offer standardization and cost advantages. Custom software are used for high tech
industries, pharmaceutical and the financial sector which demand specialized functions and is used for some core functions.
Custom software is chosen only if it yields competitive advantage and the benefit of implementing it is higher than the cost of
investment. Hybrid solutions are now increasingly being considered. They bring a blend of off-the-shelf and custom solutions.
However a solution that works for one organization may not be the best alternative for another organization. It is imperative
for the CIO to take a holistic approach taking into consideration organizational culture, strategic implications and long term
growth objectives while taking build/buy decisions.
Introduction
The build versus buy decision regarding software applications create conflict of agendas between business operations and the
chief information officer and the IT department. CIOs have to make a critical choice between using an existing product available
in the market that can satisfy the identified business needs or customize an existing product that is available in the market to suit
the business needs or develop entirely new software. Off-the-shelf software solutions are usually the most preferred option.
Organizations often purchase an existing product and extend its capabilities through integrations and add-ons. This enables
organizations to get the best of both worlds whereby the core product meets most of the critical needs and customization is
done for items which are considered the most critical. CIOs should analyze what makes sense for their organization.

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Off-the Shelf Software Solutions
Off-the-shelf software solutions offer a lot of advantages, standardization is one of those. Commercial software applications
offer myriad benefits:
 Best practices are built into the software considering the needs of a broad range of users
 Mature software packages have proven effectiveness and thus drive cost and time savings
 Costs and potential risks are reduced considerably as there are fewer bugs
 User organizations are not distracted from their core business
 The burden on the in-house IT resources are reduced by the SaaS
Organizations avoid custom development because it is not an easy option. It requires specialized programming skill sets, deciding
specifications and significant development time which is cost intensive for the organization. The ongoing maintenance of the
custom coding becomes all the more challenging with staff turnovers and codes also become outdated. The potential for high
returns is the primary motivation behind customization as organizations may believe that the additional expenditure is
worthwhile considering the probable future benefits that can be achieved. CIOs constantly make the buy/build decision as and
when new software need arises. The buy decision was earlier mostly exercised in relation to hardware, this trend is increasing
with new infrastructure and services being brought into the market. Earlier CIOs had executed the build decision mostly with
regard to data center infrastructure. CIOs are now increasingly focusing on business technology platforms. These platforms
earlier included traditional data center infrastructure but now generally have a mix of cloud based application and hybrid cloud
services. This offers a wide spectrum of decision making. At one end of the spectrum is a pure build environment which involves
building a brand new application. All the data center components are brought together and interoperability and compatibility
tests are done. At the other end of the spectrum is the buy decision involving a cloud based infrastructure. In between the two
ends of the spectrum lie options namely prebuild, prevalidated infrastructure. Eg, VCE, Vblock, Hyperconverged infrastructure
Eg. Nutanix, Simplivity and hybrid cloud environments.
Custom Software Solutions
Custom build software applications are increasingly being used in the pharmaceutical, financial services, media and the high tech
industries. Banks build custom application for risk management and to support the new financial products. Pharmaceutical
companies generally use custom software in their research and development and marketing departments. Custom software is a
more feasible option for fast moving markets where the internal IT team develops specialized solutions which offer greater
benefit than the benefit of scale and standardization.
Hybrid Solutions
Organizations are evolving rapidly to match up with the present day dynamic business world. Businesses constantly need to
evolve because processes that worked earlier have lost relevance in the present day context. Businesses today are global and
companies need to be agile to meet with changing market conditions. Earlier all business organizations had strong IT
departments with majority of function being done in-house but in the past couple of years organizations have started outsourcing
most of their IT functions and have started concentrating on their core businesses. Balancing an organization’s short term goals
with their long term growth objectives involving weighing whether aggressive investments should be made in long term growth
objectives or a more conservative approach should be undertaken. Hybrid solutions involves adapting existing systems and
allowing integrations wherever required rather than building entirely new systems. Although off-the-shelf software is cheap but
absence of customization often leads to inefficient manual processes. Hybrid solution brings the best of both off-the-shelf and
custom solutions. With increasing complexities occurring in the business processes, heavy investments are required in proprietary
software to scale effectively. Investments on custom software make sense only if it yields significant competitive advantage and
the business is large enough so that the cost of investments on proprietary software can be spread out to a large client base.

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Factors to Consider Before Investing on Custom Software
The return on investment should be high enough to justify the high cost of investment on custom software. Investments are
high not just in monetary terms but also in terms of resources, time and energy invested into developing the custom software.
Off-the-Shelf Software are Usually Rigid
The functionalities of the off-the-shelf software cannot easily be changed. Adding or removing functionalities is not possible in
most of the commercial software available in the market.
Off-the-Shelf Software May have Compatibility Issues with Other Programs
Businesses often rely on one software to complete one task, followed by another to complete the subsequent tasks. If the two
software do not blend well then processes can get hindered. Custom software can integrate a much wider set of APIs from
different data partners and software.
Every Need Cannot be addressed by Custom Software
Generic software cannot address most of the needs in an organization. Investing in custom software makes sense only if it can
address the specialized needs of the organization that cannot be addressed by the generic software.
Benefits of Using Custom Software

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When Should a Company Use Generic Software?
CIOs Dilemma- Buy versus build
The build versus buy decisions are taken based on three common decision points namely, total cost of ownership, features and
functions and time to market. A popular maxim in this context is ‘buy to standardize, build to compete’.
Time to Market
The functionalities that can be incorporated in a software solution depends on ‘time to market’ in a typical build situation.
Organization have to consider on whether they have sufficient time to match the stability and maturity that commercial software
products offer. In a buy situation multiple solutions can be evaluated immediately and with the least risk involved. One can also
demand feature enhancements from the vendors.
Features and Functions
An objective strategic analysis should be done of the solution before a build or a buy decision is implemented. If the solution is
a part of a core process and acts as a differentiating factor for the company then it makes sense to go for a build decision because
it would yield sufficient competitive advantage. On the other hand if it is related to a commodity business process, then a buy
decision makes sense from an economic and strategic standpoint
Total Cost of Ownership
The total cost of ownership, a summation of the capital costs and the operating costs, should be evaluated before a buy or a
build decision is taken. The solution that is implemented should be supported, evolved and maintained as per the business
requirements and supported by the underlying technologies namely the server platform, operating systems etc. In a build
situation the initial development costs and the ongoing costs are largely unknown. An organization whose core competency is
not software development might not be able to contemplate the total costs of the software lifecycles. Usually 70 percent of
software costs arise after implementation phase. A rigorous analysis and estimation throughout the software lifecycle is essential.
On the contrary a commercial software developer can spread out the costs over several customers.
Build versus buy decisions involve considerable strategic considerations. Usually IT organization go for building complex
applications. Some organization prefer building proprietary enterprise resource planning (ERP) software in house and several
financial firms also prefer building wealth management software in house. As is evident from the grid below, software are usually

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build in case of projects with greater strategic implications and for low impact projects, organization prefer to buy off-the-shelf
software solutions.
Industry specific functionality is more likely to be offered in mature markets than in less mature markets. Competitive markets
offer low software pricing compared to market dominated by a few vendors.

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Guidelines to Make a Sound Buy/build Decision
Conduct an Objective Assessment
Need analysis and assessment is crucial before any software initiative is taken
Your Issues May not Necessarily be Unique
A company sometimes simply decides to build a software from scratch although an off-the-shelf software solution may be
available in the market. Irrespective of the industry that a company falls under , needs often are similar, automation of
common business processes namely incident management, document, task and compliance. It is also important to learn from
the challenges that other companies who have already developed software in house have faced during automation of business
processes.
One Size Cannot Fit All
Organizations should realize that customization of the software is required to ensure right fit between the software and the
manner in which business is done in a particular organization. Business processes should be streamlined before automation
can be incorporated and organization should be able to decide what kind of tailoring is required.
Following Best IT Practices
Irrespective of whether a company decided to buy or build, following the best practices is essential namely balancing
competing stakeholder priorities, collaboration across teams, adapting processes to suit smaller or bigger projects, consistent
focus on quality and demonstrating value iteratively by providing value to stakeholders early and more often through agile
development.
Measuring What Matters Most
An effective performance management system including key performance indicators which are financial and non financial
parameters that benchmark the organization’s performance against the strategies and the objectives. KPIs should also be in
place to measure the implemented software performance.
Software Development is not Everybody’s ‘Cup of Tea’
Companies should be able to manage their internally build software throughout the project lifecycle. Needs should drive
development and vice versa. Changes are inevitable so the project should not rely too much on a few individuals.
Software is a Risky Endevour
Risk is innate in any software effort whether one builds or buys. Risks adversely impact the project cost, software quality,
project team morale, technical success and schedule. Identification of critical risks is essential. IT organizations should be able
to translate needs into concise requirements.
Hidden Cost Consideration
Companies should be able to make a realistic estimation of the software project cost. In case of commercial software total cost
is much higher than the license fees and for in-house software, it is much higher than the salary paid to the software
developemnt team. Maintenance and support costs are lower for packaged applications than for custom applications.
Sometimes the packaged software is priced low but the cost of building up on the basic functionality increases the total cost.
Budgeting is important for future maintenance, upgradation and support.
Knowing Yourself
It is important to assess how agile the organization is. Agile organizations have a competitve edge and it helps in improving
business performance. IT when properly applied enables organization to improve on their agility, thereby increasing efficiency,
decreasing reaction time, improving communication and helps in achieving positive financial results.

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Conclusion
A CIO should take a build or buy decision based on what would be best for the organization based on their culture, complexity
of user needs and skill sets. What works best for most organization is to purchase a commercial software from a proven vendor
and then consifguring it and customizing it as per the specific needs of the organization. Some organizations are more
conservative in adopting new technologies and prefer to use commercial software. An honest assessment is essential to determine
whether a build, buy or hybrid solution work best for the organization. This assessment should be done based on what
characteristics one is looking for in the software package. Each organization have their own set of idiosyncrasies and it is essential
for a CIO to make an informed decision.

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Abbreviations
API- Application Program Interface
SaaS- Software as a Service
TCO- Total Cost of Ownership