Your Investment in Enterprise Software – Guidelines to CIOs and CFOs
The overall investment associated with implementing and maintaining a suite of enterprise software products could be significant. A 1:4 ratio between product investment and the corresponding investment over time in related services is not uncommon. In other words, an initial $2M in licensing a suite of enterprise software products might easily balloon to $10M in total life-cycle costs (initial investment in perpetual license plus the ongoing investment in associated services).
I offer the following rule-of-a-thumb guidelines to assessing whether the terms quoted by a vendor for an enterprise software suite of products are right:
- Standard maintenance costs: Insist on a 1:1 ratio between license and standard maintenance over a 5 year period. If standard maintenance costs over this period exceed the corresponding license costs, chances are: A) the vendor is quite greedy; or, B) the vendor’s software accrued a non-negligible amount of technical debt. Ask the vendor to quantify the technical debt in monetary terms. See Technical Debt on Your Balance Sheet for an example how to conduct such quantification.
- Premium customer support costs: Certain premium customer support services could be quite appropriate for your business parameters. However, various “premium services” could actually address deficits or defects in the enterprise software products you license. If the technical debt figure is high, the vendor you are considering might not be able to afford the software he has developed. Under such circumstances, “premium services” could simply be a vehicle the vendor uses to recoup his investment in software development.
- Professional services costs: Something is wrong if the costs of professional services exceed licensing cost. Either the suite of products you are considering is not a good fit for your business parameters or the initiative you are aspiring to implement through the software is overly ambitious.
To summarize, the grand total of license fees, customer support fees and professional services fees over a 5 year period should not be higher than 3X license fees. Something is out of balance if you are staring at a 4X or 5X ratio for the software you are considering.
One final point: please do not forget to add End-of-Life costs to the economic calculus. Successful enterprise software initiatives can be very sticky.
The Agile Executive 
In response to an inquiry from a reader: The post does not explicitly address the perpetual licence model mindset. Nor does it get into the licensing revolution started by open source (see Open Source Software and Agile Software Development: Parallels and Lessons for Enterprise IT). These topics will be addressed in follow-on posts.
Israel
Israel Gat
November 20, 2009 at 8:10 am
I agree with the concept that measuring technical debt can be very useful in vendor evaluation. For an established product, a simple measure can be found in the defect and request backlog. It doesn’t give you results in dollars, but can show the experience that other customers have had. Look at the backlog of direct customer requests, and defects from any source. If there is more than two years of work there, be wary and dig deeper.
Another pocket of expense to explore is your cost of implementation. In addition to any services and support contracts from the vendor, you should ask the expected direct cost of implementation and maintenance that you should expect to perform yourself. I think you can add that to the other costs and make sure the 5 year total isn’t over 5X the original license price.
Paul Brownell
November 20, 2009 at 9:53 am
Paul’s good points bring SaaS considerations to the fore. Economies of scale in very large data centers are far superior to those in smaller data centers. The choice is really between a 5X or higher multiple for one’s own implementation versus SaaS fees over a five year period. The Joys of Real Hardware touches on some of the operational challenges of rolling your own at scale.
Israel
israelgat
November 20, 2009 at 11:26 am
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