The trade-off between rent vs own is a dilemma in every corner of our lives. Whether it is regarding homeownership or a software platform—it is not an easy choice to make. For this essay, I will be focusing on the software platform.
A company with critical departments such as HR, finance operations or compliance rely on ERPs, CRMs or other SaaS providers such as Workday, Atlassian, SAP or Salesforce to serve their business functions. Companies cannot ignore these functions as they scale and reach maturity.
COO asks the leadership to invest in a software that will standardize the business operation.
CTO might say they can build any software with appropriate funding.
CFO evaluates the IRR (internal rate of return) on a CapEx (capital expenditure) of building it internally vs renting the resources from a third party.
CEO is faced with a choice to make a decision on whether to build internally or rent a tool. What should the CEO do?
Building sounds good in theory because why pay for software when you can consolidate them all under one platform while getting customization capabilities from your engineering team. The world is your oyster.
Another obvious choice is cost-cutting for profitability. You pay for all these licenses per seat which racks up your IT bill. And these large platforms come with bloat. Not all functionalities are consumed, but you are stuck paying for it all nonetheless.
On the flip side, these giant ships (Salesforce) require highly specialized engineers but underneath the hood it is a relational database management system (RDBMS) with application layer with embedded components. It orchestrates internal processes at scale.
You also take the risk of outsourcing security to your vendor. For instance recent CrowdStrike and Microsoft vulnerability that brought several industries including airlines.
Another issue is getting your team to adapt to a new behavior. UX can be so drastic that it slows down your team's productivity because of cognitive load. Learning new tools while trying to do a job shouldn't be ignored.
Lastly, ongoing maintenance is overlooked by an executive team. Building a platform from scratch is one part but keeping the lights on and keeping up with new technology and standards is another.
CEO must ask where should the resources be allocated. If you are a wealth management firm, should your best engineers be helping you build your core business or a CRM tool?
The hard part is not building but maintaining the platform. I know this because I have seen internal platforms and tools being outdated time and time again because upgrades keep slipping to a low priority until one day you are forced to upgrade because the company faces a security threat. But then all business priorities are on pause. The pendulum is always shifting from one side to another.
On the other hand, renting requires huge upfront investment. You are limited to functionalities provided by your vendor, but you no longer have to worry about upgrades, security controls or best practices. Once your business function integrates with a system you can then start focusing on your core business. While initial integration is not easy, it removes the maintenance cost.
Your CapEx is now OpEx. Outsourcing becomes an operational cost. This might not sit well with a CEO who is thinking short term because profitability might take a hit. But trading OpEx for CapEx in software is a real trade-off and the decision can be consequential in long-term.
In my opinion, CEO's job is to protect the moat of the company while allocating capital efficiently. Renting might not be good at first but maintaining a platform that was built internally is not good either because you are re-shifting your resources that could otherwise be used to serve your customers.
It is an enormous mistake when pulling engineers away to maintain your internal software as most companies are already bottlenecked by velocity of feature delivery that matters the most to the core business.