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 Success Factors 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.

Education Sector Case Study

An example of this is a recent client we had in the education sector. This client was using an off the shelf product to manage the creation, integration and reporting of student learning outcomes. While parents, teachers and students were coming up with various ideas for improving what was included in student reports and how it was presented, the school could not act on these suggestions without significant difficulty and expense. This is because the software licensor wouldn’t modify the licensed software to suit the unique requirements of one school. If this were a custom application, the school would could modify parts of the software easily as it would own a source code license. It could then build in suggestions from parents, teachers and students as these emerged. In doing so, it would constantly be capturing, institutionalising and exploiting innovations. Thus differentiating itself in an area important to parents and students – the capturing, organising and reporting of student learning outcomes.

Advertising Industry Case Study

Consider another example of a customer we have in the advertising industry who was considering using an off the shelf opportunity management and CRM application, yet wanted the business to differ from rivals in how it acquired and managed customer relationships. They came to us for assistance with the search and implementation of the application. When we reviewed their existing customer acquisition, opportunity and relationship management processes, we found that a lot of these were were novel breakthroughs we hadn’t seen before and likely an important reason behind the firm’s unusually high repeat revenue numbers. Besides needing to be more efficient and effective through the leverage of process automation and intuitive interfaces, the processes were working well. This customer ended up seeing the value of developing a custom opportunity management and CRM application to match these processes. Besides retaining it’s existing novel routines that were already appreciated by customers, this client is now also better positioned to be able to make ongoing changes to the application as business needs change and as additional process innovation insights occur (e.g. they recently commissioned a $2k project to add “drag and drop job allocation” to their already in use application). The client can focus on lapping competitors rather than going back to the same same starting point as competitors.Their innitial $30k software development fee, while not great for short term cashflow, is great for long term competiveness.

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?”