Are software products overpriced?

It seems to me that a lot of software - especially the non-shrink-wrapped variety, has become unbelievably and unjustifiably pricey. As already alleged in a previous article (Need for massive reforms in procurement), we in the consulting industry have brought this upon our clients.

Let me dive into a ready example. Here is a government client who wants to implement an end-to-end solution for all offices across the state. Let us look at the application software component - with a reasonable obfuscation of particulars without missing my point.

(currency: INR)
1. Reasonable estimates by several *people and organizations* for bespoke development of the s/w: way below 10 cr
2. Estimates of a software product (let us call it COTS #1) with 30% customization estimate: ~50cr
3. Estimates of another software product (say, COTS #2) with 50% customization estimate: ~50cr
(okay, I have changed the numbers sufficiently to obfuscate - while still staying well within the estimate range)

Assuming all of us are quite well-versed with the buy-vs-build debates, how should the client go about deciding? Let us make some reasonable assumptions and some gross simplifications so that we can make a half-decent (yes, only half-decent so that we need not lock horns in a perfect-the-evaluation-model debate, missing the point) comparative analysis.

First off let us look at premium-over-cost model. Next we can look at the value-pricing model.
Assumption/Approximation #1: Customization efforts / costs of COTS for the purpose of evaluation:
30% customization => COTS #1 is shaving off 70% of bespoke development schedule => 70% of bespoke-dev-cost can be assigned to COTS as *payable-premium* => 70% of 10cr = 7cr.
Similarly, 50% customization => 5cr payable premium for COTS #2.

Assumption/Approximation #2: Annual maintenance costs for both bespoke (bug fixing & change management) and COTS products (updates, bug fixing & support) are both at 22% per annum. Let us assume a 5 year operational period to calculate TCO.

Assumption/Approximation #3: Since the bespoke software gives the IPR over the software to the government, and the government can (and will) make it available to all other government entities free of cost there is a benefit associated with it. Let us assume that only one entity will reuse the IPR and that this (second) entity will need 30% customization - so the benefit (of bespoke software) may be quantified as 70% of 10cr = 7cr.

Assumption/Approximation #4: COTS means higher quality & robustness. Let us assume that the bespoke developer will need to spend 50% more effort (I know, we are out on a limb here, but we need to begin somewhere) to reach a comparable state, bespoke software's *real* cost should be considered 50% higher => 5cr

Now for the premium-over-cost model of comparison:
Bespoke software: 10cr + 5yrs x 2.2cr/a (#2) + 5cr (#4) - 7cr (#3) = 19cr 5yr TCO
COTS #1: 50cr + 5yrs x 11cr/a (#2) - 7cr (#1) = 98cr 5yr TCO
COTS #2: 50cr + 5yrs x 11cr/a (#2) - 5cr (#1) = 100cr 5yr TCO

Clearly, COTS are a rip-off. How can I ever recommend this to a client, without going over to the value-pricing arguments?

So let us go over to the value-pricing approach with equally half-decent assumptions:
Client has a revenue of 5000cr/a. This is at risk, if we go with "lower quality" bespoke software; apart from "lost time".
Assumption #5: Revenue leaks better plugged by COTS, say at 1% better than bespoke. => 50cr value.
Assumption #6: Bespoke software by virtue of being less robust, lower quality, etc., impacts productivity to the tune of 10% (as compared to COTS) => 500cr value.

Since the pricing of COTS is only a small fraction of this (50+500 = 550cr vs 50cr), it is justifiable, you say? I might agree with this, if I were not to consider:
a) To another client department that has a revenue of only 55cr/a, would the software OEM offer the same software at the same value pricing ratio? i.e., at 5.5cr? To yet another, where there is no revenue at all (a cost center), would this be offered at close to zero price? I don't think so.
b) The 30% - 50% customization is done by equally good/bad developers as the bespoke software; leading to similar quality / robustness issues. Not to mention 30% customization schedules often run pretty close to 100% bespoke schedules (not on plan documents in proposals, but in reality when executing).

Overall, I believe software OEMs are taking my clients for a ride. Not just with application software; similar ripoffs are occurring with other software too (e.g., Cloud solutions, Storage solutions, ...).

Therefore, my recommendations to my clients: By all means, consider bespoke software favorably and manage the risks (including paying for it) with top-quality project managers. Where you can, use open source software (no, not necessarily free-of-cost) and ask bespoke developers to develop on open source platforms; pay for the support and eco-system costs.

Take COTS only if the TCO with premium-over-cost models are comparable to alternatives. After all, COTS are supposed to be *cheaper* than bespoke. If customization is only 30% effort, then cost to OEM is only 30%; what are you paying the 400% premium for? The "cost of building and maintaining such high quality products"? Really? So why the 22% annual maintenance costs then?