In January 2002, at database and applications giant Oracle's annual European user conference in Amsterdam, CEO Larry Ellison made a characteristically bold statement. "We're throwing away the price book," he announced. "Effective immediately, pricing is $4,000 per ‘power user' and $400 per ‘casual user'."
Many Oracle users (who have complained about the complexity of the company's pricing structure) will welcome this much-simplified approach to buying software. But Ellison's announcement also raises questions about how much value organisations actually get from their software investments – particularly from software suites comprising multiple modules. An increasing body of research indicates that the tendency for organisations to stockpile ‘shelfware' – software that is paid for but never actually deployed – has grown substantially over the past two to three years as IT departments have consistently invested in new applications in emerging areas such as business-to-business (B2B) collaboration, customer relationship management (CRM) and business intelligence.
In some cases, organisations have bought more licences than they need, envisaging their businesses would grow at a steady rate. In other cases, software vendors have encouraged users to purchase entire suites, despite the fact that an organisation may only use a few core functions, and never actually deploy the others. So, in the case of Oracle, a user that only intends to use a single module will find themselves paying for a lot more.
The problem of ‘software oversell' is worse in certain application areas than others, according to analysts' figures. A survey by AMR Research, for example, found that a staggering 85% of supply chain management suite users only implement one or two core modules, and only 9% plan to buy additional modules.
Nigel Pendse, author of The OLAP Report on business intelligence (BI) applications, has found that the percentage of BI software that goes unused can be as high as 62%. This means that for every hundred seats of software bought, only 38 will actually be deployed.
It is not always the fault of the software vendors, however. "When companies purchase software for strategic long-term gain, they probably bite off more than they can chew," says Simon Pollard, vice president of European research at AMR. "They are happy to make a significant financial commitment to one or two key vendors, but have to implement the application component by component, which takes longer than they thought." Pollard also notes that, where software is made up of a large number of modules, such as Siebel's CRM applications suite, less than half the software may have actually been implemented.
Occasionally, suppliers may also offer organisations sizeable discounts for buying extra licences or modules of their software, which may incite users to pay for more than they immediately need. This can work out in users' favour, according to David Roberts, chief executive of the Infrastructure Forum, a UK-based forum for IT directors and technology users. "Shelfware can be valuable. Buying software by volume means users are more likely to achieve a discount, or there may be an option to buy a certain number of further licences at a discounted rate," he says. Pendse disagrees. "In theory it may seem cheaper, but you can normally negotiate a good deal based on what you will buy in the future," he advises. "Software companies make far more money from software that is never used than from software that's actually deployed."
This is where vendors' sales tactics can be misleading – encouraging prospective customers to believe that implementation will be quick and easy. As a result, they are more likely to purchase additional modules. In reality, however, each organisation will face its own particular challenges.
John Stansfield, head of call centre and CRM operations at UK financial institution Yorkshire Building Society, experienced this for himself while visiting existing customers of a CRM application for which he was negotiating a contract. "Take what [the sales people] say with a pinch of salt. We spoke to the CRM director at Hewlett-Packard and discovered he was no further advanced than us, whereas the applications company had told us HP had implemented the entire suite."
Users should exercise the same caution when considering upgrades to their existing applications. According to Andy Bitterer, an analyst at research company Meta Group, some vendors force users to upgrade their applications simply by discontinuing support on certain products. Bitterer cites database company Sybase as one example: "The company stopped offering support on version 11 of its database so everyone was forced to move up to version 12, even though this meant a downgrade in performance," he explains. "For users, it was counterproductive to do the upgrade, but they had no choice."
In order to make sure they are getting value from their software investments, therefore, organisations should dedicate resources to software asset management, advises Roberts. By keeping an up-to-date audit of the software they have, where it is deployed and to whom, organisations will have better negotiating power when it comes to future investments in technology. "The cost of adding extra people to handle this will almost certainly be covered by the savings made from squeezing shelfware and negotiating lower software costs," he says.
Seeing this requirement, a number of companies now offer software packages dedicated to keeping track of the software organisations have deployed, such as US-based Tally Systems. According to Randy Britton of Tally, one estate agent that implemented its software saved $100,000 after it realised it was paying support fees for software it had installed on its network but never used. This is backed up by research from Gartner, which estimates that companies that manage their technology assets effectively can reduce their total cost of ownership by up to 50%.
Ultimately though, if an organisation wants to buy a piece of software for a particular business requirement, it may have to accept that the application will always have more functions than it needs. That is the essence of packaged applications software, concludes Ronan Miles, president of the Oracle User Group in the UK. "It's like the modern video recorder.
I can remember buying my first VCR in the 1980s and all it did was play and rewind. I bought another a couple of years ago and it has ten times as many functions as I need. It's the same with an applications package – it does what it does whether you require all those functions or not."