The Inefficiency of the Enterprise Software Market and Software Selection

Executive Summary

  • Software selection takes place within the context of the overall enterprise software market.
  • The problem is that the overall enterprise software market is not efficient.

Introduction

For some time it has been evident to me that the enterprise software market is not only not efficient, but is quite inefficient. Corporate customers overpay for major brands and select software that is often not even close to the best application for their needs. Let’s cover the definition of an efficient market. An efficient market serves consumers. More often than not, customers receive good value for their purchases and don’t have much of a problem finding the best product for their needs. Below I have listed important preconditions or criteria for an efficient market and, for each criterion, have analyzed the enterprise software market.

Pricing is Easily Comparable

Typically in the enterprise software market, pricing is complicated. Pricing is based partially upon how many users will be on the system; a user is called a “seat.” A host of other factors also come into play, including how strategic the account is considered to be to the software company. Some software vendors, such as Arena Solutions or Demand Works, publish their price per seat directly on their website, but the vast majority of enterprise software vendors do not publish their prices. Instead, prices are given only after considerable interaction between the vendor and the company.

The Consumer or Buyer Can Effectively and Efficiently Compare the Alternatives

Unlike the consumer software market, the executives who make the purchasing decisions are never the same as those people who use the software. In fact, neither the executives nor anyone else at the company will actually use the solution prior to the purchase. Typically the potential customer will see a few software demonstrations or review some screenshots. Much of what is published about the software in marketing literature—or what is stated by vendor salespeople—is either false or not applicable to actual implementation. Not understanding the distinctions between applications themselves, corporate decision-makers rely upon sales representatives, consulting companies, and analyst firms for this information.

Sellers Do Not Have Monopoly Power

In the enterprise software market, a number of vendors have monopoly power. This requires some explanation. A monopoly is one seller and many buyers. In real life there are few examples of this textbook definition of a monopoly; however, most companies can be placed on a continuum between perfect competition and monopoly. When an economist states that an entity has “monopoly power,” this means that the buyers have restricted options and the sellers are in a good position to control the terms and evolution of the purchase. Monopoly power exists in the enterprise software market mainly because there is so little anti-trust enforcement in this market. For example, Oracle was allowed to purchase and essentially dismantle PeopleSoft, along with numerous other acquisitions. Acquisitions stem from a combination of financial strength and innovation weakness.

When a smaller company has a better product than a bigger company, but the bigger company has more financial resources than the smaller company, the acquisition allows the bigger company to simply take over the smaller company. Acquisitions are critical to restricting competition and to reduce the degree of innovation in any field. Acquisitions prevent turnover in the leadership within the industry and is almost universally bad for buyers. A major reason as to why the negative aspects of acquisitions are not discussed in the business press is that often the acquiring companies are also the biggest advertisers. For them, there is no need to upset the apple cart.

The Network Effect

Software is subject to something called the “network effect,” which occurs when the value of a service increases with the number of people using it. An example commonly provided is that of the telephone. The more people that have a telephone, the greater the value of any one telephone. Another good example is Facebook. The fact that so many people are on Facebook means that the value of Facebook is very high. This is intuitively obvious. However, the network effect also applies to consumer and enterprise software, and it applies to products and services that are not actually “networks” (the two examples of the telephone and Facebook clearly are networks). Microsoft Windows is the beneficiary of a powerful network effect, not because Windows is part of an actual network, but because applications must work with the operating system, and software vendors want to write their products to work on popular operating systems. The same is true of hardware. Generally, hardware manufacturers don’t care which operating system runs on their hardware. However, they want their hardware to sell well and the best way to do this is to make it compatible with the most popular operating system. Windows used its monopoly power in operating systems to branch out in other directions, such as browsers and office software. In fact, the US Department of Justice case against Microsoft (which the Department of Justice won) was that Microsoft unfairly used its monopoly control over the operating system to also monopolize the browser market. Popularity creates its own credibility. Furthermore, companies prefer to buy software from the same vendors that produced the other software they currently use. There are a couple of reasons for this preference. The software that is used by companies must share data, and in theory, software produced by the same vendor should share data seamlessly.

The Lock In of the ERP Vendor

In addition, the act of purchasing software from a software vendor creates a relationship with that vendor. A perfect example of this can be found in the ERP software category. ERP systems can be considered the “mother ship” or foundational set of applications within a company. Almost every system acquired by a company must share data and be integrated with the ERP system. An ERP software vendor that sells non-ERP products (which in all likelihood are inferior to other software in that category) still has a great advantage over its competitors because the vendor can say that its product is better integrated to its ERP system than any other competing application. For this reason, as well as a number of other factors, vendors that provide the ERP software have a lock-in. Therefore, it is not at all surprising that the largest ERP vendors in the world (SAP and Oracle) also have dominant market share positions in many other software categories, as is shown in the following graphic for supply chain software.

The graphic above shows that two software vendors control 37% of the enterprise software market for supply chain applications. SAP and Oracle are the heavyweights in multiple enterprise software categories.

The Most Important Thing to Take Away from the Enterprise Software Market

It is important to understand that much of the information necessary to make good software selection decisions in the enterprise software market is hidden from view. In most cases, to obtain this information you must contact each vendor directly, interact with them, and go through their process (which they control). Again, there are exceptions. For instance, some companies publish their prices right on their website. But, the information that is available from analyst firms tends to be quite high level, and there is nothing like “Consumer Reports” for the enterprise software market. Information from consulting companies is highly biased. Furthermore, the vast majority of published information on various applications is promotional in nature and this includes books and Internet-based information.

Conclusion

In order to improve software selection outcomes, one must understand the incentives of all of the parties that are involved in providing information to buyers. This includes, vendors, consulting companies, IT analyst firms, and publications. That is, the first step to analyzing the information provided by various entities is to analyze the entities themselves. I have experience either working for or working with all of these entities, and know how they operate; however because I am an independent consultant, and work for none of them I am able to explain how they really work. Most authors cannot do this because they work for one of the entities, and would face repercussions if they were to publish the same material. This book has specific chapters dedicated to these entities as well as the information, they provide.

Software Selection

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

References

Software Selection Book

SELECTION

Enterprise Software Selection: How to Pinpoint the Perfect Software Solution Using Multiple Sources of Information

What the Book Covers

Essential reading for success in your next software selection and implementation.

Software selection is the most important task in a software implementation project, as it is your best (if not only) opportunity to make sure that the right software—the software that matches the business requirements—is being implemented. Choosing the software that is the best fit clears the way for a successful implementation, yet software selection is often fraught with issues and many companies do not end up with the best software for their needs. However, the process can be greatly simplified by addressing the information sources that influence software selection. This book can be used for any enterprise software selection, including ERP software selection.

This book is a how-to guide for improving the software selection process and is formulated around the idea that—much like purchasing decisions for consumer products—the end user and those with the domain expertise must be included. In addition to providing hints for refining the software selection process, this book delves into the often-overlooked topic of how consulting and IT analyst firms influence the purchasing decision, and gives the reader an insider’s understanding of the enterprise software market.

This book is connected to several other SCM Focus Press books including Enterprise Software TCO and The Real Story Behind ERP.

By reading this book you will:

  • Learn how to apply a scientific approach to the software selection process.
  • Interpret vendor-supplied information to your best advantage. This is generally left out of books on software selection. However, consulting companies and IT analysts like Gartner have very specific biases. Gartner is paid directly by software vendors — a fact they make every attempt not to disclose while consulting companies only recommend software for vendors that give them the consulting business. Consulting companies all have an enormous financial bias that prevents them from offering honest advice — and this is part of their business model.
  • Understand what motivates a software vendor.
  • Learn how the institutional structure and biases of consulting firms affect the advice they give you, and understand how to properly interpret information from consulting companies.
  • Make vendor demos work to your benefit.
  • Know the right questions to ask on topics such as integration with existing software, cloud versus on-premise vendors, and client references.
  • Differentiate what is important to know about software for improved “implement-ability” versus what the vendor thinks is important for improved “sell-ability.”
  • Better manage your software selection projects to ensure smoother implementations.

Buy Now

Chapters

  • Chapter 1: Introduction to Software Selection
  • Chapter 2: Understanding the Enterprise Software Market
  • Chapter 3: Software Sell-ability versus Implement-ability
  • Chapter 4: How to Use Consulting Advice on Software Selection
  • Chapter 5: How to Use the Reports of Analyst Firms Like Gartner
  • Chapter 6: How to Use Information Provided by Vendors
  • Chapter 7: How to Manage the Software Selection Process