Learning Objectives
By the end of this chapter, you will be able to:
- Describe the different methods of acquiring software.
- Explain the advantages and disadvantages of buying commercial off-the-shelf (COTS) software.
- Explain the advantages and disadvantages of developing custom software.
- Define open-source software and other licensing types.
- Apply a set of criteria, including total cost of ownership, to choose an acquisition method.
How to Acquire Software
When an individual or an organization needs a new piece of software, they have several options for how to acquire it. The main choice is often referred to as the “build versus buy” decision.
1. Buy It: Commercial Off-the-Shelf (COTS)
This involves purchasing a pre-existing software product from a commercial vendor.
- Advantages:
- Lower Upfront Cost: Generally cheaper than building software from scratch.
- Faster to Implement: The software is already built and can be deployed quickly.
- Reliability: COTS software is used by many customers and has typically been well-tested.
- Disadvantages:
- May Not Fit Needs Perfectly: The software is designed for a general audience and may not have all the specific features an organization needs.
- Lack of Control: The organization is dependent on the vendor for updates, support, and future development.
- Examples: Microsoft Office, Adobe Photoshop, SAP ERP system.
Many COTS products can be customized or configured (settings, add-ons, extra modules) to fit better — a middle path between pure buy and pure build.
2. Build It: Custom Development
This involves hiring a team of developers (either in-house or outsourced) to create a new software application from scratch, tailored to the organization’s exact specifications.
- Advantages:
- Perfect Fit: The software is designed to meet the precise needs of the organization.
- Control and Flexibility: The organization has complete control over the development process and can easily make changes in the future.
- Disadvantages:
- High Cost: Custom development is very expensive.
- Time-Consuming: It can take months or even years to develop a new application.
- High Risk: Custom software projects are complex and have a significant risk of failure.
Custom software can be built:
- In-house by the organization’s own IT team — more control, but requires skilled staff.
- Outsourced to a software company — access to expertise, but needs a clear contract, specifications, and ownership of source code.
3. Other Acquisition Methods
- Open-Source Software: This is software whose source code is made available for free, and anyone can use, modify, and distribute it. While the software itself is free, there may be costs associated with implementation, customization, and support.
- Examples: The Linux operating system, the Apache web server, the Firefox web browser.
- Software as a Service (SaaS): This is a subscription-based model where software is hosted by a vendor and accessed by users over the internet via a web browser. Instead of buying the software, you rent it.
- Examples: Salesforce, Google Workspace, Dropbox.
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Freeware and shareware: Freeware is free to use but its code is not open (e.g., many PDF readers); shareware can be tried for free for a period before payment is required.
- Leasing / licensing: Paying an annual license fee to use software installed on the organization’s own computers.
Comparison of Acquisition Methods
| Aspect | COTS (buy) | Custom (build) | Open source | SaaS (rent) |
|---|---|---|---|---|
| Upfront cost | Moderate | High | Low (free license) | Low |
| Ongoing cost | Upgrades, support | Maintenance team | Support, customization | Subscription fees |
| Time to deploy | Fast | Slow | Moderate | Very fast |
| Fit to needs | General | Exact | Adaptable with skills | General, configurable |
| Control | Vendor controls | Full control | Full control of code | Vendor controls |
| Risk | Low | High | Moderate (depends on community) | Vendor lock-in, data location |
Total Cost of Ownership (TCO)
The purchase price is only part of the cost. Total cost of ownership includes:
- License or development cost
- Hardware and infrastructure
- Installation and data migration
- Training of staff
- Maintenance, support, and upgrades
- Downtime and security
Worked example (5 years) for a 20-user accounting system:
| Option | Year 1 cost | Years 2–5 cost | 5-year TCO |
|---|---|---|---|
| Buy COTS | Rs 4,00,000 (license + setup + training) | Rs 60,000 per year support | Rs 6,40,000 |
| SaaS | Rs 2,40,000 (20 users × Rs 1,000 × 12 months) | Rs 2,40,000 per year | Rs 12,00,000 |
| Build custom | Rs 15,00,000 (development) | Rs 1,50,000 per year maintenance | Rs 21,00,000 |
In this example, COTS is cheapest over five years, SaaS is cheapest in year one and easiest to start, and custom software makes sense only if the business has needs no product can meet. (Figures are illustrative.)
Choosing the Right Method: Criteria
- Fit with business requirements — does the product cover the essential processes?
- Total cost of ownership over several years.
- Time available before the system is needed.
- Vendor reputation and local support — is help available in Nepal?
- Integration with existing systems.
- Security and data location — where is the data stored and who can access it?
- Scalability — can it grow with the business?
- Compliance — e.g., VAT-compliant billing as required by the Inland Revenue Department.
The usual process: define requirements → shortlist vendors → issue a Request for Proposal (RFP) → evaluate demos and references → negotiate contract and Service Level Agreement (SLA) → implement and train.
Nepal Scenario
A growing supermarket in Butwal needs a billing and inventory system. A global ERP is too expensive, and custom development would take a year. It chooses a locally developed COTS retail system that is IRD-approved for VAT billing, with local support available in Nepali. For email and documents, it uses SaaS (Google Workspace), and its website runs on open-source WordPress. Combining methods gives a good fit at a reasonable cost.
Summary
There are several ways to acquire software. The most common choice is the “build vs. buy” decision. Buying commercial off-the-shelf (COTS) software is faster and cheaper but may not be a perfect fit. Building custom software, in-house or outsourced, provides a perfect fit but is expensive and risky. Other popular models include using free open-source software, freeware and shareware, licensing, and renting software through a subscription-based SaaS model. Organizations should compare options by fit, total cost of ownership, time, support, security, and scalability, and often combine methods.
Key Takeaways
- The “build vs. buy” decision is a key choice in software acquisition.
- COTS software is cheaper and faster but less flexible.
- Custom software is a perfect fit but expensive and risky.
- Open-source software is free to use, while SaaS is a subscription-based rental model.
- Total cost of ownership, not just purchase price, should guide the decision.
Discussion Questions
- If you were a small business owner with a limited budget, which software acquisition method would you most likely choose? Why?
- What are the benefits of using open-source software?
- What is the difference between buying a copy of Microsoft Office and subscribing to Microsoft 365 (a SaaS product)?
Exam-Style Questions
Short answer
- What is COTS software? Give two examples.
- Differentiate between open-source software and freeware.
- What is total cost of ownership?
Long answer
- Explain the different methods of acquiring software with their advantages and disadvantages.
- What factors should an organization consider in the build vs. buy decision? Illustrate with an example.
