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COTS Software vs. Custom Software: Every Startup’s Dilemma

There are two sides to the commercial off-the-shelf (“COTS”) software versus custom software dilemma that startups and growing businesses face.

On one hand, using COTS software can help your business become operational faster and usually more economically. You license some software. You install it. You go. Or perhaps you access it via “the Cloud” if you subscribe to a software program that enables user access via a software as a service (“SaaS”) model. If commercially available software meets your business process support requirements and suits your needs, then COTS software is a great option. If it’s something popular, like Microsoft Office or Salesforce CRM, then it’s likely to be compatible with what other people are using, too. There may be workarounds you have to deal with, but while you’re smaller, they aren’t a big deal. The question is – what will the wasted time and hassle of those workarounds cost you later when your business is larger? And to what degree will licensing fees escalate as you grow?

On the other hand, developing custom software usually requires a substantial amount of expertise, time, money, and effort. You may have a long wait before the software is reliable and ready to deploy. There are iterations to go through and test. However, once it’s up and running smoothly, you could have exactly what you want – and it could make your internal business processes and/or your customer-facing interactions more efficient. That could give you time and money savings in the long run – especially if you’re doing something new that COTS software isn’t designed to handle.

So, how do you make the choice between COTS software and taking the custom software development route?

4 Main Factors

What do I need my software to do for my business?
Do you need your software to manage internal business processes, invoicing, customer interactions, or perhaps coordinate your supply chain? Maybe you want something that can connect all the components of your business process, from orders to fulfillment to invoicing.

Whatever the case is, once you determine what you want your software to do, the follow-up question becomes, is there anything already on the market that can do what I need my software to do? If you’re doing something revolutionary, there may be no option other than to develop custom software for your business. However, look around carefully. There are new programs being released every week that can handle a myriad of complex business interactions, such as help desk ticketing systems, customer relationship management (“CRM”), enterprise resource planning (“ERP”), and the list could go on and on. Some of the software you can license with a one-time fee, but more software every day is cloud based and available by subscription.

When you’re engaged in an endeavor as daunting as starting up a new business, the last thing you want to do is re-invent the wheel – unless you have to.

What do other players in my industry do?
Are you in an industry that typically relies on custom software solutions, such as finance, healthcare, or even real estate? If businesses in your industry tend to rely on custom software solutions, there may be a reason for that, such as specialized information privacy and data security concerns or the need for the capture and maintenance of highly specialized or industry-specific data. Those factors could indicate the need for you to develop something custom for your business, as well.

On the other hand, if you’re in an industry that doesn’t usually use custom software, how could developing a custom software solution provide you a competitive edge over others? Is there something that custom software could help you do better than others in your field that would deliver a material improvement in productivity and/or profitability?

You don’t necessarily want to copy others and develop custom software just to be in “the club.” You want to learn from those who have already taken the leap into custom software, so you can make a more informed decision for yourself and your organization.

If I need custom software, do I develop it in house or do I need an agency?
Do you already have an in-house team of the right developers with the right skills for the job? In-house development can be less costly and more efficient, if you have the right team of people with the right skills and they have the time to devote to such a labor- and time-intensive project. In-house custom software development will cost you more if your developers don’t have the right skills for the job and if you’re taking them away from other important money-making projects in which the company is engaged.

At the same time, having to pay an agency dramatically changes the upfront cost profile. Partnering with an agency can be a great decision, if they have the right team to develop the software you need. They may even be able to complete the job faster than you could in house. When you’re vetting your agency, make sure to ask questions, such as:

    • What kind of projects have you worked on before that are similar to what I need now?
    • What does your development process look like? (Hint: You want an agency that relies on an iterative process that allows for testing at every step of development.)
    • Are you willing to allow your team of developers to work with my team of developers to fill in the gaps in their collective skill set to get the job done?
    • What is the average length of tenure for your employees? Can I expect the team with whom we start to be the team with whom we finish? (You want to find out how cohesive the team is and if there’s a lot of turnover at their agency, because that could affect your timelines and the quality of the final product.)
    • How many other clients and projects do you typically take on at one time? Will I have a team devoted to my project, or will the team assigned to our project be working with other clients and on other projects simultaneously?

If you have the capability to develop custom software in house, that’s great! Just be realistic about what your team can actually accomplish. Don’t hesitate to secure an agency for part or all of the work, if necessary. You could engage contractors to round out your in-house team, but just be careful with this option. You want to make sure that anyone you bring in works well with your current team, so you can keep the project running smoothly.

What do the actual numbers look like?
Sit down and compare the cost of licensing the desired COTS software versus the cost of designing and developing proprietary custom software. Make sure you compare start-up costs with long-term costs. How many years would it take you to break even between the two choices? A break-even point of fewer than 5-6 years probably favors the custom software option. If the costs are similar or the payoff for custom software isn’t for many years down the road, you may not really need custom software – unless the problem that custom software would address is causing you some sort of serious harm, such as wasted employee time or constant errors.

Remember when you’re crunching the numbers to talk to your tax advisor about available tax credits, too. Software development can sometimes qualify for a Domestic Production Activities Deduction (“DPAD”) or perhaps a research and development (“R&D”) tax credit. Both tax incentives are covered under the Protecting Americans against Tax Hikes (“PATH”) Act of 2015. They also have provisions that make it possible to carry tax savings forward into future years, depending on your situation. Make sure to take these tax savings into account when figuring out what makes the most sense for you and your business.

READ:
Made in the USA: Does What You Do Qualify for a Tax Credit?
Expanded R&D Credit Opportunities for Software Developers and Investeors

The Big Picture

Once you’ve sat down and weighed these four factors, what does the big picture look like for you? Will it be more productive and cost effective to license COTS software? Or, will you save more money in the long run and enjoy the benefits of custom software by developing your own? These four questions should help clarify your situation and make it easier for you to decide.

About the Authors
Toby Stansell, Managing Director of Technology Solutions, advises clients as to how they can intelligently leverage technology to improve operational and financial performance. He has a broad base of knowledge and expertise in manufacturing and distribution, including with order management, supply chain planning and execution, ERP implementations, and lean materials management. Prior to Cherry Bekaert, he was President and COO of a boutique consulting firm and held senior executive positions with a global manufacturing corporation and software company. Toby’s full bio is available at CBH.com.

 Jim Holman, Director of Technology Solutions, has experience advising clients with business flow, manufacturing and distribution processes, and analytical reporting. His expertise spans industrial sectors, including manufacturing finance, distribution modules, business intelligence, shop floor data collection, and mobile solutions. One of his specialties is M&A activities. Prior to Cherry Bekaert, Jim worked for a boutique consulting firm, was an IT manager with a Fortune 500 specialty chemical company, and was a senior information technologist specializing in Microsoft Dynamics. Jim’s full bio is available at CBH.com.

 

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