Real Estate Management in the True Cloud

Why building real estate software in house is no longer financially feasible

Posted on: Thursday, September 23, 2010

IWMS expert and Lucernex President, Joe Valeri (see Joe’s management summary here), discusses why internally developed real estate software is no longer financially feasible.

We recently attempted to sell our applications to a very large retail chain which ended with them deciding that their “IT department had looked at everything out there and they decided to build it in-house instead.”

While it has become far less common, there remain corporate, retail and healthcare companies that still go down the road of building their own real estate management software. In the current economy, with the number of low-cost and low-risk software options out there today, I can’t imagine how a valid financial argument can be made to justify the internal short and long-term cost of an internally developed application.

Before going down that road consider: the real short-term and long-term cost; the risk you are taking sinking so much capital into a system you have not yet seen; the risk you are taking by being the only user of such an important system; the risk you are taking by allowing your internal IT group to interpret FASB regulations and adapt them to technology; the time it takes for your IT department to produce anything; how often your IT group is on time; and; finally, consider what one layoff in the IT group will do to your plan.

Having managed a very large software portfolio for Marriott International and having spoken to countless real estate executives over the past 10 years, there are some unarguable facts about developing in-house that often get overlooked.

1. Internal Cost. Any system, no matter how small, that is developed in-house or purchased and implemented behind the firewall has short and long-term internal cost. The cost of developing the software or purchasing a software license is the SMALL part of the Total Cost of Ownership (TCO). In my days running a real estate systems group (and this was over 10 years ago) even the smallest system required an internal charge of $75k per year and most applications brought an internal charge closer to $150k per year for hardware management, database management, software enhancements, overhead, etc… As you can see from the table below you actually pay FAR more EVERY year for your in-house solution.
Cost of internal real estate software developmentTable 1: Typical cost of internally developed solution

2. Timing. A vendor supplied application that is built to be flexible and quick to implement can be up and running in weeks from the time the project is approved. Internally developed applications will take at least 9 months to a year to develop and far more if they are trying to build a complete Lease Accounting or IWMS application. How often does your IT group deliver on time? What will the priority of your project be compared to other IT projects?

3. Accuracy Risk. A software company has to sell its wares to many clients and end users. Having many users means many more folks testing and ensuring the software does what it needs to do. Consider the complexity of lease accounting software; who is best prepared to ensure FASB rules are followed? What better way to be sure of a product accuracy than to have dozens or hundreds of other companies testing it to make sure its rock solid. How many people test your internally developed applications, how much industry experience do they have and how many meaningful scenarios can they come up with?

4. Investment Risk. When you develop internally there is always a substantial upfront cost in hardware, software development, design and overall IT support. You have to build a support organization and training manuals and you have to commit to this before you’ve even seen pictures of what the application will look like. Would you buy a vendor’s product without a demo? All that upfront cost is sunk and you have no recourse if the application does not do what you need. SaaS and Cloud software requires very little upfront cost and, if you are not happy, you cancel, get your data and try another vendor’s product.

5. Focus. No matter what your IT department tells you, they are not a software company and can not possibly operate like one. Software companies are in the business of not only developing their software but in making sure their customers are happy AND making sure they stay on top of new trends and advances that can benefit their clients. Internal IT departments are not in the business of developing software and are always one budget cut away from losing the application’s developers and support.

6. Data Security. No matter what your IT department tells you they are NOT as good at securing data as a SaaS or Cloud vendor using a top-tier hosting facility. If a hacker wants to get to you, the easiest place to start is knowing where your data is – if it’s housed inside your data center its easy to find! Professional, top-tier hosting facilities are in the business of keeping data safe and they implement the most modern technologies and techniques available to protect your data. How long do you think it takes your IT department to get a new piece of security hardware or software approved?

7. IT reality. Job security is more important to most internal IT staff than maximizing the ROI of a software investment. IT priorities change all the time and your project can become unimportant quickly.

In today’s world, there are Software as a Service (SaaS) applications and even more advanced Cloud Computing solutions available for most of the critical areas of real estate management. While some IT groups view these applications as unsafe the fact is they are actually far safer than internally developed applications (see Data Security and Risk above). A SaaS or Cloud solution is actually very low risk in terms of ROI. Clients can start using the application with very little up-front investment including NO hardware, NO internal IT staff, and, in some cases, NO third party licenses. If the product does not show the ROI needed it can be shut off with very little risk and no HUGE upfront investment to eat – in accounting parlance, there is very little sunk cost with SaaS and Cloud applications.

Pros and Cons of Internal Development

Pros
1. Get exactly what we want, built for us
2. More secure (perceived)
3. Protect more internal IT jobs

Cons
1. Much higher up front investment (longer time to ROI)
2. Much higher total cost of ownership
3. Risk of being only using the application (no external checks on quality of software)
4. Takes at least a year before version 1 will be ready and often much longer
5. If IT priorities change, you may not get your application for years
6. Beholden to your IT department for even the smallest change
7. How often is your IT group in time and budget?
8. Technology is outdated the day you start using it and no one is routinely upgrading it
9. One layoff away from no support
10. If you don’t like the software you are stuck with it until it all depreciates
11. Easier to be found by a hacker

Pros and Cons of purchasing a SaaS or Cloud solution

Pros
1. Very little up front investment (no hardware required); less capital at risk
2. Lower long term total cost of ownership
3. Usually a very quick ROI
4. Lower risk of errors since many other users with similar requirements
5. Can start using quickly (often within weeks of purchase)
6. Changes can be made by vendor or even by business users with more advanced software
7. Professional data security by a host in the business of protecting data
8. Cancel anytime with little sunk cost
9. Make payments quarterly or annually; lowering risk
10. Upgrades free – get benefits of new features for free
11. Built using years of experience with other users with similar needs

Cons
1. It is not 100% yours and completely under your control
2. Might mean client needs fewer internal IT staffers
3. Might not do everything exactly as you do it now

Shameless Plug

Lx Retail IWMS and Lx Contracts are True Cloud delivered web applications that require no large up front investment, no internal hardware or IT support, no third party licenses and can be up and running in a matter of weeks. Clients pay one flat fee and pay annually or quarterly. Our applications are housed in a private hosting facility that maintains their own private network (a closed section of the Internet) which houses some of the nation’s largest banks and insurance companies. We typically provide an ROI in year one of use of our systems and focus on customer satisfaction to make sure our clients stay with us for the long term. Before you get talked into building a custom in-house system by your IT group, take a look at how configurable and easy to use Lucernex applications are and see if the product you are looking for already exists.

Previous IWMS related Blogs

What is IWMS anyway?

IWMS? It’s Location! Location! Location!

The Power of Location Management

IWMS – Why so expensive?

IWMS in the “Cloud”

How Capital Project Management fits in an IWMS

What makes one IWMS easier to implement than another?