Calculate the investment
All products require investment. To successfully fund an implementation, adopt a product-centric, not a project-focused, mentality. There are many facets to the total cost of an investment and not as a one-time technology spend. Frame the investment in terms of the real cost—tangibles like the technology, time, team, impact, and ROI—along with less measurable results like enhanced user experience or quality of life improvements.
Estimates & ROI
Estimating for an initial buy is relatively straight forward. However, it’s difficult to predict the size of a minimum viable product without collecting user data. Too often, a fraction of functionality covers 90% of the necessary use cases. Instead, use ROI and outcomes as motivation.
Do: Establish specific, measurable, and achievable outcomes tested throughout the implementation or build process of the application.
Don't: Define a set budget and then retrofit the amount to a buy or build initiative.
The fees and costs are relatively transparent. Exercise caution estimating the costs for implementation, customization, and integration.
These factors often carry the same uncertainty as building software from the ground up. Evaluate the expenses for contracting and purchasing agreements.
|Annual licensing||Data-volume related (e.g., per seat, per instance, per transaction)|
|Hosting||Number of environments, bandwidth, data, etc.|
|Maintenance||Ongoing releases, ad-hoc defect resolution, performance optimization|
|Implementation and customization||Initial configuration and custom development necessary to extend|
|Support and service||Guarantees from SLA, technical support, third level responses to production issues, critical support, etc.|
|Data migration||Making sure current enterprise data is transformed and injected into the new product|
|Change management||Documentation, adoption, training, etc.|
|Initial cost and continued enhancements post-release||Upfront investment and continued investment to keep the product evergreen|
|Product team||Salaries, operations, infrastructure, software, hardware, training, hiring, onboarding, etc.|
CAPEX vs. OPEX
From an accounting perspective, the costs associated with enterprise software often fall into operational expenses (OPEX) rather than capital expenses (CAPEX). Depending on the strategy, funding either removes or increases the bureaucracy of internal decision-making. Be sure that the term targeted for returns directly influences, the product funding strategy.
For a quick fix software: Try an OPEX. Operating expenses generally include an expedient approval process and simple implementation.
For a large strategic buy or refactoring build: Use a CAPEX. Capital expenditures usually require a bit more planning and buy-in but secure a more substantial total investment for a longer-term.
Asset ownership & depreciation
Owning products means having depreciating assets on the corporate balance sheet. Develop a depreciation schedule for the asset to track the cost of ownership or continue to invest over time.
Any new system requires an investment of time with the information systems team migrating data from legacy systems to ensure the proper setup of the new product.
Internal teams need to spend time determining which workflows best support current processes and which workflows need to be extended. For example, an off-the-shelf product catering to any scale of business likely features multiple configurations to attract different markets.
Products require ongoing support to remain viable. For example, if the product is an on-premise installation, secure resources to synchronize with the release schedule of the vendor as well as internal users to plan and execute system upgrades. These additional resources come at a cost in addition to the requisite downtime that accompanies the effort.
Terms & conditions
Each product includes different contractual terms and pricing structures. In general, the initial upfront cash required for a buy is lower than building custom. That said, the lifetime cost is impacted greatly by the terms and conditions of the buy agreement. If your preference is a cloud-based SaaS product, consider negotiating a shorter opt-out clause in the contract to minimize risk in the event the product isn’t performing as expected.