Why in-house software development matters for your company’s survival

With software expertise now essential for firms to succeed in the application economy, it’s time to re-think your strategy for in-house software development.

This post is by  guest contributor, Eric K. Clemons, professor of operations and information management at the Wharton School of the University of Pennsylvania.

Software is what makes companies what they are today. Some companies are entirely based upon their software; they are their software. This includes some of the most important of the Internet companies, of course, like Google and Facebook.

Other companies obviously would not exist without their software; that includes other Internet darlings like Amazon and eBay in the US, and their equivalents Taobao, Ali Baba and Yihaodian in China.

But traditional companies like WalMart would not exist without software to manage their inventory and their relationships with suppliers. Indeed, the entire outsourcing industry, including Indian giants like Infosys and Wipro, American outsourcing vendors like IBM and Accenture, as well as specialist firms like Infotech, are all dependent upon software to allow clients to observe performance and manage risk.

Not all software is created equal

By definition, strategic software is strategically important.

Surely there is a large class of operational software that is important but not strategic. I’m certain that most of us would neither notice nor care if our employers changed their payroll software, or their tax and accounting software, or their human resources/benefits office software. As long as it functions properly all commercial offerings are pretty much acceptable.

But there is a large category of software that is unique to the firm. This software needs to be aligned with the strategy of the firm and the needs of its clients and customers. Again, it’s not surprising that Amazon’s interfaces are unique to Amazon, and that their recommendation systems and shopping cart maintenance software is uniquely theirs.

But every airline’s frequent flyer system and every hotel’s frequent guest relationship management system is just slightly different to meet the individualized needs of each brand’s guest. Reservations within the Marriott family are differentiated, with reservations at Ritz Carlton being treated differently from reservations elsewhere in the group.

Strategic software is once again a competitive weapon

Strategic software is almost never off-the-shelf. By definition, if it is available to your firm off the shelf it is also available to your competitors, ensuring that they will be equivalent. No bank ever received competitive advantage by offering the same ATM capability as all the other banks in MAC or NYSE. So, by definition, strategic software is custom software.

Surely, none of us now accept that information technology is never strategic, and that information technology is merely a cost of doing business. For firms with no differentiation, with no customer focus, this may be true. Computing hardware may not be strategic in the age of cloud computing; why own hardware if you can lease it, and why lease it if you can rent it in a spot market that meets your month to month, or even hour to hour demand, perfectly?

But cloud computing is available to all firms, large and small, and clearly does not provide advantage. The advantage comes from software that no competitor has, offering services to clients that no competitor can match.

Information, image and innovation

The CIO is the chief image officer for the firm. Information ensures that all of the firm’s processes combine to create the desired impression on customers. You can’t position yourself as a luxury hotel, and then let reservations rent out substandard rooms, even at times of peak occupancy.

Everything about the firm’s operations must interact properly, and only the CIO can ensure that. The CIO is also the firm’s link to the outside world, and the officer in charge of detecting problems when they first appear in Yelp, TripAdvisor, and other community content websites. The CIO is also the officer in charge of finding the linkage between external reports of dissatisfaction and the internal operational problems that caused the dissatisfaction.

Moreover, the CIO is also the chief innovation officer for the firm. Information enables officers of the firm to detect operational problems and unmet demand within the firm. Equally as important, the CIO is once again the firm’s link to the outside world, and to customer driven innovation.

The growing importance of in-house development

If information is critical to the firm’s differentiated image and its ability to innovate, then firms desperately need to retain their in-house development capability.

In-house capability is necessary for speed if you want to develop a competitive advantage. It’s hard to get to market first with an idea if you have to teach someone else what you are doing now, where your industry is headed, how you want to stay ahead of your industry and what you want your software to accomplish for you.

In fact, it is not surprising that the recent study conducted by CA and Vanson Bourne found that enterprises plan to increase their percent of in-house development from 33 percent to 44 percent in the next three years.

In-house development is even more critical if you wish to retain your firm’s advantage. It’s hard to retain a competitive advantage if your software is written by an outside firm that knows what you are doing well enough to do it for you. If they know it that well then they can teach any or all of your competitors for a fee.

One of the nation’s most innovative credit card issuers has policy that their most important software is never written by a vendor. The firm was founded by consultants, and they understand what should and should by entrusted outside the firm.

In-house software development capability is essential to the firm’s innovation, image, and operations. It’s not necessary for the firm to own and operate all of its computer hardware. It’s not necessary for the firm to write and maintain all of its software. But it is essential that the firm have the capability to develop software, precisely tailored to its individual requirements, and to do so as quickly as possible.

What is your strategy for improving your in-house development capabilities? Let me know what you think below in the comments section.


Eric K. Clemons (clemons@wharton.upenn.edu) is Professor of Operations and Information Management at the Wharton School of the University of Pennsylvania. His education includes an S.B. in Physics from MIT, and an M.S. and Ph.D. in Operations Research from Cornell University.

His research for the past 30 years has involved the systematic study of the transformational effects of information on the strategy and practice of business. He has published over 100 scholarly articles and regularly publishes online in Huffington Post, Business Insider, and Tech Crunch.

Dr. Clemons is the founder and project director for the Wharton School’s Sponsored Research Project on Information: Strategy and Economics within the Program for Global Strategy and Knowledge Intensive Organizations. He has held appointments at Wharton, The Harvard Business School, The Johnson School of Management at Cornell, the Engineering College at Cornell, Hong Kong University of Science and Technology, and Peking University Law School.

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