by Andy Hayler

Live long and prosper

Feb 24, 20124 mins
IT StrategyTelecommunications Industry

When companies consider buying a new piece of software, they will usually go through the process of considering their requirements and mapping these to the capabilities of the vendors that they have shortlisted.

Software tends to linger much longer than most people imagine, so it is also important to take into account the likely longevity of the product or its vendor.

You don’t want to have to replace the software within a year because the product was discontinued or the vendor folded.

There are common misconceptions around this.

It may seem that the safe way is to only buy from giant vendors whose long-term financial security is in little doubt.

However there are risks here too.

The vendor may indeed be secure, but you are not buying the vendor: you are buying a product line.

Large companies are ruthless about the financial success of their business units, and if a product line consistently fails to hit its financial targets then it will be eventually be shut down.

It was said that “No one ever got fired for buying IBM”, but I can recall the woes when I was working as far back as the 1980s when one of IBM’s ‘strategic’ product lines was abandoned (ADF in favour of CSP), leaving customers to contemplate what to do with their mass of newly obsolete applications.

This is not to pick on IBM: Oracle and SAP have shut down product lines that customers were using because they were not delivering expected business performance or no longer fitted their business goals.

If you select software from a smaller vendor then you have a different problem.

The vendor may well just have one major product which it is highly unlikely to drop, but instead you have the risk of the company folding altogether.

Financial due diligence is necessary, but can be quite difficult to carry out for companies that are privately listed.

I can recall many years ago looking at a small software company that Shell was considering purchasing from.

Despite some fairly evident financial concerns, the venture capitalists backing the company produced hearty endorsements, declared their undying commitment to the vendor and their financial director came up with all sorts of reassuring claims.

I nonetheless recommended passing on the purchase and the company duly folded about a year later. Such clear-cut cases are rare, however, so how do you go about looking for reassurance that a software company is going to last a while?

There are no sure things in this world other than death and taxes, but there are some signs that you can look for regarding the health of a vendor or a product line:

1 Recent growth in terms of new customers Relatively small software companies should be adding new customers at a good rate, and this information should be obtainable, even if they are cagey with their revenue figures.

Growth is easier for smaller companies than larger ones, but if a company is steadily adding 20 per cent or so to its customer base each year then it is probably in healthy shape, especially if such growth has been repeated over the years.

By contrast, a company which has 100 customers but which has added only a handful in the previous year should set off a warning signal.

Software companies, like sharks, need to keep moving forward to survive, and new revenues are needed to pay for further product development.

2 Clarity of marketing messages How coherent and consistent are the marketing messages of the company?

Do they describe an easily-understood and real problem and clearly articulate how they tackle it?

One quick test is to ask yourself whether you can summarise the key value of the software for a colleague.

If your recollection is that it was very clever but you can’t quite place what it really did, then you can be sure that others will have the same issue.

The ability to clearly communicate the value of a product is key to marketing, and inability to do this should set off another alarm bell.

3 Consistency of marketing messages A similar bell should go off if the company seems to be constantly changing its message, perhaps chasing the latest industry trends: “We do X too”.

Companies that prosper tend to stick to a particular market niche and focus relentlessly on that, gradually gaining market share as their reputation grows.

4 Solid ROI All the due diligence in the world will not fully protect you from software product lines disappearing, however, and any software purchase should have a robust business case.

If the product pays for itself within a year or two then it matters less if the product turns out to be dropped 10 years later.