DM University: Build vs. License vs. Buy

When it comes to fulfilling technology needs (e.g. ad server or affiliate network software), companies in our space typically have multiple options readily available to them. For instance, when launching an affiliate program, business enterprises can acquire licensing rights for certain technologies, find a third-party Application Service Provider (ASP), or even build the technology in-house, if possible. Since there is no universal formula, the best option depends entirely on a company’s unique circumstances. Nevertheless, here are some of the benefits and drawbacks of each:

Licensing Technology

Advantages in obtaining licensing rights for technology solutions, include its cost-effectiveness is the long run and the full control it allows over a company’s operations. Disadvantages include: higher upfront costs; the requirements of installation, setup, and tuning; as well as the personnel costs to maintain the technology. With licensing, companies typically only pay for the cost of the license and an optional fee for technical support. Furthermore, most licensed software is installed on the company’s in-house computers, and the company is mainly responsible for both the software and the machines that it operates on.

When comparing the costs of developing technology versus licensing it, it’s important to consider the total lifetime costs, as opposed to just the costs in the short-run. While the cost of a new development can be substantial, it frequently represents only a fraction of the lifetime costs involved in maintenance and support. The company that develops software internally must, on an ongoing basis, provide support, fix bugs, add new features and adapt to new hardware, software and application platforms. This of course, can be quite expensive and may deter company resources from projects that need them the most moving forward.

For example, licensing a third-party affiliate software solution is generally well-matched for those who desire the security of maintaining all contacts and affiliate ownership in-house. Costs are typically lower than the setup costs of similar networked solutions and there are no high monthly transaction costs like those that most ASPs charge. This option is also suitable for merchants selling niche items, or those positioned in niche markets who simply can’t afford the significant startup costs associated with a network. One major drawback of the licensed affiliate software solution is the lack of an existing pool of affiliates, which creates more upfront work for the company’s affiliate manager, who must recruit affiliates on his own.

Application Service Providers (ASP)

Advantages in working with third-party ASPs include lower upfront costs and the absence of any installation/setup requirements and personnel costs required to maintain the technology. Some disadvantages include: it’s less cost-effective in the long run; there’s less control over company operations; in addition to some hidden costs (e.g. bandwidth overage charges). An ASP will provide all the same features as a licensed software solution however in general, the ASP will host the software for you. While running affiliate programs with an ASP may save a company from having to hire a programmer to tend to the software, monthly fees can be a killer, especially if the company’s site generates a lot of traffic. Some ASPs even take a percentage of any commissions earned. 
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Developing Internally

The advantages of developing technology internally are fairly intuitive and sort of go along with the old adage, “If you want something done right, do it yourself.” By developing software solutions internally, companies possess full control over the technology, which allows for unparalleled customization and independency. As alluded to above, disadvantages of developing technology in-house center on the tremendous costs associated with not only developing the technology, but also the long run costs of maintenance and support (e.g. providing support, fixing bugs, adapting to new hardware/software).

One noteworthy, generally unpronounced, advantage of developing technology internally is that it allows companies (particularly for those in the affiliate space) to scale with minimal strings attached or legal ramifications. Let’s take for instance the much publicized conflict between the parent company of Primary Ads (affiliate network), Think Partnership and affiliate application developer, Direct Track. When Think acquired Kowabunga Technology, a proprietor of an affiliate technology platform called My Affiliate Program (MYAP) and a direct competitor to Direct Track, no longer would Direct Track power Think’s Primary Ads’ affiliate network. Subsequently, Think sued Direct Track to continue their working relationship. Allegedly, Primary Ads was looking to maintain status quo, at least until everything could be transitioned onto Think’s new MYAP platform. With numerous campaigns, links, etc. all set up within Direct Track’s system, the abrupt severing of ties would translate to significant transition costs for Think. If there’s one thing to take away from this debacle, it’s that relying on an outside party may be costly or even detrimental to a company’s plans to scale. 
   
Sources:
http://www.revenews.com/peterfigueredo/archives/000683.html
http://www.affiliatewiz.com/Affiliate-Marketing-Resources/affiliate-software-versus-network-solution.asp