I recently heard of a prospective customer considering the notion of building their own AP automation solution. As a vendor, I found it remarkable that a company would consider such an undertaking, especially with the many suitable options available in the market. I was sufficiently intrigued by the notion that I decided to do a cost comparison of build vs buy and see if my preconceived notion held up [Spoiler Alert: it does hold up, and dramatically at that].
I checked with our Director of Engineering. We have north of 20,000 hours invested in the development of AP Express for one ERP platform. That equates to 2,000 person days. Looked at another way, it would take a team of 10 developers 1 year working full time to build an equivalent system.
According to salary.com, the average Software Developer Level II salary in the United States $87,390 as of June 27, 2019. The investment in salaries and benefits comes to $879,143.
That’s just the cost of development. It does not include the cost of 3rd party software programs (database, OCR engine, security, development tools, etc.). Nor does it include the hardware costs associated with hosting, storage, system backup, etc. Let’s assume they amount to an additional 15% per year on top of the development cost.
Ongoing Support and Maintenance
The system would have to be maintained and enhanced to accommodate new features, new versions of the software, training of new invoices and new users, etc. Assume one full time equivalent assigned across all of these tasks, with an annual salary increase of 3.0%. Software and hardware costs are assumed to remain flat during the 4 years of actual usage.
Build vs Buy, Total Cost Over 5 Years
The above assumptions result in a 5 year total cost of ownership approaching $2.0M…one year to build the system and 4 years of usage. How does it compare to the cost of using an off-the-shelf AP automation solution for 4 years (remember that the first year was purely development, leaving 4 years of actual usage)? For comparison purpose, I used the costs for a midsize company processing 100,000 invoices per year at a price of $1.25 per invoice with an implementation fee of $30,000.
What seemed apparent at the outset is confirmed: The cost of purchasing an off-the-shelf AP automation solution is 28% of the cost of building one from scratch…almost $1.4M less expensive. Look closer: The ongoing costs to run and maintain a home-grown solution are almost double that of a SaaS alternative. In actuality, the difference is even more dramatic. There is an inherent opportunity cost during the first year of development that has not been accounted for since you are foregoing the benefits associated with AP automation (more efficient usage of resources, fewer errors, better cash management, and less fraud).
It’s clear. A SaaS-based AP automation solutions is the clear winner compared to a risky, home-grown solution.