Applications deployment: Build, buy, or rent?

Feb 21, 2001
Gartner

By Robert Anderson, James Browning, Joseph Outlaw

E-business requires small and midsize businesses to identify, develop, and roll out business applications quickly to compete and meet customer needs. Small and midsize businesses (SMBs) have options in the way they develop and deploy applications.

Speed and accuracy: The path to e-business success
Exploiting IT to achieve significant business advantage is the underlying promise of e-business. Most SMBs struggle to determine not only which business applications to select for their enterprises but also how to deploy and manage them.

SMB applications deployment options include:

Build applications development (AD) capability internally
Buy packaged applications
Obtain application functionality or AD services through external services providers (ESPs)

Choosing wisely is critical, for the stakes are high for SMBs. As e-business gains increasing traction, the price of failure can be extreme. Surviving, let alone thriving, in Internet time comes down to rapid and accurate response to and, when possible, anticipation of customer needs. The accelerating nature of e-business competition requires SMBs to choose, develop, deploy, and integrate sophisticated technology to automate key business processes.

Most SMB IS staffs are stretched thin and often find it nearly impossible to manage all of the IT responsibilities that e-business demands. That means SMBs must prioritize their staffing and IT capabilities. Few can build expertise in all the specialized areas needed for e-business success. Finding and keeping talented IT staffers is a continuing human resources problem. Fortunately, SMBs can tap into numerous options to access critical business applications and productivity tools.

Join the IT debate

With so many packaged applications that can be customized, when does it make sense to build? There have been several high profile ESPs and ASPs that have abruptly closed and have left clients in a bind. Has this doomed the future of the rental option—especially for mission-critical applications? Post a comment to this article and join the IT debate. Next week, we'll feature the most insightful comments in our IT Debate TechMail and award IT Debate T-shirts to the members who provided them.

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It's about business, not technology
Leading enterprises know that business strategy drives technology deployment, and not the other way around. Therefore, SMBs should develop a framework to weigh which technologies to develop, buy, or outsource. As part of a framework, SMBs should determine which of their strategic and tactical business processes enable competitive differentiation. Thus, SMBs will be better positioned to match technology and deployment options to key business needs.

Strategic processes (e.g., supply chain management and customer-facing applications that advance an enterprise's competitive position) often justify internally managed and controlled technology development and deployment (perhaps supplemented by external consultants). Production systems that support day-to-day operations can typically be purchased or even tailored if required (e.g., manufacturing management or purchasing applications). Tactical, supporting, or peripheral processes (e.g., accounting and human resource management applications) are good candidates for outsourcing, which allows internal IS staff to concentrate on technology matters essential to growth.

Technology choices and implementation decisions should also be driven by a realistic assessment of the SMB's infrastructure, systems, staff resources and skills, and time available. Finally, all costs analyses should be based on the total cost of ownership (TCO) associated with proposed solutions, including license fees, installation, required platform upgrades, and ongoing maintenance and support.

Advantages
Buy

Fewer dedicated resources needed for AD
Cost and time savings
Number of high-quality commercial packages
Ongoing stream of enhancements from vendor

Build

Rely heavily on own skills for management and development
Integration highly tailorable to gain strategic differentiation
Maintains application domain knowledge in-house
Can develop system components as needed

Outsource

Shorter time to implement
Focuses limited resources on more strategic initiatives
Minimal reliance on technical resources
Vendor responsible for upgrades

Disadvantages
Buy

Reliance on software provider and designated SIs for application knowledge and enhancements
Vendor infrastructure and architectural constraints
May provide more or less functionality than desired

Build

Dedicated resources needed for AD
Requires project management and in-house development skills
Most expensive deployment option
Need to retain developers and maintain documentation

Outsource

Reliance on service providers—need a good partner and legal contract
Minimal customization available; no legacy system integration
Legal contract/service level agreements required
Security implications: data and proprietary business process
Requires liaison and continuous monitoring

Application deployment options
Building your own
Until the Internet leaped onto the scene as an essential medium for business success, most enterprises built their own IT applications. Fewer packaged applications were on the market, and their scope was limited. Moreover, IS staffs often acted unilaterally when selecting systems to streamline operations. Over time, many internal AD projects grew cumbersome, complex, and more costly as a result of unforeseen technology introductions, changes in AD project scope, and technology integration snafus.

Through 2002, only 40 percent of SMBs will achieve optimal project results because of a failure to target objectives prior to implementation (0.8 probability).

SMBs can tap into a variety of packaged applications and outsourcing options geared to meet their application requirements. In a survey of Gartner clients, 50 percent of respondents said they build applications only if they can't buy them, and 35 percent said they would build only if it was strategic to their mission.

However, with less need for customized applications, an SMB can choose one AD technology platform, such as Microsoft or Java. Internal AD and implementation makes sense for strategic functions that can enhance applications already in use or that address specific workgroup or department needs. SMBs should identify and assess key business and technical characteristics before building applications internally.

Once an SMB opts to develop a business application, finding and keeping staffers with the breadth and depth of IT skills necessary for AD development success is a critical challenge. After the development phase, SMBs must retain the resources and document the procedures to support and maintain the application.

When buying makes cents
SMBs will rarely misstep when purchasing a packaged business application. Advantages of buying include availability of many high-quality commercial packages, savings in costs and time for development and implementation, and avoiding maintenance charges. Good prospects for purchase are standardized production-level applications critical to daily operations but not necessarily competitive differentiators (e.g., manufacturing operations and order management, inventory management, warehouse management, and transportation management).

Purchasing also saves on AD R&D spending. For example, a Gartner survey estimates that five software engineers (each earning $58,000 per year) could work for one year to create an in-bound logistics application. However, for one-third the salary of a software engineer, an SMB could have purchased a 20-seat license and five years of maintenance from one of 38 application vendors that market comparable application functionality.

Packaged applications range from horizontal, cross-industry transactional software to micro-vertical, process-driven functionality that targets such markets as commercial printing, plastics manufacturing, and medical billing. Application packages can be simple, rigidly structured, and easy to maintain or complex and customizable systems that demand significant expertise to implement and maintain. Some systems attempt to balance custom and ease-of-use features. New modular applications can often extend functionality or integrate other applications.

SMBs that decide to buy a packaged application should choose software that can accommodate and scale to their estimated transaction volumes. SMBs shouldn't assume that one will meet their exact requirements. Many packages require customization and integration to fit in with enterprise processes and operations.

When determining the cost of an application, SMBs should add the cost of potential changes and enhancements to the base functionality. Such a cost analysis will indicate whether customizing will return enough extra benefit to warrant the purchase. SMBs also need to analyze the architecture, integration, installation, maintenance, and ongoing support. For example, vendors often overemphasize their initial license cost, which diverts attention from other areas (e.g., training and support) that will eventually inflate the package's price tag.

TechRepublic members who responded to a survey prefer packaged applications by a wide margin.

Rent-an-application
The speed of Internet commerce fuels the need for enterprises to quickly roll out their e-business applications. The human and capital resources needed to maintain an SMB application infrastructure can be problematic for many SMBs.

Through 2004, fewer than 30 percent of SMBs will maintain a full-service, internal IS organization (0.8 probability).

Thus, outsourcing has become a potent weapon in an SMB CIO's arsenal for dealing with constrained IS staffing in the midst of growing enterprise expectations. Outsourcing involves turning over all or part of the management and maintenance to an ESP. Outsourcing alternatives range from traditional ESPs to providers that will replace or complement internal IS staff to application service providers (ASPs).

SMBs should closely track the evolution of Web-provisioned software. Web-based applications are operating-system-independent, require no installation or update (Web browsers provide the user interface), and follow a monthly subscription model. Gartner recently described this software provisioning model that breaks from the traditional software deployment approach. Eventually, the just-in-time option will greatly reduce IT infrastructure support costs and come closer to providing the software that SMBs actually need and use.

In response to many Gartner surveys, most SMBs view the need to accelerate go-to-market time as the most compelling reason to outsource business applications. Some other reasons to outsource are:

Constraints related to hiring, training, and managing internal employees
Lack of experience or expertise to develop or maintain applications
Access to functionality that is otherwise unaffordable
Need to refocus resources on strategic initiatives and new opportunities
Internal cost-cutting, including maintenance and overhead expenses

SMBs should monitor the strategic value of outsourced applications and be prepared to bring them back in-house, if required (e.g., due to a merger or acquisition) or if the ESP can't provide the level or service (e.g., performance or security) the enterprise demands. SMBs should also consider outsourcing when the cost/benefit ratio is attractive and the integrity and security of systems can be ensured.

Bottom Line
SMBs can obtain application functionality in one of three ways: build your own, buy packaged applications, or retain a variety of outsourced application deployment services. There is no one, perfect equation for all SMBs. SMBs must weigh the build-buy-outsource deployment question by considering what functionality is required, when the application must be available, and what resources (human and capital) are available.

Give us your recommendations

Post a comment to this article and join the IT Debate. What's been your experience with buying, building, or outsourcing applications?

Gartner originally published this article on Feb. 9, 2001.