It's a bad time to buy software - here's why!

On a recent client call, I found myself in an awkward situation. This company is looking to acquire a large suite of software and I really couldn’t recommend they do it. The software market is in some real flux now and today’s products and market leaders might not be tomorrow’s. Right now, this isn’t a software selection, it’s gambling.

Software buyers might be taking big technical and economic risks when they buy new application software today. The question is how to avoid obsolescence risk and a bunch of duplicate costs?

There’s a really good chance your firm will fall into one of the following scenarios in the next year or two. Please note the background information and scenario particulars below.

The big information gap

The changes underfoot in the application software space include:

• Software firms are trying to figure out where it makes sense to use large language models (LLMs), Generative AI and other advanced technologies. Some of these capabilities can replace entire applications or material portions of an existing application.
• Until they figure the previous point out, vendors have no idea how they’ll price these new capabilities. Moreover, whatever you license or subscribe to now may not count towards the use of an enhanced or replacement solution. Do you want to pay twice for the same functionality?
• Some vendors might take years to bring these new capabilities to market. Do you want to be the last person that bought a pager or a Blackberry phone? If you need software that delivers competitive parity (or better still competitive advantage), then you must avoid vendors that move at a glacial rate. But watch out, fast young scrappy vendors of a few years ago can grow into slow, bureaucratic, greedy vendors of tomorrow.
• Likewise, some vendors may take an incremental or bolt-on approach to these advanced technologies.  These firms might only deliver new value at the margins. Their solutions will NOT be breakthroughs. They won’t deliver outsized value and they sure won’t represent radical reinventions of what the software, a process or utility should and could be doing. These products won’t show you but a smidgen of the art of the possible. If your firm wants transformative, not incremental, change then these vendors must be avoided.
• Vendors are also rolling out (and still developing) their application platforms. The technology stack within it may not be complete and the number of directly integrated third-party services that can work with this platform may still be a work in process.
• Vendors may recognize the potential for data privacy and security risks with some of the new advanced technologies but their professed awareness should not be considered proof that they have sufficiently identified all risks and have mitigated each and every one of them. Private machine learning environments (i.e., those that only contain and learn from the customer’s secured and private data) may be preferrable solutions to those that use public AI/ML technology. If your in-house counsel isn’t a savant on these matters, get him/her some additional relevant legal expertise to supplement your side of any potential deal.

The big problem with all of the above is that vendors don’t have any firm ideas yet on what they will develop, when it will ship, what privacy issues they’ll expose your firm (and its data) to, how they’ll sell and price it, etc.  You may have better luck consulting a crystal ball than relying on vendor statements right now.

In a conversation with another industry analyst, we can’t see any real clarity on the above for at least six more months. Personally, I suspect customers and prospects won’t really see firmer product roadmaps and pricing information for a year.

Customer appetite for software still exists

Firms, like my client above, are always replacing, upgrading and supplementing their software portfolio. Their businesses can’t sit still but they may have to park some software decisions. For example:

• Firms considering a single-module/application purchase can probably proceed. It’s only one application and the obsolescence risk is low. There are some exceptions to this though. In the HR application software space, some modules, like succession planning, career development and talent acquisition (to name a few), could get completely reworked with the use of advanced technologies. If you must buy one of these applications, treat this purchase as a potential throwaway deal as significantly more powerful products may emerge in a year or two.
• Other one-off application purchases, like fixed asset accounting, may have little risk of technical obsolescence. This sort of application deals with regulated, codified matters that must be followed in a highly prescribed manner.
• Large suite purchases (e.g., ERP) could be tricky. These jumbo, multi-application deals often come with volume discounts if customers agree to license/subscribe to several applications at once. History suggests that this is bad time to do one of these deals unless you have an outstanding software contracts lawyer. In past eras, we’ve seen vendors:
  • Rename an enhanced application so that existing customers must now pay for a new license/subscription to get access to the new functionality
  • Package the additional capability as a separate module or sub-module to claim that an additional fee/license/subscription is now required
  • Rename the entire suite of products and require the customer to buy it all, all over again.

Software purchases are almost always expensive capital efforts. The software is pricey and so, too, is the implementation. If you’re buying and implementing something today, the newer more advanced version that becomes available in the next year or so, may cost you more money to acquire and implement. It’s like that quote attributed to General George Patton: “I don’t like paying for the same real estate twice.” And don’t forget that any software project comes with risk. Is this application worth twice the costs and risks in a short period of time?

What should software buyers do?

Patience is a virtue – Right now, software sales teams are crafting their sales plans for the rest of 2023. What are they forecasting? My hunch is that they all think that they’ll bag a bunch of new deals with many whopper sales in the mix. They’re also planning to snow you with loads of whiz-bang stories about how advanced technologies will power value with their customers if only you sign up now! Hey, everyone can dream, can’t they?

A rosy 2H2023 software sales forecast may not be fully achievable if vendors can’t deal with a whole new crop of advanced technology triggered sales objections.

These sales teams aren’t going to be in a real discounting mood (and customers won’t buy) until a couple of things happen:

• The economy might not favor large capital expenditures (especially if interest rates remain high and inflation is still not under control) and this will hurt application software sales, especially big deals
• A lack of clarity re: advanced technology powered application product roadmaps and pricing might trigger some buyers to ratchet down potential purchases
• An unwillingness with vendor sales teams to protect the buyer from future pricing surprises when and if new advanced-technology powered apps appear will cause buyers to curtail large purchases
• More prospective customers might extend their buying process until vendors can provide more answers and more certainty around potential new purchases. These delays will cause vendors to miss earnings estimates and your sales rep might not earn their expense-paid President’s Club Hawaii trip this year. Nothing kickstarts sales discounts like a softening sales pipeline.

Reconsider how much you really need to buy now – Chances are that your firm might not need all of that suite now. You might instead want to focus more on securing favorable pricing terms for future purchases but only commit to buying just one or two point/best-of-breed applications for now.

Bolster your resources – You might want to line up a great software negotiator and contracts attorney. Better still, have your own ‘paper’ that you want the vendor to sign. Trust me, their ‘paper’ is massively slanted in their favor. Why not level-set things?

Go open source or find a lower cost partner solution to plug into your pre-existing apps or application platform. It might be cheaper short and long-term. And, it even be functionally superior to what a large vendor might offer now.  If you want to replace it later, your sunk cost in this solution will be less.

Put the existing vendor on notice – Let them know that:

• You are concerned with all the ambiguity re: advanced technologies, privacy, roadmaps, pricing and security
• You won’t deal with them until they work up a number of protections for your firm re: current and future purchases in areas like privacy, security and pricing
• You remember some of the other pricing and contracting stunts they’ve pulled in prior situations. Be sure to point out that your firm paid, handsomely, for a perpetual license for their software years ago.  And, even though you dutifully paid annual maintenance on that decades, when new releases and reworked applications got released, the vendor may you pay all over again. And, don’t forget to remind them about all of their surprise usage audits, indirect access fees, etc.  Make them re-earn the right to be your software supplier especially if they’ve exhibited behavior inconsistent with being a true business partner.

Don’t be afraid to seek true love elsewhere – In this environment, don’t tolerate bad actors, pushy sales people and onerous contracts. Kick’em to the curb! They can’t abuse you unless you let them. Go with a vendor that appreciates you (not your bank account).

My take

Be careful! With great change comes both great opportunity and risk.