IT: Should You Rent or Buy?

Published By: MSN – Business on Main
Written by:
Dan Briody

Most people, at one time or another, have asked and answered the question of whether they should rent or buy a home or apartment.

Today, a similar calculation must be made when evaluating information technology services for your business.

Back in the dark ages, before the early 1990s :), if you wanted to use an application for your business you had to buy the software, buy the hardware it runs on and maintain it yourself. This required a lot of capital up front and in-house technical expertise to keep it running. And thus, the IT department was born.

But today, we can use the Internet to subscribe to software services and have them delivered to us. The hardware lives in one place, the software is maintained and upgraded by people you never meet, and all you have to do is maintain a good Internet connection and pay your bill.

This process is called software as a service (SaaS). It’s also known as Web services or hosted services. You’re probably using at least one SaaS application in your office right now. And if you’re not, your employees are. For example, Hotmail, Gmail and Yahoo Mail are free Web e-mail applications. Facebook is free social networking software. TypePad is publishing software. Symantec is an antivirus service — all served up on the Internet.

It’s not just the simple applications that are available online. These days, you can rent or subscribe to just about any kind of business software you need, even complex enterprise-quality applications like, a hugely popular customer relationship management (CRM) service, or Oracle On Demand, a subscription version of the ubiquitous database software. Everything from word processing to enterprise resource planning (ERP) is available if you have an Internet connection and a credit card.

So, how do you know when it is more economical to rent or buy software? I posed this question to William Snyder, a research vice president at Gartner Inc., an IT consultancy based in Stamford, Connecticut. Snyder recommends you ask yourself the following questions to help you decide:

Is this application core to my business?
As a small-business owner, you don’t need to master every aspect of your business. But software that’s essential to your revenue generation is something that you should own, master and maintain. For example, if you are a design firm, you should own the computer-aided design software you use. If you are an accounting firm, you should own your accounting software. And if you are a Web retailer, you should be intimately familiar with your Web site, host it yourself and be able to make changes to it.

How much will it cost me?
Just like a prospective home buyer, you must estimate the relative costs of renting vs. buying software. But there are a few variables that differ in this equation. For one thing, software has virtually no resale value. Once you buy it, it’s yours. Hardware can be resold, but it depreciates rapidly. The factors you’ll want to include in your calculation include the estimated useful life of an off-the-shelf application, estimated maintenance costs and the impact of downtime. Compare the costs of purchase to the costs of renting — and then make your choice.

How hard will it be to switch?
You may be attracted to the low level of commitment that comes with a monthly subscription to software, but you must consider how hard it would be to switch vendors. Some of these services take months to set up properly, feeding data into the system and getting the right information in return. Having to go through all of that again, just to switch to another software service, is significant. Imagine migrating a huge customer database, with all its fields, from one service to another. On the other hand, some services, like anti-virus, are simple and painless to swap out. Factor this into your decision, as it will save you time and money in the long run.

OK, once you’ve answered these questions and compared costs and ease of use, you’re ready to decide on whether to rent or buy. Remember, IT is a tool to help you achieve your business goals. So make it work for you — by finding the simplest, most efficient and most cost-effective ways to use it.

Dan Briody is the author of two books and the former Executive Editor of CIO Insight Magazine, a leading publication for information technology managers. He is also a frequent contributor on technology topics for Wired., Inc. and Business Week magazines.