Eventually for most of us, the shoe falls on the other foot.

Having worked in the business software industry, trying to get software sold for the better part of 5 years now, it was enlightening talking to a friend of mine yesterday about her company’s experience trying to buy ERP software for her company.

Her company is a small venture-funded start-up that provides R&D business process outsourcing, contracted primarily on a project-basis, for large companies.  They are trying to get an ERP system in place to get good cost accounting capabilities obviously so they can geneate a true P&L of their business.

The specialized nature of their business and the fact they are small of course limits the field of possible vendors.  Because of they small company with insignificant revenues and limited financial resources, whatever system they choose, because of the critical task the system performs and because the ‘Total Cost of Ownership’ of the system relative to their available cash, this is going to an important purchase no matter who they choose.  In fact, I can easily see this deal coming down to ‘no decision’ as we say in the SW industry. 

The Real Cost of Software

First, the important thing to realize is that the ‘license cost’ is not the final cost of the purchaser.

  1. In this case the stated license costs is around $25,000.  Not bad as software license costs go. 
  2. Second, you need to look at yearly maintenance costs.  This is a yearly charge customers pay to software vendors ostensibly to provide telephone and web support, updates and patches and frequently for upgrades to make the SW work on new versions of the operating system, database, etc… and sometimes for new features and functionality included in those upgrades.  In this case, the company was charging 18% of the license cost per year.  This is a pretty standard rate in the software industry.
  3. Third, you need to look at the cost of installation and set up.  Now this is a bit of an open secret in the industry, but not every piece of software is as easy to install as your latest version of Microsoft Office.  Given the complexity of software these days, especially for web-based business apps, you can expect some head-scratching moments.  However, one could argue that any somewhat technically savvy guy or gal should not have to attend a 2 week training class to understand how to get the software up and running.  Sadly, this is often the case industry.  While some cynics chalk this up to deliberate obfuscation of production functionality so companies can charge juicy professional services fees, in most cases the reasons are much more benign:  companies would rather spend their valuable R&D resources adding more features than simplifying the install.  Companies can charge more for new features, attract new customers and are the basis of good marketing ‘story’ we can take to market.  Face it, how attractive would be the new version of the product if its headline feature was "Now More Easier to Install!"? 
  4. Ongoing maintenance:  This is sometimes considered a hidden cost, but companies need to consider the cost of keeping the servers and the software updated

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