The Effect of the Cloud on Software Selection

Executive Summary

• Cloud has an important impact on software selection.
• We cover the way software selection works under on-premises versus how it will change.

Introduction

With SaaS being around for some time now, and with so many articles written on SaaS, it is astounding to find so many areas and implications of SaaS that have so little written on them. One of these topics was how SaaS changes the software selection process. If we contemplate the generally followed on-premises software selection model, it is clear that it is much easier to make a poorly informed decision (all other things being equal), and it is to make a poorly informed decision with SaaS applications. SaaS or the SaaS delivery model has a powerful ability to change the nature of software selection for the positive. In this article, I want to explain why I think this is the case.

Process of Actualized Change

Change is often promised that never improves things as much as one might think at the beginning of the change. Under the current software selection approach, there are many people with the incentive to keep things the way. However, technology is in the process of undermining the existing schema.

The Ability to Resist

What is often overlooked is how many people benefit from an inefficient system that will fight the change. This is why, for example, it is so difficult to reform the US health care system or the financial services industry. Too many people benefit from the inefficiency.

• This is often undiscussed, but it is essential to understand institutional and individual incentives before discussing the likelihood of change.
• One of the strongest predictors of whether a change will occur is whether those that benefit under the pre-existing schema can stop the change from happening.

My Background as a Critic of Traditional Software Selection Practices

I have been a critic of software selection for some time, and I have explained my reasons in different areas in four different books. In one, I focused on the lack of quantification of the actual total cost of ownership for purchasing decisions. In a second, I focused on how the interpretation of risk within companies lacks sophistication. In the third, I covered the problems associated with the financial bias of entities that make software selection recommendations. With the fourth book, I zeroed in on one entity in particular. I found that this very influential entity lacked any transparency concerning how they rate and recommend software, or which software vendors pay them, or how much they are paid.

Overall, the issues lie both within the decision-making entities (the buyers) and the software vendors and the third parties that often pose as unbiased advisors, who in almost every case have a financial bias.

The Reality of Software Selection

If you look at enterprise software selection objectively, it is easy to see significant problems with both the information provided and the decision-making process.

The Basis for Proposing Poor Software Selection Being Common in Enterprise Software

There are many academic papers on various methods that can be used to make the right software selection decisions. However, I could find no research on the quality of decisions that are generally made. (If any reader disagrees with my assessment, please comment at the end of the article, and let me know what articles you think I missed.)

Instead of public sources, I have come to the conclusions that I have regarding the generally poor quality of software selection based upon:

• My experience seeing many applications in many companies — as I have been a longtime IT consultant
• Through my experience testing and evaluating many applications across various application categories.

Conclusion on the Efficiency of the Market for Enterprise Software

My conclusion is that enterprise software has some efficient parts, but most of the areas are quite inefficient.

• This means that companies are unlikely to get the best or even an appropriate application that matches their business requirements for many categories of software.
• For those that think that the enterprise software market is efficient, I would have to ask then why it is the case that I routinely find excellent applications that have minimal market share. And conversely, why I regularly find poor quality applications that sell very well.

ERP Centric Strategy?

One of the most important events that reduced the enterprise software market’s efficiency was the introduction of ERP systems in the 1980s.

ERP vendors used the ERP systems to steer purchases to applications that in a freely competitive arena would have never been purchased, and it has set back enterprise software decisions ever since. And while it did this, it established a faulty thought pattern in enterprise software decision makers — and ERP-centric thinking is a consequence.

I parodied this way of thinking, which I likened to a medical condition in the article Do You Suffer from (ECS) – ERP Centric Strategy?

Tough Competition or Fair Competition?

Software selling and selection is a competition for resources on the part of software vendors, which determines winners and losers in the enterprise software market. The competition for software sales is solid; however, this does not necessarily imply an efficient market. The efficiency of the market for enterprise software can be measured by how frequently the buyer ends up with the best or at least suitable software as an outcome of the software selection process. If poor quality information is available to software buyers, if software vendors can buy influence into advisors or pay software analysts to recommend their applications, market efficiency declines.

Much like if one of these two boxers were allowed to cheat, the wrong boxer would win.

Economic Productivity

The efficiency of the enterprise software market is about more than sales dollars. This is because the use of enterprise software directly is a direct input into economic productivity.

How Can SaaS Improve Software Selection?

So what is it about SaaS that holds such a promise to improve software selection?

In a word, “exposure.”

The present or on-premises software selection approach depends upon software vendors, consulting firms, etc.. providing second-hand information to software buyers.

Indeed, a software vendor will provide a demo in almost all cases to its prospects. However, a demo to executive decision-makers is much different from using the system day in and day out. Many software vendors actively deceive their prospects, and they can do this because they control the process.

I once worked for a software vendor myself. One of my stories is that when I asked the sales team why none of the users had been brought into the selection process, and I was told the following:

“We don’t want the users involved in the selection process. The application is too new, and so we want to bypass them and go directly to the top.”

Therefore, knowing they had a weak application that could never survive the scrutiny of users, they adopted the only approach that could have allowed them to win, limiting its exposure and engaging only with the organization’s top.

And this leads to a different but highly related topic.

Hierarchy for the Purpose of Hierarchy

A great deal of hierarchy has nothing to do with efficiency but is related to the desire to maintain control. That is a hierarchy to benefit those at the top of the hierarchy. However, better performance is achieved by pushing away from an egotistical view that people at the top of organizations have all the information they need to make decisions.

This means taking input from those that work the most with systems, which means doing more to incorporate users’ input into software selection.

Pushing Decision Making Up Away from the Actual Users

I feel quite comfortable generalizing that software selection is driven too high in organizations. Many executive decision-makers are making software purchases with minimal user input on applications and for applications which they will personally never use. Secondly, much of the input they get from consulting companies and other advisors are of poor quality and focuses on the advisor’s needs than their customers’ needs.

The less competitive the software vendor’s offering, the more the software vendor will want to engage with executives, and the less they want to see users in the meetings. They will actively lobby to keep the users out of the process, promoting the idea that only those at the top have the insights to make such “executive decisions.”

User-Based / Involved Decision Making

One of the most important reasons that SaaS can improve software selection is because SaaS vendors encourage users actually to use their systems. Their objective is to spread through user communities within companies through word of mouth and motivate them to tell management to buy more licenses or seats. That is to become an indispensable application.

SaaS software selection users have a higher likelihood of using the application. And because SaaS software vendors provide either trial versions of the software or the potential customer can buy one or a minimal number of licenses and test out the software without committing further. This allows companies to test multiple applications before deciding to purchase seats with one SaaS software vendor. Under this arrangement, it is less likely that the buyer can be misleading.

Some of the applications that I have seen purchased that arrived at the customer broken could never have been sold if this “test drive first” approach applied.

The Ability to Change One’s Mind

Up to this point, I have only been describing the initial software decision, but this is not the end of how SaaS can improve the quality and fit between the buying company and users and the software that ends up being used. The fact is, things change in companies. On-premises applications work much more based on winning a one-time decision. This is referred to in the industry as the degree of “lock-in” that an application has. The buying company takes longer to implement on-premises solutions, making the overall upfront investment larger and significantly reducing their ability to change their mind. That is lock-in.

I face this all the time when I am contracted to diagnose a system that has underperformed expectations. What I often find is that the company purchased an inappropriate application for their needs. I could have helped them much more if they had involved me in the software selection process rather than merely bringing me in to fix issues and close the barn door after the horse has taken its leave. Still, they trusted that decision to a large brand name entity that did not have their financial interests at heart.

Defending the Bad Decision

At the point where I a sometimes called in, the emphasis is “making the system work.” That is why a bad software selection, particularly a wrong on-premises software selection is so damaging. Because once it is made, even if the fit is quite bad, even if several things the buyer thought about the application turned out to be all sales hype, a group of influential people is incentivized to defend the purchase.

Companies have some comments that tend to predominate the conversation about the application but often actually have their basis in poor software selection.

“The training was not performed correctly the first time. We need to retrain the users.”

or

“The users aren’t getting the system, the users are the problem.”

or

“We need to get a gold/platinum/top grade consultant in here to fix the issues.”

This is not to say that these statements cannot sometimes be true. However, they are overused, and I have been present when a number of these statements have been made where it is quite evident to me that the ball was dropped during software selection.

• I have been dealing with the denial of bad software selection for quite some time.
• When I investigate the research that was performed to select software for some clients, I often find that the extent of the analysis performed into the software selection was to listen to the advice of an entity that had a financial bias.
• Why would anyone assume the best possible software was selected under such a design?

Mistake Recovery

SaaS helps reduce the financial impact of bad software decisions, providing the buyer with more flexibility.

• With SaaS purchases, in addition to having a better likelihood of making a better initial purchase, executives are much less likely to defend a poorly fitting application because the upfront investment is so much smaller.
• Every SaaS vendor that I talk to speaks of the importance of retaining their subscription base. On-premises vendors see the renewal of their support fees as much more of an automatic function.

Conclusion

SaaS has already had a positive effect on software selection. Its future growth will mean a boon in competition and software selection changing from its present state where lengthy and expensive sales pursuits are performed and replaced by much more trial-based SaaS software reviews.

Because of all of this, SaaS has the potential to make very significant changes to the software selection process and the sales and presales processes as well, as they are two sides of the same coin.

Disclaimer on the Nuances of the Strategies of Different On-Premises Software Vendors

All software vendors cannot be categorized by how they interact with customers based upon whether they are on-premises versus SaaS-based. I don’t mean to imply that all SaaS vendors are open and all on-premises vendors are closed. I am speaking of tendencies.

In fact, several software vendors that I know of that while being on-premises, actually operate much like SaaS vendors.

Probably the best way to think about it is vendors that compete more on the actual application’s attributes rather than on marketing hyperbole, influencing recommending/advising entities and that try to lock their customers in. However, the vast majority of SaaS vendors operate with a more open approach. The technology of quickly bringing up new customers to give out trial versions of software at low expense reinforces this operation. It should be remembered that the dominant on-premises vendors did not innovate saaS. It was innovated by the smaller vendors who had far less invested in the prevailing software sales and delivery model.

Update As of July 2nd 2021.

Over five years after this article was written, we find that this is one of the least accurate predictions we have ever made. SaaS vendors moved away from making their applications available to test, and many SaaS vendors are pretending they are SaaS but are not. Lock-in is still the name of the game, particularly for the largest vendors. The cloud service providers like AWS and GCP do allow people to spin up resources that are priced by the hour and minute, but this is more for infrastructure and has little impact on most applications.