A new house is being built in my neighborhood.
The builder, who is the homeowner, is an electrician and has construction skills and experience. He appears to be taking every component into consideration to make the process as efficient as possible, preparing the lot, pouring the foundation, getting the building up and under roof quickly, with wise design choices to accommodate the weather in this climate. Progress is faster than anything else we’ve watched go up nearby. I’m looking forward to seeing the finished build.
To some people, this process would be nothing but headaches and overwhelm. Maybe, as is likely the case for most homeowners, they lack the skills to build a house. Even those with building skills and experience may be so busy with work and family commitments that they can’t take on a project like this, even if they’d hire a general contractor to oversee logistics. Instead of building a house, they buy one.
To build or buy is a common consideration. It applies to personal situations big and small. It also applies to software companies, where a business must evaluate how to best meet its operational needs. For software suppliers, the build v. buy evaluation is particularly important when it comes to software monetization systems that manage and track entitlements, licenses, and usage of their products. Knowing what to evaluate can help ensure that a software supplier implements the solution that’s most likely to support its overall goals.
Building v. Buying
Developing a homegrown solution is appealing; it provides you with control over your IP, allows you to develop that system further, and can save third-party expenses. Less appealing may be the continued investment of time and resources, the challenges of managing different types of licenses, the complexities of integrations with other back office systems, and limited scalability. Buying (licensing) a commercial software monetization system is often appealing from another angle. It can support business and technological needs, freeing up in-house resources to focus on product roadmap decisions, streamlining complexity.
Whether one approach or the other is best-suited for a particular software supplier depends on various considerations. Address four questions to evaluate whether building or buying a software monetization system is the most suitable path for your software company.
- What staff capabilities and resources are in place?
Whether to build or buy is a matter of cost-effectiveness. Developer talent is a limited resource. Consider the frequency with which you’ll need to deliver updates and the features that your customers demand; the ability to meet customer expectations is increasingly important as subscription models grow in popularity. Allocating time to building an in-house system may not be best when compared against investing your engineering resources in products that earn revenue.
Closely evaluate your internal development capabilities to help determine whether an in-house solution is worth the effort or whether the time and work of your development team may be applied more effectively applied elsewhere. Commercial solutions often offer a higher degree of automation, scalability, and coverage, freeing internal resources to focus on their core competencies along with your defined product roadmaps and software development priorities.
- What’s the best long-term use of resources?
Any software company has certain core competencies, which are funneled into efforts to support the long-term commitment of creating revenue-generating products and getting them to market. Innovative, feature-rich products are the cornerstone of a software maker’s competitive advantage in the marketplace. Rapid release cycles help retain customers and attract new ones.
Tracking licenses associated with core products is clearly essential for optimizing revenue, minimizing leakage. This is particularly important as many software suppliers move toward software-as-a-service (SaaS) deployments and to subscription monetization models that support annual recurring revenue (ARR). Tracking licenses, though, isn’t a source of competitive differentiation. The process of building and maintaining a license and entitlement management system can end up side-tracking other goals.
- How will the system function?
In order to effectively track entitlements, licenses, and usage, a software monetization system must accommodate multiple factors. To avoid complications, determine how effectively the built or bought system can:
– Work with all devices. Not all devices are networked, meaning that they can’t be discovered over a network. A software monetization system should not only work with networked devices, but with those that are offline or air-gapped, as well.
– Integrate with other business systems. To best support the full sales cycle—the quote-to-cash (QTC or Q2C) process—a software monetization platform much function smoothly with other business systems. These include the CRM (which may track license renewals by account) and financial and accounting systems (used for billing). Without integration, processes such as billing must be completed by manually reentering data from license and usage management systems into the billing system.
– Accommodate hybrid deployment and monetization models. Concurrently, a single customer may have perpetual on-premises licenses, licenses that are locked to devices, cloud virtual machine (VM) licenses, and subscription licenses. The software monetization system must accommodate this increasingly common type of hybrid use, with a mix of deployment models (e.g., SaaS, on-premises, and embedded) and monetization models (e.g., perpetual, subscription, usage-based, or outcome-based).
- What is the business case for building or buying?
The decision between a home-grown or a commercial software monetization system is not just a technical question. It’s a business decision. When looking for comprehensive entitlement, license, and usage management, financial considerations and the potential return on investment (ROI) must be evaluated.
To accurately compare the cost of building a solution to buying one, pay close attention to the full financial investment in the solution. Also carefully evaluate both the cost and the revenue. Determining this accurately may be challenging, but close estimations are possible. Consider:
Employee time, based on a “fully-allocated” basis. Calculate this expense not strictly on salary, but on salary, benefits (paid time off, insurance, etc.), facilities costs, and liabilities.
Opportunity costs. This often includes other projects developers could be working on to add revenue-enhancing features to products. Use a growth estimate to help model the revenue impact of adding a desired new feature set to a product that would help drive sales of that product, versus investing the same time in building a comprehensive new system for entitlement, license, and usage management.
Customer experience. Consult with your account team to help guide your evaluation of factors such as how your customers consume your software and whether or not customers may switch to a competitor if they can’t get certain features from you. Also evaluate whether the process of confirming licensing and usage is a burdensome task that’s negatively impacting customer experiences.
Mergers and acquisitions (M&A). Many software makers look to make acquisitions. The process of buying another software company adds products to the company’s portfolio. Those products must be included in the software company’s licensing and usage tracking system. Evaluate the complexity and expense of adding the built or bought software monetization system to products added through M&A.
As you aim to reach new markets, ensure that your software entitlement, licensing, and usage management program can keep pace with and support your software monetization initiatives. Whether you ultimately choose to build or buy a software monetization system, ensure that it operates efficiently and delivers on the interlocking needs of your business.
About the Author:
Michael Goff is principal, product marketing at Revenera, focused on software monetization and usage analytics solutions. Revenera helps product executives build better products, accelerate time to value and monetize what matters. Revenera’s leading solutions help software and technology companies drive top line revenue with modern software monetization, understand usage and compliance with software usage analytics, empower the use of open source with software composition analysis and deliver an excellent user experience—for embedded, on-premises, cloud and SaaS products.
Featured image: ©Immimargery
