The Secret to Successful Software Innovation Projects

CIO — Enterprise software has long been available, neatly packaged, for all core corporate functions. And now, in the age of cloud computing, it can be turned on and off like water from a spigot. Outsourcers run our data centers, technology is for sale at discount warehouse clubs. And still, some CIOs choose to build major software from scratch. Why?

Creating competitive advantage is the goal of many IT innovation projects, and in some cases you can’t achieve that without building your own systems. The New York Stock Exchange (NYSE) Euronext and its fierce rival Nasdaq OMX, for example, run custom-built trading systems that they continually tweak for stability and speed.

Other companies elect to build software because they must support unique business processes. That is the case for Alcoa, a $21 billion company that manufactures aluminum sheets that will become products as varied as beer cans and airplane exteriors.

CIO — Enterprise software has long been available, neatly packaged, for all core corporate functions. And now, in the age of cloud computing, it can be turned on and off like water from a spigot. Outsourcers run our data centers, technology is for sale at discount warehouse clubs. And still, some CIOs choose to build major software from scratch. Why?

Creating competitive advantage is the goal of many IT innovation projects, and in some cases you can’t achieve that without building your own systems. The New York Stock Exchange (NYSE) Euronext and its fierce rival Nasdaq OMX, for example, run custom-built trading systems that they continually tweak for stability and speed.

Other companies elect to build software because they must support unique business processes. That is the case for Alcoa, a $21 billion company that manufactures aluminum sheets that will become products as varied as beer cans and airplane exteriors.

Still others seek to invent new markets or ways to operate—business ideas for which no ready-made software exists. Not everything in IT is a commodity like a box of 500 picnic forks. Consumer products distributor Eurpac, for example, built a logistics system to ensure that items like soft drinks and toothpaste reach customers on military bases in Afghanistan, and that these goods arrive still fresh and in good condition.

“The [software packages] we saw are very good at making automated business decisions and supporting efficient supply chains in a typical environment,” says Mike Skinner, Eurpac CIO. A war zone, however, “is not typical,” he says. “Packages don’t understand so many exceptions to the rules.”

Sometimes, all three objectives lead a CIO to custom development. Private equity powerhouse Kohlberg, Kravis and Roberts (KKR) wrote a business intelligence system to consolidate, harmonize and analyze monthly financial and operations data from the 70 companies it owns in nine industries. The software also generates metrics that cut across these diverse companies, to show how KKR, on the whole, is doing. No vendor offers this, says CIO Ed Brandman, so he had to build it. (For more on KKR's project, see "How KKR Used Data Mining For Competitive Advantage.")

In general, Brandman says, “the pendulum has swung very hard to ‘Why would you ever want to build anymore?’ It was a major commitment by the firm to allow us to go down that road.”

But the payoff is big. Now top KKR executives call the system a competitive weapon. And that is the primary reason a CEO will approve a risky project to write software in-house, says Louis Gutierrez, a consultant at the Exeter Group. “The only thing they want to invest in is something no one else has.”