In today’s digital era, software is a crucial aspect of business strategy for organisations seeking to innovate and remain competitive. However, the cost structures associated with buying, building, and maintaining software can be complex and multifaceted. This article explores the cost of custom software development and how it compares to other approaches.
When companies require new business functionality, IT Leaders typically go through the following steps to determine the best approach to acquiring the necessary software. First, they examine their existing systems to see whether they can meet their needs. If not, they might canvas the marketplace to see whether they can find a commercial off-the-shelf (COTS) solution that meets their requirements. If nothing fits the bill and they already have a COTS solution, such as an ERP, they might assess whether it’s feasible to customise this solution to fulfil their needs. If these approaches seem too complicated, the IT Leader might opt for the third approach: building a new application to get exactly what they want. This brings a further choice between traditional software development and custom low-code software development.
Price vs cost: How do you calculate software development costs?
Amid tight budgets, cost rather than price should be a key factor when deciding on the best software approach. Any cost analysis must go beyond the initial licence fee or the upfront development rates to consider the total cost of ownership (TCO) of the software. TCO provides a holistic view of all software costs throughout its lifecycle, including direct and indirect expenses. They include:
- Ongoing licence costs: the ongoing fees for using the software.
- Development costs: Expenses related to software design, coding, and testing.
- Deployment costs: Costs incurred during the software rollout, such as staff training, integration with existing systems, and potential downtime during the transition.
- Staff and training costs: Expenses for recruiting specialist staff or upskilling and expanding existing IT teams.
- Maintenance and support costs: Costs related to regular updates, bug fixes, and customer support. It’s estimated that software maintenance costs 20-25% of the license cost per year and 60-80% of the lifecycle costs.
- Infrastructure costs: Expenses related to the hardware and software infrastructure needed to support the application and data storage.
- Integration costs: Costs incurred when complex integration development is needed to build bridges to other systems.
- Opportunity costs: Potential forgone profits from a missed opportunity or the time and resources spent implementing solutions before they generate value for the business.
TCO also includes strategic factors beyond direct and indirect costs:
- Quality and ROI: Poor-quality software decreases user satisfaction, increases downtime, creates future costs with technical debt, hampers performance and negatively impacts return on investment (ROI).
- Scalability, innovation and growth: Will your software be able to handle increased data loads and user demands and change, innovate and evolve with your business requirements?
- Strategic advantage: Will your software help the company create a competitive edge by using digital services to differentiate itself in the marketplace?
Including TCO criteria in your cost analysis provides a far more accurate picture of the cost of each software approach, than relying on price alone.
Is it cheaper to buy, customise or build software?
Let’s examine some of the hidden costs of each option.
The cost of buying COTS software
Finding exactly what you need off-the-shelf can be advantageous, but it’s important to be mindful of the indirect expenses, such as training, vendor implementation, IT support and maintenance. Plus there are ongoing licence fees that increase with large user numbers and grow over time as your product expands with additional modules. Hidden costs also arise from a poor match to your requirements, system rigidity that prevents easy updates and constraints from being locked into the vendor’s roadmap.
These expenses can be more challenging to identify, measure, and control. Further, when your company has unique ways of working, opens a new business line, operates in a niche area, or wants to use intellectual property as a key differentiator, purchasing a COTS solution is unlikely to be the answer, even if it has a lower upfront price tag. These costs quickly add up, making off-the-shelf solutions a less attractive option for many use cases.
When an off-the-shelf solution doesn’t meet a company’s exact business requirements, IT Leaders usually explore the costs of customising or building software.
The cost of customising COTS software
Many companies consider customising their COTS solution, such as their ERP, with the hope that extending their investment in an existing core system will be the most cost-effective, cohesive approach to meeting their needs. However, in practice, this may not be the case. COTS customisations are typically expensive to create, scale, modify, and maintain, and they can be difficult to update, leading to technical debt. COTS solutions come with their own business rules and logic, often requiring manual coding for modifications, even when they market themselves as low-code. It can be difficult to create seamless user experiences, and integrations with other systems can require extensive development. Customisations also risk compromising the integrity and performance of the underlying system. As a result, keeping a tight lid on your total cost of ownership (TCO) can be challenging. Generally, if you need to customise more than 20% of a COTS system to meet your needs, it may be better to build custom software. We explore this topic further in our article, Why it’s better to complement rather than customise your ERP.
The cost of building software using traditional development
Traditional coding is widely regarded as slow and expensive, and it typically requires a significant investment in DevOps. IT leaders must hire software engineers, UX designers, and an army of developers, which is costly, risky, and time-consuming. Manually coded software is slow to market, often taking years to complete a project. By the time the solution is deployed, business requirements have frequently changed. Research from Oxford University and McKinsey found that 66% of large-scale software projects exceeded their budget, and 33% were delivered late. Updating and modifying manually coded applications is equally problematic. Under these circumstances, accurately calculating the total cost of ownership (TCO) of traditional software development becomes difficult.
Overall, the technology landscape has become so complex that delivering even the smallest use case requires skills in various languages and frameworks such as Android, iOS, Web reactive, .NET backend, and SQL.
Another approach to custom software development
Thankfully, due to advances in software development, there is another option for companies seeking to meet new business requirements. Today, if you need to rapidly build high-quality enterprise-grade software that meets your company’s specific needs, custom software development using an AI-powered low-code platform, such as OutSystems, presents a far simpler and more affordable choice.
The Custom Software Development Platform Advantage
Taking a low-code platform approach to custom software development accelerates development while reducing costs and complexity, making it much easier for IT Leaders to control the TCO of their software projects.
- Rapid development and deployment: With OutSystems’ automation and visual programming capabilities, drag-and-drop interfaces and the ability to reuse code, teams don’t need to “start from scratch” every time they build an application. OutSystems allows for faster prototyping and deployment, reducing time to market by up to 60%.
- Greater output with smaller teams: The OutSystems platform reduces development teams to much smaller sizes, even for mission-critical applications running on any device. One single source of code for mobile and web applications. Ease of use also reduces recruitment and training costs.
- Less maintenance and technical debt: When developers make a change, automated governance built into the OutSystems platform analyses the impact, checks for bugs, and monitors performance in real-time. OutSystems can improve application stability and reduce code defects, lowering application maintenance costs by 25-50%.
- Lower infrastructure costs: OutSystems is a cloud-native platform that makes infrastructure costs predictable and cost-effective.
- Easy integrations: OutSystems developers can quickly and easily add 400+ out-of-the-box pre-built connectors, making complex systems integration easy via plug-and-play.
- Lower opportunity costs as OutSystems projects are completed in months not years, with minimal disruption to operations. Time to market is accelerated, delivering tangible value to the business much sooner.
- Quality and ROI: High-quality software leads to a better ROI. A study by Forrester Consulting concluded that OutSystems’ AI-powered low-code platform pays for itself in only 5+ months and has up to 2.7x better ROI than other low-code vendors.
- Scalability, innovation and growth: Companies can future-proof their software by scaling and evolving their applications and creating new innovative functionalities in response to market changes and shifting business requirements. OutSystems can reduce post-live/ongoing application development and enhancement costs by 35-65%.
- Strategic advantage: OutSystems enables companies to retain control of their digital roadmap and forge a competitive edge by using digital services to differentiate themselves in the marketplace.
OutSystems plays the long-game
When considering the true cost of custom software development, there is much more to consider than the upfront price tag. In fact, there’s a big difference between the software’s initial price and its cost-effectiveness over its lifecycle. By considering the TCO, evaluating buy versus build options, and recognising strategic factors beyond price, IT leaders can make informed decisions that drive digital transformation and deliver long-term value.
OutSystems’ custom software development platform allows companies to build and release better applications faster and more cost-effectively, both now and in the future. Applications require less investment, less developer time, and fewer IT staff resources, all of which help lower your TCO. OutSystems can reduce the overall lifetime cost of building, supporting and owning your applications by 10-40%.
Want to know more? Talk to us.