How Custom Software Investments Increase Enterprise Value
and Why Off-The-Shelf Systems May Be Hurting You
We live in a changed world, where no product can stand alone as a physical item. Intangibly wrapped and layered into every product – be it chemicals, food, or iPhones – are the services provided to customers by a company, and the software, processes, and tools those producers use to help their customers achieve an end result.
At one time, a Taxi Driver in New York City needed only a cab to pick up hailing riders, who paid in cash. Now, they not only need to accept credit cards, Venmo, or maybe even Bitcoin, but will find themselves missing out on the pool of riders if they don’t have an app, a loyalty program, a real-time map, and any number of other layered services. As time has gone on, B2C customers’ expectations for an integrated service experience has increased, leaving the old-fashioned in the dust.
B2B customers have of course, not been immune to this change. They face pressures not only from customers to “make it easier” to do things, but from their own employees who wonder “if I can order a pizza in a single tap on my phone, why do I have to file papers or pound away at a green terminal screen to do my job at the office?” I recall one executive I spoke to who was shocked when a young 20-something employee quit his job because “you guys don’t have an app”. He wondered “Why would anyone ever quit their job just because they have to work on an old system instead of an app?”
In light of this environment and its demands, few would disagree that software systems for customer or employee use are key to remaining competitive, and need to be a part of every corporate program strategy. In our experience working with enterprise clients however, what often is missing from those strategies is a calculation of the true enterprise value of custom-built solutions, and what might be lost from choosing an off-the-shelf solution.
The Value of an Idea
When a company is looking for a software solution, it only makes sense that they first look at existing products. For many problems out there, this makes the best sense. Off-the-shelf (OTS) solutions usually have a lower upfront cost, and some of the concern about long term maintenance is taken off the customer’s plate. Email, word processing, CRM – there are many systems for these “bottom of pyramid” types of solutions (that solve a problem that just about everybody has). It would be ludicrous for a manufacturer to hire software developers to build them their own custom email program – it will never be as good as Microsoft Outlook or Gmail, and will cost thousands of times more.
When it comes to more industry and domain-specific problems, the tendency then is to take the same approach. Clients’ ask themselves “Can I find something off the shelf that will solve our problem, and even if it doesn’t do things exactly the way we do things, can we change our businesses processes to fit the way the product does things?”
The problem with this thinking is that it fails to consider the fact that if you are a software product company, you are designing your product for the lowest common denominator. As a product vendor, you cannot afford to add in each and every feature requested by a customer. You have to look at the features that “everyone wants” that are going to give you the highest return on your development investment. (There are some exceptions to this rule, as I have seen product companies get a customer like the US Military and basically give them everything they want.) But for the rest of us, we have to get in line and hope that our mission-critical needs bubble up to the top of the list.
So, here’s the rub: what if that mission critical feature you’re waiting on, that may never be delivered, is the difference between a two-fold increase in your revenues next year, and a 20-fold increase? The 80/20 rule strongly applies here – it’s often the case that you will get the vast majority of ROI from just a couple of key features. What if those key features for your business don’t make the cut?
For those key features that are vital to your business goals, just about all of the value of the project investment can be tied those ideas – but by leveraging an OTS solution, you’re unable to capitalize on those innovations, and that value goes missing from the bottom line.
Capturing the Value
Imagine if instead, you and your team filtered down your project needs to just those “key 20% features”, and then created a piece of software yourselves, working with either internal software developers or a software development partner. Those features – really, “business capabilities” – become a wholly-owned asset at your disposal, potentially that no one else in your industry has.
Several years ago, a large client hired us to build them a system that was, at the time, quite revolutionary for their field. It allowed for 3D BIM models to be designed by sales personnel within a web browser, cutting off weeks of engineering lead time and meaning that their proposals hit customers’ desks several days ahead of competitors.
We spent a great deal of time at the start of the project looking at OTS solutions that “sort of” did “some of” what we wanted, but would have to be extensively modified by the vendor (which they probably would never do for us). Instead, the client chose to have us build the entire system from scratch (a three-year effort). Now, almost 8 years later, their competitors are just starting to release similar systems. For a good 8 years, they got reactions from customers like “How are you doing that??” – it was like magic.
And what was the enterprise value of that magic, that let them leapfrog ahead of the capabilities of their competitors? What was the value of creating a system that became a long-term asset and leg up on their competitors? It’s difficult to calculate, but in the case of this customer, potentially billions of dollars. If they had instead bought the same so-so tool that everyone else had access to, even though it still would have cost a pretty penny, it would have essentially delivered no competitive advantage.
Exiting with Value
One final note about the value gained from investing in your own intellectual property is that unlike a purchased system, code that your firm owns and developed can become an attractive, sellable asset. I have seen companies bought and sold solely because of the software or website they created, even if it was a small part of their overall operation.
Just recently, I spoke to an executive that sold their business for $100M, not due to the strength of their business model or sales, but because of the uniqueness of their custom-made fulfillment software in the marketplace.
While calculating this true potential value can sometimes be complicated, it is a question we at Unstoppable Software help clients answer all the time. The key is to look at the whole picture, the comparative value of a “lowest common denominator” OTS solution, and think about what value could be unlocked by charting your own course.