Evaluating the ROI of Build Operate Transfer in Software Development
Many contemporary businesses find themselves in the position of needing to venture into unexplored markets, diversify their product and service offerings beyond their core competencies, reduce costs, and leverage the resources of other organizations without compromising security or compliance. Traditionally, these enterprises faced a choice between in-house and outsourced operations. However, evolving needs have given rise to a novel approach that blends insourcing and outsourcing – the build-operate-transfer (BOT) model.
What is the value of the BOT model and how does it translate into higher ROI? To understand this, we will discuss the BOT model as it stands, find out how businesses forecast the ROI of software development projects, and see how the implementation of the BOT drives positive project outcomes.
Understanding the Build Operate Transfer Model
The BOT model is a business strategy where an enterprise outsources a project to a third-party partner organization for a specified duration. Governed by a “build operate transfer agreement,” this model dictates that the third-party company completes the entire project lifecycle before transferring ownership back to the commissioning organization. In the realm of IT outsourcing, Build-Operate-Transfer is a highly potent strategy that has numerous high-value use cases. It comes with various advantages, such as reinforcing business partnerships, reducing expenses on IT infrastructure, ensuring project development by specialists, making significant inroads into foreign customer bases, and circumventing the geopolitical, cultural, and bureaucratic complexities of new markets. Additionally, it can enhance transparency, security, flexibility, and compliance.
The most noteworthy advantage of BOT models is their ability to pave the way for sustainable ventures. This is particularly crucial as companies often grapple with establishing a long-term impact in today’s highly competitive and volatile market conditions.
How Does a BOT Project Operate?
The duration of build-operate-transfer projects varies depending on the project’s nature and specifics. Typically, a BOT scheme comprises three primary phases, aligning with its namesake: Build, Operate, and Transfer.
Build
This stage, which can be referred to as the development phase, involves the BOT service provider conducting market research and collaborating with project stakeholders to define goals, technical requirements, project scope, timeline, corporate culture, budget, and any other relevant business considerations.
Based on the specifications, the contractor formulates a plan, gaining approval from both parties before execution. The plan is translated into a contract signed by both sides, with responsibility for preparing the necessary infrastructure and resources resting on both parties. This phase typically involves a significant investment from both parties.
Operate
In the second phase of the BOT approach, the service vendor assumes complete ownership and responsibility for operational management. Throughout an agreed-upon duration, they manage maintenance, monitoring, and regular updates to ensure the project runs efficiently. The primary objective during this phase is to ensure that the project or team functions as intended and is ready for transfer.
Transfer
Upon reaching the specified period, as outlined in the outsourcing contract, the BOT partner transitions the legal ownership of the project, along with its assets, back to the client. The transition typically occurs in the final months of operation, during which the service provider gradually steps back and transfers control to the client. In the post-completion phase, the contractor continues to provide support until the clients are fully autonomous in managing their projects.
What is Return on Investment (ROI)?
ROI, or Return On Investment, refers to the objective assessment of the value a business attains from its initial investment. The primary aim is to achieve a positive ROI by developing software that generates more revenue than the costs incurred in its implementation. The gain of investment signifies the net profit a business anticipates from implementing a custom software project. This is particularly evident in retail companies, where gains often manifest through increased sales. For other businesses, the gain of investment may be linked to more streamlined processes or reduced losses.
The cost of investment encompasses the initial value of the new software system, along with any additional costs associated with its implementation. These may include licensing fees, technical support, and the time-related expenses incurred in training employees on the new software.
Considerations for Defining the ROI of Software Development
While the ROI calculation is inherently objective, the parameters involved can vary based on the specific nature of the software development project. Each business has its unique processes and challenges, and identifying these is critical for an accurate ROI assessment. To initiate this process, ask the following questions:
- Why is new software needed?
- What problem will it solve?
- What is the projected implementation timeline?
- Is long-term support required?
- Will day-to-day processes be impacted?
- Who will be the primary users of the software?
- Are new hardware or cloud services necessary?
- Is employee training required?
A comprehensive understanding of these aspects is crucial for quantifying the costs associated with a BOT software project. Businesses should approach this analysis seriously to prevent a skewed ROI. The key cost factors to consider when measuring the ROI of a custom software project encompass:
- Hardware costs: Include relevant expenses if the new software necessitates updated hardware.
- Implementation costs: Software implementation can be expensive due to factors such as data migration, disruptions in data processes, and a widespread transition to the new system.
- Training costs: The introduction of new software often incurs training expenses. Failure to adequately address this aspect can result in the loss of potential benefits from the new system.
- Support costs: Typically, ongoing software maintenance and support costs amount to approximately 20% of the initial development cost. This directly impacts annual net income, making it imperative to factor into average ROI calculations.
How to Evaluate the ROI of Your Custom Software Product?
Once businesses have considered the factors above, they are ready to assess the ROI of their custom software project. The basic ROI calculation is expressed through the following equation:
ROI=(Gain of Investment/Cost of Investment)×100%
Follow these steps to apply the formula effectively:
- Determine the cost of investment: Consider all expenses associated with creating a custom software project to calculate the cost of investment. This encompasses hardware, implementation, maintenance, training, and support costs, as well as annual operational costs and any net income losses resulting from software implementation.
- Assess the gains and profits: Evaluate the overall savings and profits that a custom software project can potentially achieve. While this can be challenging, especially in the initial stages, businesses often rely on estimates when concrete evidence is unavailable. Consider factors such as increased efficiency, reduced errors, enhanced sales, and other forms of profit or savings resulting from the new/existing software.
- Apply the ROI formula: Once you have the Gain of Investment and Cost of Investment figures, use the formula to calculate the ROI of your custom software project. As an example: ROI=(450,000300,000)×100%=150%
How Build-Operate-Transfer Model Improves Your ROI
The BOT model can prove highly advantageous in software outsourcing projects, especially when dealing with extensive scopes of work that entail long-term commitments and investments. Employing this approach can yield various benefits for both the client and the service vendor. Here are some of the advantages you can anticipate from such a project:
You can reduce operating costs
Similar to other outsourcing models, the BOT model offers cost-cutting benefits. By entrusting IT operation setup and maintenance tasks to a reliable software development provider, you can sidestep the challenges of establishing an internal IT team or investing in substantial resources. This alone results in significant cost savings that would have otherwise been spent on hiring and training new personnel. The highly efficient processes implemented by the outsourcing company allow organizations to optimize operational costs and maximize profitability.
You avoid the stress of control loss
With BOT contracts, organizations can outsource services without entirely surrendering control and ownership rights. The BOT partners handle the setup and management tasks on behalf of the organization, taking over temporarily to ensure everything is set to function. At the end of the agreed-upon duration, the organization regains complete control over its projects and assets. This provides peace of mind, knowing they cannot be taken advantage of while in a vulnerable state.
You have fewer risk concerns
Well-planned and communicated BOT contracts have a minimized risk profile due to the level of control the organization retains. The outsourcing partner is responsible for all operational activities and can swiftly address any challenges before they escalate. Risks associated with software development are also minimized, as the vendor must assume responsibility for the entire project.
You get value for your investment
The BOT approach ensures clients receive maximum value for their investment. With effective outsourcing partners, clients can anticipate satisfactory results within a specified timeline and budget. The service provider remains consistently accountable for all project-related tasks, ensuring the delivery of high-quality services that meet expectations. This sense of responsibility ensures that the job is executed correctly. Build-operate-transfer is indeed a prudent investment that yields returns over time.
You get exceptional flexibility
The BOT approach offers significant flexibility, allowing the contract to be tailored to meet the specific needs and requirements of the client. This customization empowers clients to adjust the services provided by the vendor according to their preferred timeline and budget.
This arrangement ensures that organizations are not bound by long-term agreements with outsourcing partners, allowing them to retain control over their projects from inception to completion. Moreover, it eliminates the need for frequent contract renegotiations, reducing transactional costs associated with hiring new personnel or modifying existing agreements.
You access a broader expertise
Opting for build-operate-transfer contracts grants organizations access to a diverse range of expertise and technology that might otherwise be unavailable to them. This competitive advantage enables organizations to leverage cutting-edge technologies for the rapid and effective delivery of services and products, outpacing their competitors. Additionally, these vendors can tap into specialized talent pools that would be beyond the client’s reach. Hence, BOT, and outsourcing in general, emerge as optimal solutions for addressing the shortage of IT manpower.
Pitfalls of the BOT Model that Could Affect Your ROI
Of course, the BOT model is not a silver bullet. There are certain limitations you should consider before opting for this strategy. A reliable consulting partner will always provide a comprehensive overview of the strategy’s compatibility with your business needs and suggest a more suitable approach. Here are the top three drawbacks of a BOT model.
Dependency on the partner company
During the operating phase, the client’s company relinquishes control of day-to-day operations to the vendor, which can be a challenging period. Enterprises may feel uneasy about not having complete control over operational processes. This concern can be alleviated by implementing mechanisms to ensure visibility in the operating phase, establishing clear communication and collaboration protocols, and selecting a world-class, highly reputed partner organization with a robust track record.
Contractual complexities and negotiation challenges
Build-operate-transfer agreements serve as the foundation for the entire model, necessitating businesses to address potential challenges and misunderstandings at a contractual level. The BOT agreement should outline roles, responsibilities, timelines, limitations, best interests, cost-sharing, compensation, and other crucial project details. Negotiation challenges may arise, but these can be navigated by having a clear vision and strategy for the project and collaborating with partner companies experienced in numerous BOT initiatives, possessing a clear understanding of its financial intricacies.
Regulatory and political uncertainties
BOT models are particularly suitable for enterprises seeking to implement projects in unfamiliar foreign markets and tap into untapped customer bases. Opting for foreign bases may be driven by the desire to leverage local talent or more affordable infrastructure. However, such decisions bring geopolitical challenges and region-specific regulations that enterprises may not be adequately equipped to handle. In a BOT model, partner organizations assume the responsibility for addressing these challenges, underscoring the importance of selecting partners with a strong presence, reputation, and relationships in multiple geographies.
Conclusion
BOT models present a transformative solution for enterprises aiming to leverage external resources and capabilities, cut costs, boost profits, expedite time-to-market, navigate challenges, and venture into new markets and customer bases. The primary advantages of a BOT model encompass risk sharing and financial flexibility, accelerated project execution, and access to top-tier, highly specialized expertise and technology. While challenges such as dependency on the partner, contractual complexities, and political uncertainties may arise, selecting a partner like NearshoreFriends can effectively mitigate these issues.
