Architecture economics
On this page 9 topics
Overview
Topics
- Build vs buy
- total cost of ownership
- opportunity cost
Learn first
3.5 h of practice (estimate)
Learning outcomes
- Analyze build vs buy vs open source with total cost of ownership over several years.
- Include opportunity cost, staffing, and exit cost in decisions.
- Value architectural options (the cost of keeping a decision open vs committing).
- Present an economic case that finance can check.
Lessons
Lab and exercises
Lab
SRA-008-LAB1 · Payouts decision
Outcomes: 1–4 · Time: ~2 h
- Define requirements for marketplace seller payouts and three options (build, buy, hybrid).
- Build a five-year TCO model with volume growth, staffing, infrastructure, compliance, and integration costs.
- Add opportunity cost and an exit plan for each option; value the flexibility of at least one option.
- Write a one-page business case with sensitivity analysis and recommendation.
- Defend it to a role-played finance partner who tries to reproduce the numbers.
Acceptance: role-played finance partner can reproduce the numbers.
Exercises (case-based; six exercises)
| ID | Outcome | Task |
|---|---|---|
| SRA-008-EX01 | 1 | Compare build, buy, and open source for a search engine over five years using a given set of costs. |
| SRA-008-EX02 | 1 | Identify the hidden costs missing from a TCO that compares a vendor licence with "zero". |
| SRA-008-EX03 | 2 | Compute the opportunity cost of assigning twelve engineers to build an internal tool for eighteen months. |
| SRA-008-EX04 | 2 | Write an exit plan for a vendor payment platform: triggers, data portability, parallel run, and cost. |
| SRA-008-EX05 | 3 | Value an abstraction layer that costs 150k now and could avoid a 1.2M migration with 30% probability. Decide and state assumptions. |
| SRA-008-EX06 | 4 | Rewrite an engineering-language case into a one-page finance-checkable business case with assumptions, sensitivity, and decision request. |
Show solutions
- EX01 Sum licence or usage, infrastructure, staffing, operation, and upgrades per year; compare with growth; note exit effort and fit. Pick the lowest risk-adjusted TCO that meets requirements.
- EX02 Missing: engineering, operations, on-call, compliance, upgrades, delay to market, and the cost of capacity growth. Also missing: exit and training.
- EX03 Estimate loaded cost of twelve engineers over eighteen months plus the value of the next best project they would not deliver; state the benefit forgone.
- EX04 Triggers: price rise, service failure, acquisition. Needs data export format, a second provider path, a reconciliation parallel run, and a cost and timeline estimate.
- EX05 Expected avoided cost 0.3 × 1.2M = 360k against 150k, so the option has positive expected value; state that probability is an assumption and a sensitivity check shows break-even at about 12.5%.
- EX06 State decision requested, options, cost and benefit by year, assumptions sheet with source and owner, sensitivity on top two inputs, risks, and the cost of delay.
Outcome 4 is also covered by the lab finance defense and the quiz.
Workplace evidence: a build/buy decision you analyzed and its outcome.
Quiz
Outcomes: O1 build vs buy vs open source and TCO · O2 opportunity and exit cost · O3 real options · O4 finance-checkable cases.
A self-check for you: nothing is graded, saved or sent anywhere. Choose an answer, then check it. You can try again as often as you like.
Practical part
Six case exercises SRA-008-EX01 to EX06 plus the lab, defended as a business case to a role-played finance partner. Pass: at least five of six exercises correct, quiz at least 8/10, and a business case whose numbers the finance partner can reproduce.
Common mistakes
Comparing licence cost to zero; ignoring engineering opportunity cost.
Assessment
Business case review.
Workplace evidence
A build/buy decision you analyzed and its outcome.
Career relevance
Technology assessment and financial analysis (ARC-008, ARC-039).