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Specialized solutions vs. In-house development

Ljubljana, 11. 9. 2017

Potential clients often debate the merits of developing an in-house workout/legal services management software package versus the off-the-shelf solution package. Such an analysis invariably shows that using a specialized solution is the better, more efficient alternative, also in terms of its technical and fiscal merits.outsource-vs-inhouse

A specialized solution does one thing. It produces software for managing business processes; it is particularly focused on managing workout and legal processes. This means that a software house, focusing on development of specialized solutions, has specific expertise gained from years of working with a large number of clients and other partners. No in-house IT department can claim the wealth of knowledge regarding process management, as well as workout and legal department process management software that an expert software house has acquired as result of years of diligent case studies and hands-on experience. And while an in-house IT department is well acquainted with its organization's internal procedures - much better than any company contracted to implement a specialized solution can be in the beginning - the broad experience of having worked with a number of financial institutions that an expert software house can bring to the table is invaluable, and so enables the software house to rapidly master a particular firm’s processes and procedures with little difficulty.

Cost is, of course, a key consideration. To present this point clearly, let’s assume that a specialized solution costs 20.000 € to implement. This is equal to 400 hours of IT  professionals' time assuming a blended cost of 50 €/hour; 50 €/hour is a low estimate even in CEE countries given that the cost of in-house personnel includes social contributions, office space, etc., but it will serve for now. In contrast, thousands of hours of work by IT professionals focused solely on business process management software development have gone into the perfection of specialized solutions. It is unlikely that in 400 hours IT workers, who are not specialized in the process management field, no matter how capable in their own area of expertise, could come close to duplicating the capabilities of a specialized solution. The real cost of duplicating even a subset of a specialized solution’s functionality would accordingly be far higher than the cost of the implementation of such a solution, if a duplication could be achieved at all, even if only the cost of It staff is considered, disregarding the additional costs that would be incurred as a result of the involvement of staff from other departments. And, as noted below, the involvement of non-IT staff would have to be considerable.

Even assuming that any in-house staff could duplicate the workings of a specialized solution at a reasonable cost, there are other concerns that make this approach undesirable.

First, there is the time that would be required to develop and test a specialized solution equivalent. Usually, process management software is required immediately, not a year hence. Or two years hence. We all know how IT deadlines slip.

Second, there is the disruption to departments other than IT that recreating a specialized solution would cause. Workout, legal, compliance, finance, and other departments would have to be constantly consulted during the software’s design and development phase to ensure that their needs were understood. And they would have to be heavily involved in the testing phase to ensure that the software as written in fact met those needs.

Third, there is the opportunity cost of assigning in-house software developers to creating a specialized solution equivalent. Most clients have many software needs, and it is unlikely that developing a new specialized solution would provide the best monetary return of developers' time invested, whether measured through costs avoided or additional income earned. In this regard it is worth noting that an off-the-shelf specialized solution is in many ways a profit centre; it reduces the costs associated with workouts and legal procedures, and by making staff more efficient it also increases recoveries.

Finally, there is the issue of support, improvement and modification of whatever software package a firm adopts. In the case of a specialized solution, developed by an expert software house, all of this is usually covered by paying the developer a modest monthly fee of that is estimated to be no more than 40 €/user. Whereas in case of in-house software, company IT personnel would have to be dedicated to education and help desk support (among other support activities) for a software package unique to the company. I.e., personnel with prior expertise in the software could not be hired. Given the high turnover of IT personnel, this is a serious drawback to an in-house solution because of the cost and time that would be required to train new experts on the in-house system when current staff moved on with their careers.

Even more pressing is the consideration that significant effort would have to be expended to make sure that the in-house software was properly modified to conform to constantly changing regulations and procedures. Given the rapid and continuing changes in privacy, capital adequacy, and other regulations, and in many cases the high penalties prescribed for not implementing these changes, it would be essential that they be identified and implemented rapidly and accurately.

This would be a challenging job for any company’s in-house teams. And teams they would have to be, since IT personnel are not qualified to keep track of regulatory changes or to evaluate their significance. Accordingly, the company’s IT department would have to coordinate closely with the company’s legal, compliance, finance, and other departments in order to collect those other departments’ views as to what changes would need to be made when and to what aspects of the in-house software. This would be - at the least - highly disruptive for all departments involved, not to mention time consuming and expensive. An even more precarious: a regulatory change could be missed or poorly implemented in the in-house software, leading to fruitless and divisive finger-pointing between departments in the best case and a large fine or even criminal liability in the worst.

A software house, developing a professional specialized solution, on the other hand, is able to spread the cost of identifying regulatory changes, determining their consequences for the software package, assessing how best to modify the package to reflect the regulatory changes, coding the required modifications, testing the software as modified, preparing educational materials relating to the changes, working with client personnel confused by the changes, etc., over many customers. It follows that paying a reasonable monthly fee to a software house is financially sounder, as it covers all the above mentioned costs; costs that a company with an in-house developed solution would have to bear alone.

For all the above reasons, implementing an off-the-shelf specialized solution is a better, more cost effective and less risky solution than attempting to create an in-house equivalent.