Most large enterprises were on a journey for the past 30 years where a higher and higher proportion of the core systems driving the enterprises was software packages or software as a service. Traditional wisdom for companies was “don’t build – buy.” Then, again, as companies undertook digital transformation journeys, the prevailing belief was that the best way to do digital transformation is to get there as fast as possible by buying (not building) many components, using third-party software and SaaS products. Now, two disruptive forces are starting to shift the balance between build vs. buy in the IT world.
ISSUES AND LIMITS OF SOFTWARE
The problem is software packages and SaaS products has limitations. First, they are very expensive. Once your company implements another company’s software package or service, the rest of your systems must integration with it and your processes must be built around it. They become very hard to unplug. Consequently, the intellectual property (IP) owner then uses that stickiness to raise the cost of maintaining the software. Maintenance used to be 5% of the software package purchase price but now are 20-25% of the price. Likewise, when your company adopts an as-a-service construct and SaaS offering, the vendor can raise prices over time, making that SaaS product increasingly expensive.
A second problem is the software products either don’t evolve, or they keep changing. Once a software package or SaaS product hits maturity and the vendor has its natural market share, there is a strong incentive for the IP owner to stop investing in it. The software manufacturer reduces the amount of new functionality coming into it and does the absolute minimum to keep the product current; thus, the value tends to erode. That’s what Oracle did.
The flip side of that situation is a product that keeps changing, forcing your company to upgrade to the latest iteration. This creates a tremendous whiplash in back-end cost to upgrade and change APIs and related processes in the rest of your ecosystem. This is particularly apparent in the SaaS world where even small changes to a SaaS platform can create a bunch of unintended consequences downstream to other SaaS platforms and/or other software that interface with and rely on the data.
A third problem with software packages and SaaS products is that vendors build them for a multi-tenant world. Therefore, they build for the least common denominator and never quite meet the needs of your company. Yes, you can configure them, but configuration has limitations as well.
THE TWO DISRUPTIVE FORCES
Into this world of software package and SaaS limitations, come two new forces of disruption: open source and the cloud. Both allow companies to build capability fast that fits precisely what a company needs them to do and maintain the product going forward.
I’m not forecasting the death of software packages and SaaS. But I see that open source and cloud are driving companies from a software “rental” world to replacement opportunities that allow companies to build bespoke capabilities fast and in a quality way. As a result, I’m seeing more companies decide to build rather than buy software.
As is often the case, this trend occurred first in technology companies and then quickly matriculated into other industries. We’re now seeing Fintechs changing their build-vs-buy mind-set. Banks, for example, previously focused heavily on buying services from others but now increasingly pull back in their core payments platforms and develop their own products rather than using third-party payment products.
As digital transformation transforms the landscape, companies find a digital platform is their competing differentiation, the way they are going to compete in the future. So, they have a strong urge to build rather than buy because they don’t want to be disintermediated by the IP owner raising rates. They want to own that competitive-advantage space.
THE COST CONSIDERATIONS OF BUILD-VS-BUY DECISIONS
Companies also switch to a build (rather than buy) approach to reduce the long-term cost of ownership. Because of the disruptive forces of open source and cloud, building is easier than it previously was, and building is longer the providence of just super-rich tech firms. Given the force of cloud and open-source software, the actual cost to build today is like the cost of buying.
Your company’s investment – at least up front – may be greater in a “build” approach, but the benefits are much greater as well. You’ll be able to build a “right-fit” platform and own it moving forward.
By taking a “build-first” approach, your company also will also avoid an age-old issue that comes with third-party products: if you use other companies’ software, they learn from your company. They can quickly duplicate your digital platform and take your company’s learnings to your competitors.
Consider an example from the tech world. When Microsoft first looked at building a cloud world, it considered using another company’s hypervisor. But Microsoft quickly decided it would not fall into the trap that IBM fell into. When IBM went into the PC world, creating the PC as a platform, it made the tragic mistake of using a Microsoft operating system rather than building its own system. In hindsight, we can see that this tragic mistake positioned Microsoft to own the PC world, not IBM. In the cloud world, Microsoft decided to avoid that problem and write its hypervisor from scratch. Hence, Azure was born.
In addition, given the problem of welding disparate third-party and SaaS products together, it may not take longer to get to a viable product. Trying to reconcile disparate technology architecture, software packages and SaaS products, slows a company down and creates friction, which ends up largely diminishing the value of the “buy” approach. Proof of this phenomenon is how fast start-up or venture firms go from idea to a working platform. They do it by aggressive use of cloud, open source and the latest in technology architecture.
So, the question is: should your company always take a build approach? Should you build rather than buy software packages and SaaS components in constructing a digital platform?
Some companies thank that it’s important to construct a digital platform as fast as possible, so they take a “buy” approach and use many third-party software and SaaS components. But this approach only makes sense if your company’s digital transformation is a modernization of IT. The “buy” approach makes less sense is your company’s digital transformation is a business transformation where the digital platform is the company’s basis for competition. In this case, your company needs to build and own the components going forward.
originally posted on Forbes.com by Peter Bendor-Samuel
