Something is amiss in the way we assess the value of business software. Like most investments, value is assessed in the context of a return. Returns from software are measured in terms of increased sales, or gains from better operational efficiencies — or both. To justify the investment and placate the boss, spreadsheets are drawn up, pitting gains against expenses and dutifully calculating metrics with slick acronyms such as ROI, NPV, and BEP. Once the software oracle has ‘spoken’ the numbers, value is roundly declared.
What’s missing? An awareness and assessment of the risk that actually comes along with any selection of enterprise software. While calculations of return may be meticulous, risk calculations are perfunctory or altogether absent.
To be specific, here are nine implicit and explicit risks that may significantly impact — or, in the worst case, entirely wipe out — the anticipated returns from a business software purchase.
Software is an unusual asset in that, even though you often pay a lot of money to acquire it, it has no market value once purchased. You cannot resell it the next day, even at a steep loss. No other asset behaves like this! What’s more, many vendors expect you to pay upfront for business software before any gains can be realized, putting all that capital at risk. The emergence of cloud software has largely mitigated this risk as companies can now pay through a subscription model that matches payments to actual use, thereby transferring much of the risk from buyer to provider. But beware! Some cloud software vendors still try to bind you into multi-year contracts, which pushes all of the risk right back on the buyer.
Once bought, software must be deployed to its users and this adds a measure of risk and cost. It must be available to its customers at all times, must be maintained and continuously upgraded, and must be secured. Thankfully, cloud software once again has largely shifted this burden — previously absorbed by the buyer — back to the provider. Providers may price this in, but they have to stand and deliver. Can you be confident your vendor can provide 24×7 service? And are they proactive in adequately protecting your business against attacks from malicious viruses and roving hackers?
Software is often priced like cars. Much as expensive accessories and options load up the cost of your car before you get it on the road, software prices are often inflated by add-ons, extensions, and editions. It gets worse. Software often needs to be “implemented” to fit the requirements of a specific business, and these additional costs sometimes come to multiples of the base price. An inability to estimate all this properly, at the time of purchase, constitutes pricing risk. Consider vendors who offer a simple all-in price directly from their websites, with no need to “call for pricing.”
Risk from unanticipated requirements
During the assessment phase, it can be difficult for a business to anticipate and prioritize all its various software requirements, from front-end to back-end and everything in between. Even if the business manages to capture all its current requirements, businesses grow and evolve, often in unanticipated ways. Business software must be able to keep pace. Only software designed to be extensible — through customer add-ons, extensions, and third-party custom-code — can support unforeseen needs.
User adoption risk
Procurers of business software aren’t often the same people as its end users and often misjudge its adoption. This is often the slip between the proverbial cup and lip. A good many obstacles will deter users from adopting the software as a new way to do their work. Often they will be asked to abandon familiar business processes, which could be arcane or archaic. But it’s equally important for software to be customizable to fit the way your business works, and in a way that makes it easy for users to understand what they need to do. Software vendors are often surprised when their products turns out to be difficult to use, or when users require learning aids and training before they can ramp up. Well designed software can ease adoption risk through learning tools, templates, pre-built modules, and flexible design.
Most businesses are built around a set of processes specifically designed to serve their customers. The software that enables this exchange may come from multiple vendors addressing partial needs, yet they must all work together so the customer doesn’t suffer the discontinuities. Software built for integration with other software can do just that. When software is designed with components, and APIs that allow them to be called and executed by other applications and services, dissimilar systems are more likely to work together.
Vendor lock-in risk
The biggest risk of getting locked into a specific vendor’s technology is that it can prevent a buyer from making the best choices for its own business. The interest of the software vendor here is at odds with that of its customers. A vendor can mitigate this in several ways. Readily allowing their products to be integrated with other products, as mentioned, above, is one way — but it’s also important for multi-product vendors to interoperate with the complementary products of others. Avoid vendors who will not unbundle the price of their software suites, especially when the individual products have strong competition.
Risk of vendor staying power
Software is a highly competitive business where giants are regularly felled by dwarfs. An abundance of risk capital from venture and private equity firms has spawned hundreds of companies building very similar software. Such funding often comes with its own obligations and expectations where software companies may have to sell out to meet the timing and liquidity requirements of their investors. This business disruption creates uncertainty and change for the buyers of their software. When picking a software vendor, check where their money comes from, how long they’ve been in business, and the ecosystem of partners and customers they’ve put in place.
Risk of vendor obsolescence
Software development methods, technologies, and approaches have changed dramatically in less than two decades. Few companies can keep up, which is exactly why the wayside is littered with fallen titans of the past. Vendors who innovate faster and update their software more frequently are more likely to keep up with changing customer needs.
To sum up — not all these risks may apply to a given situation, but a nuanced and clear-headed understanding of the ones that do will determine the success of your software implementation and its ability to unlock value from the business processes you seek to automate.
Image credit - Business man balancing cost and risk © William Potter - shutterstock