What a bad enterprise software purchase will cost you

The costs of buying the wrong enterprise software

The costs of buying the wrong enterprise software

Credit: 123RF Stock Photo

If you fail to do the work upfront to select the best-fit enterprise software, you will pay the price.

A successful enterprise software deployment is defined as one that meets or exceeds planned ROI. A previous article examined the ROI benefits that accrue from selecting best-fit enterprise software.  This article considers the flip side of the coin, namely the costs incurred when an organization purchases software that is not best-fit for their particular needs, i.e. they purchase the wrong software. Under these circumstances, one of the following things happens:

  • The software goes into production, and the organization lives with the limitations.
  • The software goes into production, but the functionality mismatch eventually causes it to be replaced.
  • Some modules make it into production, but the software is never fully implemented and is replaced.
  • The software never makes it past the customer acceptance tests.

Each of these situations can incur many of the 16 costs listed below. Some of these costs are obvious, others not so much, but potentially many of them can apply to any situation where the best-fit software was not selected.

1. Replacement cost

The most obvious cost of a software selection failure is the cost of ultimately replacing the wrong software. This could also include early termination costs if multiyear SaaS or maintenance agreements were signed.

2. Dual system cost

When new software moves into production, the old system often runs in parallel for a short while. Then it may be maintained for reference purposes, or decommissioned.

However, if the new system doesn’t properly meet needs, the old system will stay in production until those problems are resolved. In addition to duplication of costs (admin, backups, disaster recovery etc.), data must be entered into both systems. If the transition period is too long, this increases labor costs.

3. Customization costs

Limitations of the new software can tempt companies to customize it. A problem with customizing (as opposed to configuration) is that customizations must be tested and possibly re-written every time the software is upgraded. Every upgrade cycle incurs customization costs, which accumulate during the life of the software.

4. Upgrade costs

Not entirely understanding their needs, an organization may select the wrong version of the software. After encountering problems, the decision may be made to upgrade to the next product level. With SaaS, this can mean paying for unneeded functionality just to get a particular feature. For software in the data center, this can mean a complete upgrade. In both cases, there are costs that could have been avoided by selecting the best-fit software in the first place.

5. Third party product costs

There is nothing wrong with using third party add-on products to extend the feature set of existing software, but to minimize costs and other problems this is best avoided with new purchases. For example, think of a company with an extensive field sales team. If the accounting system can’t support expense claims, third party claims software must be integrated with the accounts.

Third party costs include the product itself, integration, maintenance and admin costs. Problems include disruptions, e.g. when there are data discrepancies and sync interruptions between the two products. The organization may be forced to delay upgrades to the core software until a compatible version of the third party product is available. Third party vendors tend to be smaller, and there is the risk of them going out of business. Why not minimize the need for third party products by selecting best-fit software in the first place?

6. Software selection costs

The new system is such a poor fit that the organization decides to restart the project. At this point they realize they need consulting help to select the replacement software, which, of course, is not free. Read how Marin County had to spend $1 million to restart a failed ERP project.

7. Re-implementation costs

If the software is replaced because it is an outright failure or a poor functional fit, funds spent on implementing the wrong system are written off. There is another round of implementation costs for the new software.

8. Retraining cost

Adequate end user training is a critical part of rolling out new software, and skimping on training is a recipe for disaster. In addition to the direct costs for a second round of training, there is the cost of training fatigue. Employees have too much to absorb; morale sinks and user errors increase.

9. Business disruption cost

Any major enterprise software change disrupts business to some extent while employees take the time to learn the new system. If this is not communicated properly to customers, sales can be lost to competition. Replacing a failed system doubles this disruption cost.

10. Unknown requirements cost

Evaluating and selecting new enterprise software is a journey of discovery for an organization. Done properly, this uncovers requirements the organization does not know they need. Done badly, these unknown requirements are discovered during implementation when it is too late. If the wrong software is purchased, there is the cost of meeting those requirements by some other means.

11. Time cost

This is the cost of time spent working on problems that would have been avoided by selecting best-fit software in the first place. Support staff spends time trying to develop ways to work around software limitations. Occasionally add-on products are required for missing features, which takes more time to evaluate, install and maintain. End users also waste time working around deficiencies.

12. People costs

Related to time costs above, extra employees may be needed to overcome limitations of the new software. For example, a client had bought the wrong ERP system and needed a small army of accounting staff to create reports in spreadsheets. They also had to use spreadsheets to manage things like returns because the software lacked those features. Selecting the right ERP system in the first place would have avoided those labor costs. The new system may cause morale to drop, and increase recruitment costs. See Computerworld article.

13. Opportunity costs

This is a hidden cost of selecting the wrong software. Employees spend time working around software deficiencies, causing them to miss new business opportunities. For example, consider a CRM system that demands more work and decreases the time salespeople can spend with customers. The opportunity cost of the wrong software comes from sales missed because the salespeople don't spend as much time with their customers.

14. Customer perception cost

Customer perceptions of an organization depend on the responses from that organization. If the wrong software increases response times, errors and unresolved problems, customers head for the competition. Sometimes called churn, this is the perception cost of the wrong software.

15 Legal fees

When a software project fails, customers may feel the vendor or system integrator misrepresented product capabilities, and take the offending party to court. Legal fees are high, and success is by no means guaranteed as Marin County found out when they sued SAP over a failed ERP implementation.

16. Career cost

The final cost of wrong software is borne, not by the organization purchasing the software, but by the employees involved with the project. Employees who lead failed software projects can bear a personal cost ranging from being denied promotion to being fired. This can go all the way to the top as the Foxmeyer CEO Thomas Anderson found out when he was asked to resign after promised ERP savings failed to materialize. However, just being associated with a failed system can taint careers and diminish prospects of any employee when applying for a new job.

This list of cost highlights just how expensive it is to purchase enterprise software that is not a best-fit for the organization. Like many other facets of business, if you do the homework up front, you reduce overall costs. If you take short cuts and buy the wrong software, you pay the price.

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