Question

Until now, the owner, Bob, kept the business records on his personal computer. He created a simple database to keep track of inventory, but it is not always up-to-date. He also developed spreadsheets to track expenses and payroll. The business has grown and Bob wants to install a new computer system to handle all business functions.

      Bob recently asked you to help him plan a system for Discount Appliances. You used an object-oriented approach to create a model of the business functions and actors involved.

      Now Bob wants you to do a “make or buy” analysis. Specifically, you will look into the pros and cons of in-house development versus purchase of a software package. Your research indicates that the most popular appliance shop package is offered by a vendor called ApplianceData. In your last meeting, Bob said that tangible savings for a new system would be hard to measure, but improved customer care, better service department records, and increased productivity are expected. Bob estimates that these benefits will add up to about $6,000 per year, whether the system is developed in-house, or purchased from ApplianceData.

            You decide to compare relative costs to establish a total cost of ownership (TOC) over the useful life of the system. Based on your research, you put together the following summary:

In-house development option

• The system will have a six-year useful life, be very flexible, and easiest to maintain.
• It will cost $15,000 to develop, install, and configure the system, and $1,000 to load existing data.
• Bob and the bookkeeper can handle day-to-day support with no added expense.

ApplianceData software package option

• This is a vertical package with a four-year useful life.
• The software is less flexible than an in-house system and some customizing will be needed.
• It will cost $8,000 to purchase, $1,500 to install and configure, $2,500 to load existing data, and $1,000 additional hardware will be needed
• Support is free for the first year, then there is a $2,000 annual fee

Tasks

1. Prepare a detailed list of pros and cons of in-house versus software purchase.

2. Calculate ROI for both options.

3. Calculate NPV for both options. Use an 8% discount factor.

4. Create a PowerPoint presentation for Bob showing the results of your analysis, including recommendations and reasons.

Answer 1

Inhouse Development

Pros:

• Specific needs of the company could be understood in a better way with inhouse development as they know exactly what the requirement is and what needs are to be satisfied with such a software.
• Communication process between the developers would be an easy task they work at the same company interdependently.
• When you have an in-house team of software developers, it’s always faster to change project's features, add new ones, and discuss their technical background. Also, in-house developers usually process bugs quicker.

Cons:

• In-house developing is always costlier than gettjng the work done from an outside agency. The final price makes up of many expenses like rent, taxes, software, hardware, and more. In fact, there are some additional spendings like training for employees, sick days and benefits.
• For in-house developmet, the company need the help of highly talented workforce with them. If the company does not have such employees, they need to recreuit such employees. But as these type of employees are of very less in number, they will have a huge demand. And in case such employees are already employed elsewhere, they need to be paid handsum as well. Hence it becomes a big task for the company.
• There are risk of absentism from the employees side. If such employees are absent in the company it would highly affect the software development of the company.  

*if you interchange the pros and cons with each other, you get the pros and cons of Outsourced development.

ROI:

Inhouse = 14.47%

Appliance Data = 8.48%