The 'Build-vs-Buy' Debate

Dec. 21, 2004
An age-old industrial question takes on new importance when applied to software.

When Saab Cars USA Inc. wanted to link its 220 U.S. dealers with U.S. and international headquarters, and also connect to Caterpillar Logistics Services, the company knew that customized software was going to be critical. "There was no packaged software we could buy that would do exactly what we needed," says Jerry Rode, director, management information systems, at Saab's U.S. headquarters in Norcross, Ga. So Saab contracted with IBM Corp. to build the intranet-based Retailer Information System, or IRIS, which proved to be so successful in the U.S. that Saab began rolling it out worldwide last month. The project is a textbook example of the many changes taking place in the world of customized software development. Once upon a time, virtually all large companies had veritable armies of programmers hard at work creating the seemingly endless software applications needed to run the business. If that sounds expensive, time-consuming, and hopelessly out of synch with today's fast and flexible business practices . . . well, it was, although some companies continue to make it work. In the last four to six years, the makers of packaged software applications have improved their products, gotten to know customer needs better, and become extremely competitive on price. Sales of so-called off-the-shelf software are booming as a result. Even so, many companies find their specialized needs can't be met by a one-size-fits-all software program. Recent developments in customized software have provided new options, enabling these companies to avoid spending huge sums of money and many months in writing complex applications that may, as is often the case, be outmoded by the time they're actually deployed. To avoid those pitfalls, Saab and IBM made sure that IRIS could tap the resources of the Internet. Although the product's name may start with "intranet," in fact it's designed to operate on the Web, with dealers using PCs to tap into Saab's vast database of model information, repair history, sales records -- virtually every nugget of information available at headquarters. "With our old system," Rode says, "dealers had to use a modem to dial in. If they were keying in the monthly sales figures, which by the way was so tedious that they weren't willing to do it more often than once a month, their system could be tied up for hours. Bad news for a salesman with a customer looking for a Saab configured in a certain way." Now dealers can have any number of PCs accessing the system simultaneously, using a new, simplified interface that requires no training. One benefit is that Saab now collects sales information almost every day, since it can be entered with a few mouse clicks. "We have one dealer in Massachusetts who has 18 PCs -- one for each employee," Rode says. "They can do this because it costs them nothing other than what they spend on the PCs." Saab's previous system was sold to dealers, and the software ran at the dealer site. Now the software itself exists only at Saab headquarters. Because IRIS is built using Java, an application development language that allows software to run over the Internet, Saab has none of the management headaches associated with malfunctioning (or incorrectly used) software at each dealer. Java came on the scene about four years ago, originally to develop animation and other user-interface gewgaws for the Internet. But software developers soon saw that it could be used to build all sorts of business-critical applications that could run across the Internet, downloading small "applets" to a PC as they were needed to perform each task. And it could build them quickly -- IRIS took only six months to create -- and the software could be created in a way that made it "platform independent," or able to run on many different brands of hardware. That doesn't mean that all those programmers who wrote the Cobol applications at the heart of the current Y2K morass are all rushing to write customized applications in Java, however. "Companies will build their own software when there's the potential to gain a competitive advantage," says Richard Heiman, an analyst with International Data Corp., Framingham, Mass. "But with IT resources so limited, they are more often tending to buy software for things like payroll, human resources, or various aspects of factory operations." David Dobrin, a principal with Benchmarking Partners, Cambridge, Mass., agrees. "No one is going to write their own ERP system," he says. "The beauty of those kinds of packages is that they give you integration across many functions. Doing that yourself would be more than anyone could handle." In fact, most IS executives agree with Anwar Abbas, vice president of MIS for Bugle Boy Industries Inc., Simi Valley, Calif., who says, "I can think of three reasons why we buy software whenever possible: Writing your own is too costly upfront, too time-consuming, and the support and maintenance costs are prohibitive." Those reasons recently prompted the apparel maker to phase out a shipping-and-distribution system it had written years ago in favor of a packaged application from Manhattan Associates. "Our old system was too difficult to integrate with other aspects of the business," Abbas says. "With the new package, we were up and running in six months." Having spent $10 million on a new conveyor system for its southern California warehouses, Bugle Boy was not about to have its shipping operations suffer from old software, and developing new software in-house was, as noted, virtually out of the question. "With packaged applications," Abbas says, "you can now get most of what you need. Usually you can customize them to some degree, and then if you have to change your business practices to work with the software, it's worth it." Whether and to what degree a packaged application will require the customer to adapt to the software, rather than vice versa, has long been a sticking point for buyers. While software makers claim that their products can be customized to meet a given customer's need, too often such customization ratchets up the cost and complexity of implementing the software while still leaving the customer unsatisfied. But vendors, feeling market momentum swinging their way, are working harder than ever to address this and related issues. Customers want to be able to fine-tune packaged applications not only to meet their specific needs, but also to make sure these applications can be integrated with other software the company uses and extended beyond the enterprise via the Internet. For example, Lawson Software, Minneapolis, announced in March that its Insight II family of ERP applications can now be customized with standard languages such as Visual Basic or Java. That means that rather than drawing from a limited pool of people who specialize in a given application, or configuring the software so that only limited portions can be altered, Lawson now allows any part of its software to be modified via common programming languages. "A year ago customers asked us if we were doing something with the Internet," says William B. Lawson Jr., executive vice president for advanced technology. "Now they want the product to be able to run on it. They take it as a given." That's in large part because the Internet has suddenly become crucial to so many kinds of businesses." Many companies are in the position that Westcon Inc. encountered this year. "We had a homegrown financials system that was almost 15 years old," says Robert Gordon, manager of global IS for the Tarrytown, N.Y.-based distributor of computer networking products. "Our business is changing a lot, the Web is huge for us, and it didn't make sense to enhance it or try to build another system ourselves." So Westcon worked with a consultant to assess its needs and then shopped around. Ultimately it went with software from J.D. Edwards & Co., in part because, as Westcon's IS director Bob Barnes notes, "they're focused on areas that we know we want to move into, like sales-force automation. So even though we're only rolling out their financial applications now, as we expand we know they can supply more of our needs, and it will all work together very easily." These testimonials might lead one to believe that going with packaged software is a no-brainer, but vendors realize that this recent boom has come at a cost: customer disillusionment. Michael Schmitt, senior vice president of worldwide marketing and industry solutions for J.D. Edwards, is among the first to admit that, "despite the huge growth for various ERP packages in the mid-'90s, there also has been a backlash against it, as customers find that it's not often the be-all and end-all it's been cracked up to be." One downside: Your software looks just like your competitors', and information technology begins to lose its strategic appeal. "And that is why," Schmitt says, "customers need to find products that [can be] customized not only at the time of implementation, but again down the road when business needs change." So even though a fair amount of commoditization has occurred in the packaged-applications market, shopping for the right product and vendor is still critical. Westcon's Gordon says that hiring a consultant was well worth the money, because the consultant was "vendor neutral" and knowledgeable about the many products available, and also understood how to assemble a team of Westcon managers and help them assess how their business was run and what their requirements really were. And, while packaged applications are fast becoming the rule for ERP, back-office functions, and other core business needs, analysts including Larry Perlstein of Dataquest, San Jose, say that homegrown software hasn't completely disappeared -- it simply has been relocated. "I think two major things are happening," he says. "One, lots of IT staffers who might be creating new customized software are busy helping to fix the Y2K bug. Second, it's in emerging arenas like e-commerce that you see most of the development taking place today. Companies' needs really differ here, which is why they often have to create [the software] themselves." One company that writes plenty of its own software is Union Pacific Corp. (UP). "We have to, because railroads have unique needs," says Jim Fox, IS manager at the firm's Kansas City operation. "We take it on a case-by-case basis, and we can sometimes find railroad-specific applications in the market, but often we have to create our own." Sometimes UP creates its own systems simply because its IS staff has the talent. In one case, although there are plenty of products available to test and debug programs for Y2K viability, a member of Fox's staff took it upon herself to build a homegrown tool that helped the railroad address some of its Y2K compliance work. "She got it up and running very quickly," Fox says, "and saved us thousands of dollars." Software-industry observers wonder what will happen to custom-software creation once the Y2K hurdle has been cleared. Given the general shortage of talent in IT, it's unlikely that many companies will allocate legions of programmers to a custom application. Even vendors of the software tools often used to create those applications -- such as PowerBuilder from Ottawa, Ont.-based Cognos Inc. -- admit that the trend toward buying packaged applications has serious momentum. They say they somehow need to "rebuild the value of customized applications," in the words of Ed Shepherdson, Cognos' director of application-development tools. J.D. Edwards' Schmitt notes, "The best single indication of the new thinking when it comes to build-versus-buy is that a couple of years ago we vendors would get RFPs that could run 300 pages. Now they might be only 20 pages in length. Customers know what they want now and what they'll need going forward, and they understand what packaged applications can do." At the same time, however, there are an estimated half a million Java programmers out there, eager to help create new cutting-edge applications that allow companies to get a jump on the competition. So in Web-based software -- whether it's e-commerce, customer service, or intranet-based applications that serve an internal corporate need -- there is likely to be plenty of custom development. "At least for now, anyway," says analyst Perlstein. "But vendors see this as the next great battleground, and it won't take them long to bring a lot of products to market."

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