Evaluating software? Consider costs first
Software Buyers' Guide
By Susan Avery -- Purchasing, 7/18/2002 6:00:00 AM
PURCHASING Magazine's 2002 Buyers' Guide to Software for Purchasing presents the latest applications for use by buying organizations. In the pages that follow, buying organizations will find a listing of companies and descriptions of the purchasing, manufacturing, logistics and warehousing software they provide (along with pertinent contact info). Yet, as many buying organizations well know, there is more to buying software than comparing product features and functionality.
It's important (and key to a successful negotiation with a software supplier) to consider costs surrounding the software purchase (total cost of ownership), says Gregory A. Buchanan, a supply chain consultant based in Memphis, Tenn. Well before the buying organization makes its product selection, Buchanan says it needs to address the following six issues, which work for both shrink-wrap and non shrink-wrap software packages.
Software license expenses
Buchanan recommends buying organizations first learn more about the type of licenses being offered by asking the supplier these questions: Is the license perpetual, periodic/subscription, irrevocable, transferable, nonexclusive and assignable? Can the software be used worldwide, with local (current and future) languages and functionality? Beyond initial acquisition cost, how will future product needs be calculated and priced? What are the options for a buying organization to grow at a defined price structure or is there an appropriate index-based structure that's more beneficial? ('Believe it or not, some suppliers do not produce a price list for their product,' says Buchanan.) In an evaluation, he suggests including the expense impact of the direct and indirect application, operating system (OS), database, tool, middleware/translator and upgrade (not covered by maintenance) licenses over the buying organization's defined period of time.
Fitting the type of licensing agreement to the buying organization's needs is critical to maximizing value and minimizing expenses, Buchanan says. 'Buying organizations should thoroughly define current and future needs to determine which licensing model will work best.'
Software maintenance expenses
Software maintenance has taken on many different names in recent years. Buying organizations must understand what is included in a software maintenance program. Are product upgrades and patches included for both major and minor revisions? If so, what is the timeframe expectation for upgrades and patches? Are service packs/call support included? If so, what are the parameters (i.e., number of calls per year, other) and service level resolution commitment? 'By understanding software maintenance composition and the organization's needs, the buyer can complete the expenses associated with the product over the given period of time,' says Buchanan. 'Indirect software expenses must not be overlooked. For example if a buying organization is purchasing an application software product, what impact will this product have on the OS, database, tools, and middleware/translator license expenses?'
When comparing multiple products, buying organizations must consider each product's warranty period. Are they the same? How are they different? Will product corrections, modifications, enhancements and releases have the same warranty period? How will the buying organization receive price advantages for the supplier's current and future products? Does the supplier have a problem escalation procedure? What is it?
How is maintenance renewed? Annually? Other? What is the coverage for maintenance? 7x24 or 8x5? Should maintenance increase, what will the increase be based on? What advance notice is provided? What would the annual cap be? How long will the supplier support the current software and how many previous versions? Will the supplier automatically notify of any new fixes and/or patches? Should the buying organization cancel maintenance for any period of time and decide to reinstate, how would that be handled?
Buchanan says that this can be the most challenging category: 'Buying organizations cannot be shy in asking questions to complete this category of the software total cost of ownership (TCO) model.'
Hardware and peripheral expenses
This is the most straightforward category. In implementing software, the buying organization needs to determine direct and indirect expenses related to servers/local area network (LAN)/wide area network (WAN)/desktop, storage/ printers/other hardware, upgrade(s), hardware for contractors/ consultants, shipping and disposal. What impact do these expenses have on depreciation and cost of capital over the buying organization's defined period? Also, Buchanan says, 'understanding how the software product can be transferred to future platforms must be included to gain long-term expense clarity.'
Professional services expenses
Beyond the acquisition of the software, who will be responsible for training, installation, testing and validation? Many buying organizations do parts and/or all of the above. In any of these scenarios, what will training expenses be for the software, hardware, networking, others? What will the installation expenses be for the software, hardware, network, other? What will the testing and validation expenses be for the software, hardware, network, other? Will there be any custom modifications or interfaces that need to be calculated into the model?
Miscellaneous expenses
In this category are transportation, travel, telecommunication, documentation, license management, audits, software escrow, and contingency planning for mergers, divestitures, acquisitions, and tax expenses. Due to buying organizations diverse needs and requirements this is not intended to be an inclusive list, but rather a starting point.
Hidden expenses
These expenses often get overlooked or taken for granted. But, in the pursuit of capturing the TCO, they must be listed. Hidden expenses include items like floor space, energy, personnel, and others to keep software purchased operational.
Prior to the software purchase, the buying organization also needs to ask these questions: Does the product have any viruses, traps, time bombs, trojan horses, keys, and/or expiration devices? If so, what has been the history of these experiences and expenses with other references or customers? Again, buying organizations' are different and each must define and include all their hidden expenses.
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