For private equity firms that invest in their portfolio companies, the question is this: What investments will generate the best ROI with the lowest risk?
In 2011 The Wall Street Journal quoted Marc Andreessen of Andreessen Horowitz explaining why “Software is eating the world.” Time has proven Marc correct. For the reasons cited in the article, it behooves PE firms to examine the enterprise software used by their portfolio companies.
A relatively easy way to identify inadequate software is to look at the number of spreadsheets used by the company. In the absence of other process management tools, people tend to use spreadsheets to manage processes, but the flexibility that makes them so easy to start with is also their biggest weakness. Spreadsheets are inherently manual, error-prone, and do not scale with growth. Processes managed with spreadsheets in a $10 M company will struggle to cope when that company grows to $50 M.
When buying enterprise software it's tempting to buy based on a good demo, but that can lead to buyer's remorse.
It’s the nature of our work at Wayferry to see lots of software demos and this post shares a few thoughts to help you get the most out of them. First, remember that the aim of the software analysis is to make your software selection decision. The aim of the demo is to confirm that decision.
Not understanding how important requirements are and where they are used is a major cause of problems with implementing enterprise software.
Industry is littered with enterprise software purchases that failed to meet expectations and objectives. While you might read about outright failures that end up in court, most partial failures are never exposed because those involved don’t like talking about them, and that is why so few organizations appreciate the risks they are taking with these projects.
Organizations ask users for their requirements, only to find that when enterprise software goes live, it doesn’t meet user expectations. It turns out that we have been doing this backward for years.
Imagine you were moving to a new city and wanted to buy a house. You contacted a local architect and asked him to design your dream home. He interviewed each member of your family to discover needs and wants and eventually produced a set of plans. Then you took your plans and started looking for a house that met those specifications. Absurd isn’t it? And yet that is exactly the way organizations approach major software purchases like ERP.
It’s easy to see why this happens:
Ever come across “Hotel California” software licenses? Software vendors have spent years perfecting techniques for extracting post-sale revenue from customers, and this is one of their favorites, especially with larger SaaS or cloud vendors.
Will Bachman is a co-founder of Umbrex ("UMBRella of EXcellence"), the first global community connecting top-tier independent management consultants with one another. Will hosts regular podcasts, and in episode 47 he interviews Chris on the topic of software selection. (54:54)
If the new year brings thoughts of a major software purchase, help is at hand! Just published: Rethinking Enterprise Software Selection: Stop buying square pegs for round holes is written to help you make your purchase an outstanding success.
Buying enterprise software is a minefield of immature selection processes, conflicting interests, and predatory vendors. Over 90% of purchases fail to meet expectations, and close to 30% are outright disasters. This failure rate is astounding when you consider that the total cost of ownership over the software's operational life is a significant fraction of annual revenue.
A major software acquisition is an opportunity to "kick it up a notch" but, despite the best of intentions, few deliver. Far too many organizations squander the opportunity and remain mired in mediocracy.
It doesn't have to be that way!
Many companies think they know how to purchase software when in reality they have no idea of how little they know about the process! This article looks at the four places where money is squandered.
Companies tolerate the growing pains of inadequate software for years, but once they have made a decision to replace that software, they can rush headlong into disaster. Enterprise software is a substantial investment for any organization, especially when you consider the total cost of ownership over the lifetime of the software. Part of the problem is caused by inadequate attention to the return on the investment in that software.
Software itself has no intrinsic value. Rather the value comes in the form of the value of the benefits that flow from using that software. To illustrate the point, suppose an insurance company spends $1 million per year on labor to process a particular type of claim. If the company introduces new software that reduces labor costs by 20% annually, then the value of that benefit is worth $200k per year to the company.
Cubic Corporation invested in an ERP system to streamline operations and improve profitability. More than two years later software and implementation costs are over $61 million and climbing. Is this another ERP boondoggle?
Based in Southern California, Cubic Corporation is a public company that operates in the defense and transport industries. In February 2015 the CEO announced steps to streamline operations and improve profitability, which was expected to yield about $16 million annualized pre-tax savings in the financial year 2016. This would be about $160 million savings over 10 years.
The ERP project was started in late 2014 and was expected to be completed by the end of 2015. But as of mid-2017, the implementation was still going strong. Based on published financials, as of March, 2017 Cubic had spent $61 million on the project so far. With completion currently estimated to be in 2018 (assume Q2) and extrapolating implementation costs, Cubic will have spent a total of about $86 million on their new ERP software project by the time it goes live.
Enterprise software implementations usually take substantially longer and cost more than planned. When going live they often cause major business disruption. Here's a look at the root cause of the problem, with suggestions for resolving it.
Whether it is in the cloud or the data center, so often enterprise software takes much longer to implement than expected. There are three main reasons for this.
1. Unknown requirements
New requirements are discovered during implementation that should have been found during the analysis. When these new requirements are found, the organization must decide what to do with them. If they are weighted as important or higher, the consultants must determine how to implement them: by configuration, writing code, business process re-engineering, or adding new modules or third party products. All of this takes time, and when too many new requirements are found implementation schedules slip.