Build, buy or outsource
Mangrove pays Lagoon Digital about $390,000 a year to build and run the Partner app, and the contract ends on 30 June 2027. This lesson shows you how to compare staying, rebuilding in-house, buying a platform and a hybrid with a month-by-month total cost of ownership, how contract terms move the numbers, and what the numbers leave out.
By the end you can
- Build a three-year total cost of ownership for build, buy and outsource options, month by month, with Mangrove's own people in it
- Discount the costs at the finance team's rate and explain when timing changes the ranking
- Read a contract calendar (notice, extension, cut-over) and see where the vendor has leverage
- Price the contract terms that change the answer: pricing model, price caps, service credits, licences and exit help
- Name what a TCO leaves out and the switching values that would change the decision
The everyday picture
You rent a furnished flat. The lease ends in June and you must give three months' notice if you want to leave. The sofa and the bookshelves are yours. The fitted kitchen belongs to the landlord, and it stays when you go. The rent is fine, but every repair takes the landlord six weeks.
You have four choices. Renew, and try for a better rent. Build your own house: it takes nine months, so you pay rent and builders at once and need the landlord to let you stay past June. Buy a flat in a serviced building: cheaper, but its rules decide what you can change. Or stay, buy the kitchen from the landlord, and do your own repairs. The rent is one line of each choice. The dates, the notice and who owns the kitchen decide the rest.
Total cost of ownership, done the finance way
Total cost of ownership (TCO) adds up everything an option costs over a fixed horizon. Build, buy or partner showed the three groups of cost (one-off, recurring, easy to forget) and why the quote is only the sticker price. A finance team adds three habits to that list.
Work month by month, in cash. A yearly total hides when the money goes out, and discounting and notice dates both depend on timing. Count your own people at a fully loaded rate, about $5,000 a month for an engineer at Mangrove, including the hours spent managing a vendor. Discount at finance's rate so options with different timing can be compared, as in Business cases.
Each option type has its own cost lines. Use this list so nothing drops out:
- Build: the team (most of the cost), cloud and tools, the old system you keep paying for during the build, transition (data migration, training, a parallel run), and the risk of losing the few people who know the code.
- Buy: subscription fees and their rises at renewal, implementation and integration, your staff who run it, workarounds for what it cannot do, and the cost of leaving later.
- Outsource: the retainer, change work billed on top, costs passed through, your time managing the vendor, and knowledge held by the vendor's people.
Start with the option you have today. Lagoon's contract has three parts: a $21,000 monthly retainer (support, hosting management and up to 100 hours of changes), about 1,500 extra hours of change work a year at $60, and hosting passed through at about $4,000 a month. Imran and you also spend about a fifth of a person's time on Lagoon: status calls, change requests, testing, invoices.
Retainer 21,000 x 12 = 252,000
Extra changes 1,500 h x $60 = 90,000
Hosting passed 4,000 x 12 = 48,000
Contract all-in = 390,000 a year
Mangrove time 0.2 x 5,000 x 12 = 12,000
TCO of staying = 402,000 a year (33,500 a month)The vendor's invoice never includes your own hours, so the option costs more than the contract. And a TCO is a cash view. If Mangrove rebuilt the app, part of the build could be capitalised as development and amortised over three years (Budgets, capex and opex), so the 2027 profit and loss would show less than the cash spent. Decide on cash and timing, and let finance say how each option lands in the accounts. The rules for a real company come from its finance team and auditors.
Quick check
In a TCO, why is the cost of staying with Lagoon $402,000 a year when the contract is about $390,000?
$12,000 a year of Mangrove time is the gap. The retainer covers hosting management, while the hosting itself is passed through, so nothing is counted twice. Discounting would make the number smaller, and no price rise is in the base case.