In the competitive world of real estate, especially for large corporate entities, maintaining control and transparency over financial processes is crucial. As a Head of Controlling or Head of Project Department you often detect inefficiencies with high impact on the economical success of your company: time-intense processes, lack of transparency or poor data quality costs you and your team valuable working hours.
Moreover, the outdated software you use creates extra work, adding to the inefficiencies. As it’s becoming more and more obvious that conventional tools like Excel cannot handle the increasing complexities of managing financial data in real estate projects, it's natural to consider whether a new financial controlling tool is necessary.
You will catch asking yourself questions like: Should you develop a financial controlling tool in-house, or is it better to rely on external software? This article delves into the total economic impact, and is evaluating why outsourcing might be the better solution.
Factors that are crucial for your evaluation of new software
The Total Cost of Ownership (TOC) is a proven methodology that helps you measure and understand the financial impact of technology investments. It goes beyond simple cost analysis by considering a broad range of factors. And is even more accurate than the pure calculation of the Return on Investment (ROI).
What are factors that should be considered when evaluating a new software purchase?
- Cost Categories: Direct and indirect costs associated with the software.
- Benefits: Tangible and intangible benefits gained from the software.
- Flexibility: The ability to adapt to future changes and opportunities.
- Risk: The potential uncertainties and risks that could impact the investment.
Understanding your direct and indirect costs as well as effects on your business is crucial because it provides a comprehensive, balanced view of both the costs and benefits of in-house development and external software solutions.
Evaluating the TOC of developing software in-house
1. Costs
Initial Development Costs:
- Recruitment and hiring of a software team ($20,000 to $40,000 per hire)
- Initial infrastructure setup for servers, cloud infrastructure, and development tools ($50,000 to $100,000)
Ongoing Operational Costs:
- Salaries and benefits for software developers ($80,000 to $150,000)
- Regular maintenance and updates (aprox. 20% of the initial development cost annually)
- Training and development for team members ($5,000 per employee annually)
- Compliance with regulations and maintaining security (10% to 15% of the operational costs annually)
Hidden Costs:
- Opportunity costs: time spent by management and other team members on the project, which could otherwise be used on core business activities.
- Risk mitigation: costs related to addressing potential failures, security breaches, or compliance issues.
2. Benefits
Direct Financial Benefits of a modern Financial Controlling software:
- Revenue increases: improved financial controls and reporting can lead to better decision-making and potential revenue increases. For instance, a study by McKinsey & Company found that companies with effective financial controls can improve their profitability by up to 10%.
- Cost savings: automation and improved processes can reduce operational costs by 20% to 30%, according to a report by Deloitte.
Indirect Financial Benefits of a state-of-the-art Financial Controlling software:
- Productivity gains: enhanced efficiency and reduced manual processes can lead to significant time savings. The Boston Consulting Group (BCG) reports that digital transformation initiatives, including new software implementations, can boost productivity by 20% to 30%.
- Improved data quality: better data quality leads to more accurate forecasting and decision-making, which can improve overall business performance.
3. Flexibility for scalability and adaptability
- Future-proofing: the ability of the software to scale with business growth and adapt to technological advancements.
- Innovation: the potential to integrate new features and capabilities to stay competitive.
4. Risk Adjustments
- Potential delays: risks associated with project timelines, such as delays in recruitment, development, or implementation.
- Budget overruns: Financial risks due to unforeseen expenses.
- Security and compliance: Risks related to data breaches, regulatory non-compliance, and other security issues.
While the initial investment in in-house development might appear manageable, the cumulative costs and resource allocation can be substantial over time. To comprehensively calculate the total economic impact, both the costs and benefits over the software’s lifecycle need to be evaluated.
The Fast Lane: How to benefit from a state-of-the-art Financial Controlling software
Developing software in-house can provide substantial benefits, particularly for organisations with specific requirements and sufficient resources to manage the process effectively. Nonetheless, when it comes to Financial Controlling software, a full in-house software development might not be the best choice.
To benefit from revenue increases, cost savings, productivity gains and improved data quality you want to implement your state-of-the-art software solution as fast as possible. You wonder when you will actually benefit from an in-house solution? From the start of the development to implementation it will take you up to 14 months, whereas the implementation of an existing software is possible within 4 weeks. Besides that, you can apply the same framework to calculate the TOC of a Financial Controlling software solution from an external software provider. Studies show that for other software products an ROI of 213 % is possible over three years with a payback period of less than six months for financial management software.
The Pros of choosing an external software solution for your Financial Controlling
Cost Efficiency:
- Lower initial investment: avoid the high costs associated with recruitment and infrastructure setup. (Licensing Fee, Implementation costs, Training costs, Support Fee)
- Predictable costs: regular subscription fees or fixed-cost contracts provide predictable financial planning.
Access to Expertise:
- Specialized knowledge: external software partners bring industry-specific expertise and advanced technological knowledge.
- Skilled teams: experienced professionals who are adept at handling complex projects efficiently.
Financial Benefits:
- Productivity gains: improved efficiency and reduced manual processes, leading to significant time savings.
- Cost savings: reduction in operational costs due to increased efficiency, automation, and better resource management. Automation and improved processes can reduce operational costs by 20% to 30%, according to Deloitte (Deloitte, 2023).
Faster Time to Market:
- Immediate availability: external software solutions are ready to deploy, reducing the time to market.
- Optimized processes: established methodologies and streamlined processes expedite development and implementation.
Scalability and Flexibility:
- Easy scaling: scale the software as your business grows without the complexities of in-house adjustments or new regulations.
- Adaptability: quickly adapt to new market trends, regulations and technological advancements.
Quality and Innovation:
- High-quality standards: external providers maintain rigorous quality control measures.
- Continuous improvement: regular updates and improvements keep the software competitive and efficient.
Risk Management:
- Reduced risk: shared responsibility with the software partner mitigates risks related to project failures and compliance issues.
- Proven solutions: external providers often have a track record of successful implementations, reducing the risk of unexpected issues.
Position your company for sustained success
For large corporate real estate companies, the high costs, resource allocation, and potential delays of building a financial controlling tool in-house often outweigh the benefits. External software solutions offer significant advantages in cost efficiency, access to expertise, faster time to market, scalability, quality, and risk management. By partnering with an external software provider for your Financial Controlling, you can achieve better financial control, transparency, and efficiency, ultimately benefiting your bottom line and positioning your company for sustained success.
