- Software has an inherent return on investment.
- Software vendors and consulting companies, through increasing the costs of software have reduced the ROI of software.
One of the major issues of enterprise software is its connection to the productivity paradox. The productivity paradox is the inability to find the productivity benefits of IT software.
In this article, we will start off by describing the productivity paradox, and then explain several possible reasons for it.
The Productivity Paradox
What is the productivity paradox? It is well stated by Stanford’s website on the topic.
The productivity paradox (also the Solow computer paradox) is the peculiar observation made in business process analysis that, as more investment is made in information technology, worker productivity may go down instead of up. This observation has been firmly supported with empirical evidence from the 1970s to the early 1990s. This is highly counter intuitive. Before investment in IT became widespread, the expected return on investment in terms of productivity was 3-4%. This average rate developed from the mechanization/automation of the farm and factory sectors. With IT though, the normal return on investment was only 1% from the 1970s to the early 1990s.
Now, this is something that does not fit with the narrative provided by the entities that sell enterprise software. The enterprise software industry has an interesting view on the ROI and productivity enhancements that come from systems implementation. As far as I can ascertain the commonly presented idea is that without any evidence, systems have a positive ROI. This is true for instance of ERP systems. ERP is broadly considered to have a positive ROI. However is that true?
My book entitled The Real Story on ERP: Separating Fiction from Reality analyzes all of the academic literature on ERP that was ever published at that time. And what that research shows is that there is no return on investment from ERP implementations. Software vendors and consulting companies are not interested in getting this type of information out, so it does not get out.
Common Explanations for the Productivity Paradox
This is another quotation from the Stanford website on the Productivity Paradox.
In the realm of capital investments, Information Technology is of particular interest because it has the potential to redistribute market share rather than increase overall productivity. When looking at the economy as a whole, this can create the illusion of the Productivity Paradox – IT investments don’t appear to increase overall productivity. In truth, IT is benefiting the firms that invest in it, but it is taking away from those firm’s competitors yielding no net gain. As Erik Brynjolfsson puts it, “IT rearranges the shares of the pie without making it any bigger.
Consider two firms — Firm A and Firm B. They are members of the same economic industry, and within that industry Firm A holds 50% of the market and Firm B holds the other 50%. If Firm A chooses to invest in IT to improve their research and marketing they may gain a competitive edge over Firm B and therefore have the ability to take a percentage of Firm B’s market share, say 25%. Thus, because of succesfully investing in IT Firm A has improved their market share to 75%, but the overall market and overall productivity remains the same.
So there you can see a hypothesis for the Productivity Paradox that sets IT investment as a zero-sum game. These is something to this. And let us look at one category of enterprise software to see why.
The ROI on CRM Systems
I have on several occasions presented the hypothesis that CRM systems have a negative return on investment. CRM systems should be the easiest systems to show an ROI as they are supposed to directly increase sales. However, CRM systems do not bring in new leads, they make more available the leads that already exist to more people within the organization and allow more characteristics of the leads to be understood (when the last contact was made, who is the decision maker, etc..). Thus even if CRM systems improved the ability to close on leads (which I there is no evidence that they do), the sales would simply come from another competing firm. And of course, that is all companies are interested in. They don’t care if the sales come from a competitor or is a sale to a customer who no other competitor was competing for. CRM systems are not the second largest category of software by revenues in the enterprise software market and have been around for more than 15 years.
If CRM systems are so effective at increasing sales, why has the US economy’s overall growth rate not changed much over the past 15 years, a time when CRM systems have become nearly universally installed at the medium to large sized companies? Yet, if you speak to most people that work for CRM vendors, they immediately propose a benefit from CRM. It is simply assumed. If your job relied on selling and implementing a CRM system, would you be interested in determining whether CRM has an ROI? What if the outcome of the research is negative?
Yet, if you speak to most people that work for CRM vendors, they immediately propose an ROI benefit from CRM. It is simply assumed. If your job relied on selling and implementing a CRM system, would you be interested in determining whether CRM has an ROI? What if the outcome of the research is negative?
Do you get a different job? Out of a hundred people, how many are interested in learning that what they make their living from adds no value? The truth is that neither CRM software vendors nor CRM salespeople, CRM system implementers care if the ROI is positive for companies. What matters to them is if CRM systems sales and implementations have a “positive ROI” for them, and of course, they do.
A Quick Guide for How to Parasitize Software Implementations
What researchers who look into the Productivity Paradox don’t seem to discuss or potentially be aware of is the entities that are major makers or implementers of IT systems.
There are important characteristics of the IT market that can help explain at least part of the Productivity Paradox. Yet it is difficult to find these characteristics of the IT market discussed anywhere.
…For Software Vendors
The enterprise software market has dominant software vendors that create software that is in many cases not very efficient. The easiest example of this is Microsoft with their Windows operation system. Windows has the largest market share, yet is considerably less efficient to use than the MacOS. SAP creates software that is expensive to implement and maintain, yet is one of the largest software vendors in the enterprise market. (I say this as an implementer of SAP going back decades that every time I touch an SAP system, my productivity declines from using competing software.)
And within companies that use SAP, their user productivity is low.
Furthermore, in comparative TCO estimations at Brightwork, SAP has consistently the highest TCO of any software vendor across every software category in which they have an entry. This is available for verification at the Brightwork TCO online calculators. SAP is recommended as frequently as possible by many SAP consulting companies, over other vendors, because of characteristics of SAP, including its consulting model, allow consulting companies to make more money on SAP than any other vendor in enterprise software.
…For Consulting Companies
Major consulting companies like Deloitte, Accenture, and IBM recommend software based upon how much money they can extract from their clients. A partner at one of these firms must bring in roughly $2 million in service billings per year, and must also meet quite aggressive margin requirements (which is the real reason behind H1-B Visa exploitation. H1-B = margin). This means recommending software that takes the most consulting hours to implement. SAP, for instance, has outsourced nearly all of their consulting to the large consulting companies, and therefore they receive the largest number of recommendations by these parties. If consulting companies are not given a substantial amount of consulting work for a software vendor, they will not recommend their software to a client. Therefore, the software vendors that do end up being recommended give up most of their consulting to them. And that is the only real metric used by these large consulting companies for whether the software is “good” or “bad.” This topic is covered in my book Rethinking Enterprise Software Risk.
…For IT Decision Makers
One idea often presented is that IT decision makers within buyers are so sophisticated that they cannot be tricked by vendors and consulting companies that seek to offer them high maintenance applications that offer low productivity. However, this has turned out not to be true. IT decision makers are frequently easily tricked by software sales strategies and by the control over information that the consulting companies and software vendors have over the IT media entities. The evidence? I have witnessed some of the worst outcomes of software selections with some of the worst and most competitive applications selected. If IT decision makers were consistently that good, these outcomes would not have been possible. This is explained in the book Enterprise Software Selection. And then, of course, we have the productivity paradox. Therefore, we have both anecdotes combined with broad scale productivity evidence.
After companies make a poor software decision, they do what they can to cover up the mistake. I have repeatedly been brought in to fix implementations, almost entirely recommended by a big powerful consulting company that never should have been purchased in the first place. I can easily find a far more suitable application that should have been purchased. But more often than not, the IT organization is not interested in moving off of what they purchased.
The IT organization will tend to hide the depth of the problem or gaslight the business by telling them that the problems with the application rest on their shoulders often using the exact statement that their users are “too stupid” to learn the application. In fact, the IT departments in SAP shops tend to show more allegiance to SAP than to their employer as is covered in the article To Whom Does Your IT Department Owe its Allegiance.
…For IT Media Entities
Large vendors give large amounts of money to IT media entities that cause those entities to write favorable articles about the largest vendors and consulting companies. I cover this in the article IT Media Output and The Fake News Debate. Gartner is a major influence of IT decision makers and is awash with money from software vendors, but because the largest vendors can offer them the most money, this influences Gartner, to rate their applications as high as is possible without Gartner losing all of its credibility. This is covered in the book Gartner and the Magic Quadrant: A Guide for Buyers, Vendors, and Investors. The very fact that Gartner is which follows no standards research rules, has an entire business model that is based upon conflicts of interest, and when sued has declared in court documents that it offers nothing more than “opinions,” is a clear illustration of the unsophisticated the typical decision makers in IT buyers. For decades the largest software consultancies have tricked software buyers into installing the most expensive and difficult to use applications, all for their own profit maximization.
With all of this, is there any wonder there is a Productivity Paradox?
The Impact of SaaS and Cloud
Over the past 10 years a new software delivery method has arisen called SaaS or Cloud. This software delivery method has the potential to upturn the enterprise software market, to reduce implementation times, reduce consulting hours and to open companies like SAP to very significant competition. And unsurprisingly the response from SAP and the consulting companies has been to try to dilute the terms by offering faux SaaS and Cloud. By many in enterprise software, the desire is to co-opt the verbiage of SaaS or Cloud but without offering any of its benefits.
Software can be hugely beneficial to productivity when analyzing an individual case. But whether it does, and how much depends upon the software that is selected. It should never be simply assumed that all software has a positive ROI. There is a great deal of software that adds little to nothing to productivity. For example, one of the worst applications I have ever tested is called SAP PP/DS, another example is SAP BW, and another is SAP EWM. It is not possible for companies that implement these applications to have a positive ROI. And each of these applications has far superior alternatives in the market that are made by smaller software vendors that cannot get recommended by consulting companies because they implement too quickly, are too easy to use and don’t want Deloitte, IBM or Accenture to inflate the project costs. These vendors cannot afford to outbid the major vendors to buy ratings from Gartner.
The result of these forces is that incompetent or mediocre applications continue to be recommended by consulting companies because consulting companies are looking out for their personal profit maximization rather than looking out for their client’s interest. In IT, no consultancy is a fiduciary, and in fact, the topic is never even broached during the sales cycle or during implementations of enterprise software. This means they do not have any obligation to look out for their client’s financial interests above their own financial interests.
One obvious explanation for the Productivity Paradox has to do with how IT has been parasitized by entities that collude to prevent the best applications from being implemented as widely as they would be without this collusion. Through their natural function, they reduce the benefits of IT, while radically increasing its costs while at the same time reducing innovation and in particular the dissemination of innovation in the market.
The academic community that performs research on the Productivity Paradox does not seem to be aware of these features of the enterprise software market, and private industry, most of the media entities being on the payroll of the largest IT entities have no interest in investigating this issue.
Financial Bias Disclosure
Neither this article nor any other article on the Brightwork website is paid for by a software vendor, including Oracle, SAP or their competitors. As part of our commitment to publishing independent, unbiased research; no paid media placements, commissions or incentives of any nature are allowed.
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