I am a packaged software bigot. If the choice is buy v/s build, I always
vote buy - I am card carrying member of that club. I drank the Kool-Aid as a
young PwC consultant when I was implementing a US HR package in Saudi Arabia,
and found it flexible enough to customize for "multiple wives" in the
employee master record. I was given a team in London to
prototype configurations on SAP's R/2 software - was not much fun on the mainframe with
documentation mostly in German. But it was packaged software - I could not see
any warts. This was in 1989 when few outside Germany had heard of it. There was nothing packaged software could not do - cook
breakfast, iron my clothes. In my career I have implemented, analyzed, helped companies procure a whole range of packaged solutions - ERP, CRM, SCM on AS/400s, UNIX servers. Loved them all.
But something has happened in the last couple of years to shake my
unquestioning loyalty. Changing labor economics (offshore, rural, lowered contractor costs) have
made building new software or extending old software pretty darned cheap. At
the same time, packaged software vendors and systems integrators have not lowered the
cost of buying (as against building) much, in spite of all their talk of
"rapid implementations" and "accelerators". Oracle has
discounted software pricing some in the last few years but continues to expect
22% in annual maintenance. SAP has discounted core ERP functionality some, but
more than makes up for it with its vertical and other "engine" pricing. It
also wants to charge 17% maintenance from day 1 - in the past it used to allow
companies to pay lower they were "live". The Big systems integrators
continue to expect mega-pricing. Offshore vendors have had some impact but because
many missed out on the ERP/SCM/CRM package wave in the 90s, do not have enough
citations to be considered for initial implementations. They do better with
rollouts and "post-live" support services.
Here are some numbers. If you spend $ 1 on a software license, over the next decade you will spend between $ 2 and 3 in annual maintenance contracts. You will spend 50c to $ 1 in project team training (vendor classroom training, travel costs, additional licensing of a training tool like RWD that SAP recommends), You will spend between $ 1 and $ 5 with the systems integrator and software vendor consultants (in some cases the services may even be $ 10+ if you have a complex roll out). You will spend between $ 1 and $ 2 for every major upgrade - likely one every 3 years. So, even without factoring in costs of your own staff or incremental hardware you are looking at $7.50 at the low end and $ 21 (or more) at the high end for every $ 1 dollar of software license costs.
SAP and Oracle and their services partners may in different ways be taking advantage of the current market conditions (see a really nice statistical analysis of the software industry by Rick Sherlund of Goldman Sachs), but they are damaging the basic buy/build equilibrium. Aesop's fable about the goose which laid golden eggs comes to mind.
Are companies going to custom code their own general ledger, payroll and other horizontal functionality? No, but they will look harder at BPO, per transaction pricing models. And when it comes to vertical functionality in banking, insurance, healthcare and many other markets the option to custom build or extend legacy software will continue to look attractive. Especially when they can "bespoke" the customized system - with a package they have to configure their way through 70 to 80% of features they never need.
If you are a package fan like me, join me in trying to save the "goose". Not asking you to join PETA - but as card carrying members of the "buy" club we have to cajole, pound, work extra hard to keep "buy" economics much more sensible.
