The Great Global Seat Scam

Ever talk to a con man? he’ll tell you that it’s the smarter folk who make the best marks. No one is really dumb enough to draw their life’s savings out of the bank and hand the wad of cash to someone just so that they can hold it. No one, that is, except those who think they are canny enough to watch their money carefully.

Most global CIOs rather fancy their prowess round the negotiating table, and I think this is why they get swindled so regularly, and so thoroughly, by software companies.

Here’s a version of the scam I ran into last month. A company is about to buy a new “global” ERP software package from one of these ERP companies that’s promising all the usual global access hoopla. (No names here, and the circumstances have been altered for the sake of job protection.) Included in the deal is a “global” HR package that is desperately needed in the United States.

“How many seats shall we put you down for in HR?” asks the software salesman. “You’ve got 11,000 employees worldwide, right? And they’ll all be accessing the system. Better put you down for 11,000″?the CIO starts to say something?”and at a very substantial discount.” The CIO hesitates, just the way a mark does when a con man reassuringly offers to let him hold the money again. Then the CIO acquiesces.

But you see, that particular HR package doesn’t do anything outside the United States. You can’t pay anybody in New Zealand with the package because it doesn’t know about New Zealand payroll. You can’t report on total compensation in Japan with it because it doesn’t handle Japanese pensions correctly. Very little data about Germans can go in there because of German privacy requirements.

Inside the United States it will be used. Folks will use the self-service capabilities, and they’ll be happy with them. Corporate headquarters will use it as the worldwide HR database. Every employee’s name will go in there, and vital information will be copied into it from the HR systems that are actually used to manage employees in Tashkent, Uzbekistan, and Athens, Greece. But even assuming that some regional managers in Frankfurt, Germany, use it for appraisals, that only adds up to about 6,000 users.

I’m going into this in some detail be-cause I’m trying to make it sound like a plausible mistake, but in my experience, grotesque overbuying without even the shred of an excuse is the rule, not the exception. And it’s not just my experience. A senior executive at one of the Big Five?a former analyst at Gartner whom I’d better not name?estimates that the typical buyer ends up using about 70 percent of the seats he pays for. That doesn’t sound too bad, until you realize that this typical buyer is paying 40 percent more than he should. “And that’s at the end of the day,” the Big Five executive went on. “When you consider that they probably shouldn’t be paying for users until the users start actually using the software, the cost is considerably greater.”

To understand how important this last point is, remember that the useful life of one of these packages is roughly seven to 10 years. If a global installation starts out with the German headquarters and the European manufacturing sites, it may be four years or so before the teams finish in Kuala Lumpur, Malaysia. Even if they actually succeed there and the package gets used, they’ve had four years of zero return on the initial investment in seats, plus (if they’re not careful) 15 percent per year maintenance on those seats, and all this for software that has six years left of useful life.

You and I in our personal lives don’t buy a car because we’re planning on maybe using it in Brazil two years from now. But somehow when we sit down around a big cherry table on the top floor and we’re spending the shareholders’ money, it seems to make sense.

Why do people get taken in like this? The reason at the top of the list has to be a completely unwarranted confidence in one’s ability to strike a good deal. Buying software from an ERP salesman is pretty much like buying a Persian rug in Istanbul. If you work really hard and know exactly what you’re doing, you might end up paying what you should. Otherwise you’ll pay too much. The only question is, How much is too much?

But tell that to a CIO. I’ve done it. They give you that knowing smile and pass on. They might spend months with RFPs and long functionality lists, but before the pricing session their due diligence will be to call some 23-year-old analyst at AberGart or ForresMet and get some benchmarks. They don’t think they need to do more. After all, they didn’t make it to the C level because they were stupid.

And you know what? Most of the time they’ll be quite happy. After the deal is signed and sealed, both sides will get up from the table feeling confident that the other guy’s been had. But only one of them will be right.

It isn’t just hubris, though. There’s also corporate complicity. When you’re a CIO and you’ve got a hard-nosed business case that justifies an aggressive push toward a single global solution, the more money you spend, the more important your project becomes. And if you can negotiate a hefty discount on top of that, all the other C-level folks will pat you on the back. You’ll be some kind of hero. But if you told your wife you’d just bought a Ferrari on the same basis, it’s doubtful she’d be so congratulatory.

And finally, there’s a feeling that you’re just paying the going rate, however disguised it is. “Most software ends up as shelfware,” says Chuck Philips, the well-known Morgan Stanley Dean Witter financial analyst. It’s built in to the economics of the business?simply put, you don’t get all those developers working busily away in warrens from San Jose, Calif., to Bangalore, India, unless you’re willing to pay for a lot of stuff that you’ll most likely never use.

Now, seat scams are nothing new, of course; CIOs were paying too much for too many seats back in the days of the IBM 360. But the global seat scam has some special characteristics of its own.

First, it’s much more work to manage seats on a global basis than it is to manage them by site, or even by country. If you’re running a global installation, do you know whether you’re paying maintenance on seats you’re not using?

Second, it’s hard to manage the timing of a global installation. When you’re sitting around the table and you’ve already committed to your CEO that the Abu Dhabi site will be up and running in two years, you’ll be genuinely surprised when it turns out to be four.

And it’s only going to get worse. With the arrival of the Web, software companies have taken to charging for all those “casual” users from other companies who log on to see where their order is. Sometimes it’s a lump sum; sometimes it’s a low cost per seat. This casual user charge is certainly a great value?every customer who uses the Web rather than calling saves you money. But however great the value, you still shouldn’t pay for customers who don’t use it.

But how do you tell? Do you know how many customers there will be in Abu Dhabi who will use this service? Do you know when it will be implemented?and if it requires an Arabic self-service module that’s still being developed?

If you don’t, I’m sure your software salesman will be happy to give you an estimate.