Custom Software and Competitive Advantage

The Different Roles of Custom Software and Off the Shelf Software

Since the essence of strategy is being different in a way that matters to customers, we find it curious when prospective clients consider off the shelf software for the business activities that are at the heart of their differentiation. To be clear, we aren’t against off the shelf software (we have subscription software products and a subscription software implementation service that are important parts of our business). But we see off the shelf software being best suited for generic activities the firm doesn’t want to differentiate itself on. For instance, if best practice is good enough for the HR function, then off the shelf solutions like HR Advanced and CloudHR can be better than going custom (although this may not be true for firms differentiating on talent). Or if little differentiation can be derived from the Accounting function, then cloud services like Xero or Oracle Financial may make better sense. Using off the shelf software in such situations makes sense because it can lead companies to best practice almost overnight for functions and processes they may have underinvested in or not prioritise for investment in future.

Differentiation and Innovation

But for activities the business wants to be different in or to out innovate competitors on, off the shelf software may be a risk. By using off the shelf software for such activities, a business may achieve some initial benefits (e.g. quickly closing the gap between current practice and best practice or avoiding the innitial upfront software development cost). But it is likely to sap the business’ ability to perform these activities differently to rivals (even in applications with more built in customisability). In such cases, the business’ ability to innovate in that area is limited to the rate at which the software licensor adds functionality to the software. Even then, the additional functionality is likely to be available to competitors. The same applies to the business’ ability to differentiate itself in that area.

The Crucial Crossroads of Choice

So, as we advise all of our clients, before choosing to go down the off the shelf or custom software path (which both have their place), two important questions to consider are “Do we want to be different in the set of activities this software is to perform?” and “Do we want to out innovate our competitors in the set of activities this software is to perform?”