Should you rent software or build it so you can own it?

There are so many apps and software solutions available to everyone today.  It’s easy to assume that everything useful has already been made, and that all you have to do is search the Internet using the right keywords and you’ll quickly find software that does exactly what you need, for the price you want to pay.  Sometimes that happens.  But just as often, paying for a custom software solution is justified.

I like to use the analogy of renting office space vs buying own your own building for your business.  If you want space for your business, you can easily search the real estate section, find a space with the square footage you need now, sign a lease, and move in.  That might be great for the short term because your upfront cost is very little.

The downside is your space might look just like every other office in the building, you probably won’t get all the amenities you really wanted, the landlord won’t allow you to make many changes, you’ll pay the landlord forever, and the rent goes up each year.  Your space doesn’t have a kitchenette so every time you want to make coffee you have to go down the hall to get water.  Hired a few more employees and wish you could add some square footage for more desks?  Too bad.  You have to move your whole business to a new building in another part of town to get that sink and more space.  Annoyances like this are common when someone else makes the rules.

Now compare renting office space with constructing your own building for your business.  The cost will be initially higher, and it’ll probably take more time before you can move in.  But the benefit is you can make your office work exactly how you want.  You get to decide where and how big the rooms are.  You choose the décor to make your space stand out from your competition.  And you can be sure to include a nice kitchen so you can easily make those fancy coffees your employees love.  Eventually you’ll have the building paid off and you’ll only have to pay for maintenance.  Now you’ve got another asset you can leverage.

Software systems are like that too.  If you rent software, the initial cost may seem cheap.  Just $20 per employee per month!  Which is fine when you only have three employees.  But what happens when you scale your business and now have 30 to 50 employees?  And you’ve used that software for 10 years?  And the owners of that software raise the price each year?  Now you’ve paid $100,000 over time.

Plus, that software never did everything you needed it to do, so you developed hacks and workarounds. It has a bunch of features you never use, you had to change your business practices to match that software’s workflow, your employees complain whenever they have to use it, and you have no competitive advantage because your competitors are using the exact same software. And probably the software's original creators sold out to a bigger company that forces you to upgrade to the new version which functions much differently from the system you originally liked, so now you have to convert all your data and retrain your staff.

If instead of renting that software, what if you invested $100,000 to have a custom system built?  You can have 10, 100, or 1,000 employees using the system for no additional cost.  The software can model the way your business works, instead of you changing your business to model the way the software works. Training new employees will be easier because the software will have your business’ rules built in, and the user interfaces will use the same terminology your staff already knows.  The system will have the exact features you need, so no more workarounds and hacks. And you won’t be paying for features you never use.

Once built, you own this software, so you have another asset.  Maybe your custom software allows your business to do something your competitors can’t do with their off-the-shelf rented system, so you now have a competitive advantage. Maybe your software is so great that other companies hear about it, and they want to use it too.  And they’ll pay you to use it.  Maybe pay you a lot.  Much more than your original investment.  Maybe some company with similar software is so impressed or afraid of your system they buy it from you for millions.  Deals like this happen all the time in the software world.  Go read about the history of Slack for a recent example.

For some tasks, renting software is a fine solution.  Utilitarian tasks such as processing payroll for example. There’s no inherent benefit to doing payroll differently from others.  But for everything else, ask yourself these questions before assuming renting is better than building:

Is custom software right for you? We can help you make the right decision for your business. Schedule a free consultation with the DelMar team.