Category Archives: Technology

Software Acquisition Insider Tips, Part IV

Forego the Escrow (because It’s All About the Data)

You’ll be hard-pressed to cheerily find a vendor who won’t agree to put their code in escrow for you, in case they go bankrupt, and laugh all the way to the bank when they do so. That’s because your average vendor knows that it’s no effort for them and useless for you. Why?

  1. You probably don’t have software developers working for you, and have no ability to do anything with the code.
  2. Even if you do have a couple of developers, who probably spend most of their time doing integration projects and not core development, they’re not going to be able to translate 1,000,000 lines of code — or more — and do anything sensible with it any time soon. It will be months, and maybe years, before they are fluent in the code.
  3. If the software was remotely hosted, it will be a monumental effort to get a local copy compiled, linked, loaded, configured, hooked up, and populated with your data. Monumental. Especially if you need a recent version, because you have no idea how to do this and neither does your team. You could be facing months of downtime before you figure it out, if you ever do.
  4. Even if you half an IT team with a few competent developers, there’s no guarantee that the escrow code-base is going to be up-to-date (many vendors never update the escrow code-base because they know you’ll never check if they do) or that it’s going to contain the documentation you need to make sense of it, if it has any documentation at all!

You’re only safe if you have a stable application installed behind your firewall that your team, or third party system integrator, can maintain or if you’re using an on-demand application that could easily be replaced with one or more competitor products at the drop of a hat.

What you really need is a data availability agreement which allows you to get a complete extract of your data in a neutral format (like XML or CVS) at any time, and guarantees that you will get a complete data extract within 24 hours if the provider stops supporting your product at any time for any reason. That way, you can just switch to a competitive on-demand solution, load up your data, and keep on truckin’.

Is it Software or Service?

Many software products aren’t really software products at all. In other words, there is some incantation that has to be performed by the software vendor, in the form of services, configuration, or other magic, on a regular basis, to keep the software running. In this case, you haven’t bought software, you’ve bought software plus services. What’s even worse is that you’ve single-sourced it. If the vendor goes broke, or can’t deliver, you have no options.

Always ensure that you can procure services from multiple third party vendors, not just from the software vendor. Even better, make sure that whatever magic process the software vendor is performing can be easily transferred to your own staff. If there are special tools that the vendor uses, insist on owning them yourself. If the vendor cannot provide them, or is unwilling to train your personnel to use them, then find another vendor — fast.

Software Acquisition Insider Tips, Part III

Read the Contract

Don’t Be Fooled By the Presence of an SLA

The majority of Service Level Agreements (SLAs) are designed for one purpose — and one purpose only — to give you a false sense of security that will cause you to overlook the fact that the wording insures that the vendor will be able to keep your money for the length of the contract, no matter what. Your average SLA will run for a dozen or more pages with lots of fancy wording around “Level 1” problems, “Level 2” problems, and so on with detailed text spelling out your responsibilities and consequence-free reprieve time for the vendor while you lodge your complaint and fill out the necessary documentation.

When you take out all the superfluous text and boil it down to the essentials, you quickly find out that your average SLA is toothless and promises very little. While there may be a process for every issues that could arise, the language will always be sufficiently vague that a lawsuit couldn’t be filed, as a case couldn’t be won, nor would it be worth your while to do so. And it’s a waste of time to argue it, as your vendor’s attorney’s will be just as good as yours, and for every point the vendor’s attorney concedes, he’ll introduce two more that could be used to screw you even worse in the long run.

The ideal SLA, and the only SLA with value, is one that allows you to terminate the contract at any time without leaving any money on the table under a pay-as-you-go kind of contract. (That’s why SaaS solutions can often be the best value for your money as many SaaS vendors will allow you to go month to month after a minimum period of time.) This is the only SLA that counts as the vendor understands that unless it keeps delivering a quality product backed by quality service that earns your business, your business is something it might not keep. There is no stronger incentive to a vendor than your ability to walk away.

There’s No Such Thing As A Free Lunch

Free modules? Free support? Free training? Not likely! Either it’s included in the price, is being offered as an enticement to lock you in for a fixed term, or it’s being offered in an attempt to divert your attention away from a complex SLA that benefits the vendor and not you. If you want the extra module, extended support, or training, offer to buy it a-la-carte instead. Anything that ties your hand contractually is not only not free, but very, very expensive — especially if it locks you into a long term commitment to a solution that doesn’t deliver the results you expected.

Don’t Get Fooled by the License Fee in Disguise

Many traditional enterprise software platforms have a clause buried deep in the SLA that requires you to pay the annual maintenance fee, or lose the right to use the software altogether even though you have years left on the contract. That’s not a maintenance fee, that’s a license fee. Make sure the maintenance fee is a real maintenance fee for support and bug fixes. If you’ve licensed the software, and paid six or seven figures to do so, you should retain the right to use the software for as long as you desire, even if such use doesn’t come with free assistance.

Don’t Get Screwed By The New Release

As sure as the sun rises in the east, the vendor will come out with a new release not long after you’ve bought the current version and expect you to pay a large tranche of money to get it. You may get offered a small “upgrade” discount, but you’ll pay, then pay again, and pay again, and again for as long as you own the software. If you can’t do business with a vendor that simply charges you a fixed, steady, predictable monthly rate for the software — with no surprises — consider at least going with a vendor who will fix the price of the upgrades up-front. At least you’ll be able to plan for the expenditure and know up front how much the software is really going to cost you over its lifetime.

The Economic Advantages of Fleet Management

A recent article in Integrated Solutions pointed out the economic advantages of fleet management which can save hundreds of thousands (and sometimes millions) a year in fuel costs for your average mid-size distribution company. In addition to fluctuating fuel costs, excessive idle-time, out-of-the-way routes, and unsafe driving are all expensive issues that plague your average distributor. And although the price of fuel can’t be controlled (although it can often be locked in for a limited time), fleet efficiency can be increased with technology that decreases idle time, optimizes routes, and eliminates unnecessary trips.

The article presents a case study of Namasco Corp. which is saving more than $500,000 per year in fuel costs thanks to a GPS-based fleet-management solution that optimizes loads and routes, minimizes idle-time, and gives Namasco real-time visibility into where its trucks are at any given time. In addition, when this software is paired with DOT logging software, the savings that result from efficiency improvements start to add up rapidly. Considering that a recent study by Motorola found that vehicles equipped with a GPS solution have 53% less travel downtime and a 26% improvement in employee accountability, can you afford not to do it?

Cutting the Right Costs with Technology

A recent article in Industry Week, which advocated that you “cut the fat, not the limb”, reminded us that there are a number of strategic projects, based on appropriate supply chain technology, that can provide a far greater internal rate of return than merely slashing costs. After all, companies that layoff employees, consolidate suppliers, reduce product offerings, and halt key projects may inadvertently get rid of the very things that made them successful in the first place!

As Jim Thompson pointed out, in his Supply Chain Brain article, cut, cut, cut is NOT a cost reduction strategy. The only real strategy for cost reduction is the strategic reduction of fat in capital and operating costs … which is easily exposed by technology designed to root out inefficient and redundant processes. Now, more than ever, managers need to look at innovative and aggressive technology projects that will provide increases in operational efficiency.

And, as per the Industry Week article, three great places to start are:

  • Excess Inventory
    Synchronizing actual inventory to recorded inventory provides the data necessary for sound purchasing decisions based on good forecasts.
  • Manual Processes
    Unnecessary manual processes lead to errors and wasted time. Error-handling, re-processing, and lost productivity costs add up, especially if these costs can be affordably eliminated.
  • Supply Chain Weak Links
    Vendor Managed Inventory and longer-term collaborations offer opportunities for both parties.

And when you’ve mastered these, you can move on to the ideas chronicled in Dead Company VII: Even More Ways to Avoid the Graveyard.

Uncovering the True Cost of On-Premise Sourcing & Procurement Software

Coupa recently released a good white-paper that did a great job exposing the true costs of On-Premise Software and why Software-as-a-Service, even with its annual license fee, can be much cheaper, especially when one does the long term calculation. Whereas SaaS generally has just two costs, the annual license fee and training costs, which are usually nominal as most of today’s SaaS technology is starting to utilize B2B 3.0 technology, which is more-or-less self-explanatory, on-Premise software has a host of up-front and hidden costs. In addition to the up-front perpetual license fee and installation costs, which can sometimes run into the seven (and even eight) figure range, you typically have additional up-front costs for required support software (such as databases and application servers) and hardware (as you need to buy production, backup, and QA servers and storage area networks). Then, you have annual maintenance fees, every few years you have to upgrade — or risk losing support for the version of the product you are on, and every few years you’ll have to upgrade your hardware as well. Finally, you have on-going training and re-training costs and, more importantly, on-going internal support costs that consists of the salaries of the system administrators and user support representatives that you need to maintain the system and support the users — and when you consider that you will need one support representative for every 25 to 35 users in a typical organization, these costs will quickly dwarf the acquisition costs.

Consider the following example for an average mid-size business over five-year and ten-year time horizons. Assuming that a perpetual license to an e-Procurement solution could be obtained for $150,000 and that maintenance could be negotiated at a mere 25%, by the time you factor in the need for six servers (for production, back-up, and QA before patches are applied in production) which need to be replaced roughly every three years, database software, application server software, upgrade costs at roughly $40,000 to $60,000 a pop every three years, initial implementation costs, training, and internal support costs which consist of a system administrator who likely makes at least $90,000 a year at 50% utilization and two support representatives who each make at least $60,000 a year, you end up with a fully burdened total cost of ownership that is anywhere between $150,000 and $240,000 a year! Compare this to a SaaS system, like Coupa, that can be obtained, depending on the size of your organization and e-Procurement needs, for somewhere between $25,000 and $50,000 a year. Now, it’s true that not all on-premise solutions will be this expensive and not all SaaS solutions will be this cost-effective, but it will usually be the case that the fully-burdened cost of traditional on-premise enterprise software will be significantly more expensive than SaaS.

 

5-Year Amortized Solution Cost

Cost On-Premise SaaS
License 150,000 210,000
Maintenance 187,500 0
Upgrade 60,000 0
Hardware 60,000 0
Database 56,250 0
Application Server 56,250 0
Implementation 60,000 0
Internal Support 825,000 0
Training 50,000 25,000
Total 1,505,000 235,000
SaaS Savings 1,270,000
10-Year Amortized Solution Cost

Cost On-Premise SaaS
License 150,000 420,000
Maintenance 375,000 0
Upgrade 180,000 0
Hardware 90,000 0
Database 87,500 0
Application Server 87,500 0
Implementation 60,000 0
Internal Support 1,650,000 0
Training 50,000 25,000
Total 2,730,000 445,000
SaaS Savings 2,285,000

 

What should you conclude from this? Simply that you should only choose an on-premise solution over a SaaS solution if:

  • the SaaS solution is not evolved enough to meet your needs and
  • the additional ROI you expect from the on-Premise solution is more than enough to cancel out the extra costs associated with an on-Premise solution for the next three to five years (as you’ll be stuck with the solution at least that long, whereas most SaaS providers allow you to go month to month after an initial six to twelve month contract).

For example, if you expect that the on-Premise solution will save you $400,000 a year in efficiency improvements and cost savings, but that the best SaaS solution, which is still evolving, would only save you $200,000 a year, and the on-Premise solution only cost $50,000 more per year than the SaaS solution in a fully-burdened calculation, then the on-Premise solution would likely be the way to go (since, over 5 years you could save as much as 750,000 over and above the expected returns from the SaaS solution). However, if the on-Premise solution cost $150,000 more per year than the SaaS solution, then the cost-savings are minimal, then SaaS would likely be the right solution, especially once you consider the other benefits and the fact that SaaS solutions mature rapidly and, within a year or two, could offer more savings potential then the on-Premise solution.

To run your own calculations, download the Excel Side-By-Side Costing Template that allows you to quickly and easily compute the expected 1-year, 3-year, 5-year, 7-year, and 10-year costs of on-premise vs. hosted ASP vs. SaaS, and the expected cumulative savings of going with a SaaS solution.