Bad idea: suing your software vendor

Thomas Wailgum, blogging for CIO magazine, thinks that it's not wise for customers to take legal action against software vendors. He looked at the lawsuit against SAP for $100 million, filed by Waste Management, and decided to interview IT executives of other organizations to get their perspective on the litigation option. He found a strong bias against the idea of suing vendors:

In recent conversations with IT executives I asked them if they had ever sued a software vendor and whether, in retrospect, it was a good thing to do.

Most had known about or participated, in some capacity, in the litigation process against some well-known and some not-so-well-known vendors. And what nearly all of them had decided was that suing your software vendor just wasn't a smart thing to do.

Sure they had all been disappointed by software packages and could tell tales of broken vendor promises, but when it came to critical enterprisewide software implementations, the bigger picture mattered most.

The reasons cited against taking legal action were three:

1. Enormous cost of litigation.


2. Odds against winning the case.


3. Distraction from the business that the litigation would bring, as executives would need to participate in discovery, etc.

Wailgum admits that sometimes the threat of legal action is useful to "get vendors to return a call or fix the bugs infinitely faster than retaining an army of lawyers." But still he insists that "initiating a major lawsuit against a software vendor should be the very last option."

Generally, I would agree. I have seen one or two cases over thirty years where there may have been a clear misrepresentation and the threat of legal action was justified. Generally, though, vendors recognize their culpability in such cases and they get settled long before they reach court.

But I've seen more cases where the customer simply didn't do its homework and bought into the vendor's sales pitch without due diligence. Rather than admit that they didn't really understand what they were getting into, customers feel the need to blame the vendor. Legal action is a way of saving face. The problem is more acute among small companies, where the whole decision might be made by the owner. In larger companies, there is often enough shared leadership to prevent a purely emotional response. And better legal advice as well.

So, if lawsuits against vendors are generally counter-productive, what's the alternative? As indicated above, doing one's homework up front is the key. Software decisions, especially in small and mid-size businesses, are still too often being made based on too little information. Key requirements are not defined. Critical business processes are not mapped. Software demonstrations are based on the vendor's scenarios instead of the customer's. References are not checked, or they are limited to those that the vendor provides. And customers underestimate the resources that they will need to devote to the project to make the implementation successful.

There are many other keys to successfully implementing major systems. But I agree that legal action is not one of them.

Workday: evidence of SaaS adoption by large firms

Workday, the on-demand HR system provider, has signed up two new mega-clients: Flextronics and Chiquita (hat tip: Vinnie Mirchandani), providing evidence that software-as-a-service (SaaS) is not just an option for small companies.

Workday is a new human capital management (HCM) system provider, founded by David Duffield after he sold is previous software company, PeopleSoft, to Oracle.

According to Information Week, the Flextronics deal is huge, and Workday won in a bake-off with all the major traditional enterprise system vendors, including SAP and Oracle:

Flextronics, which designs and manufacturers parts for automotive, cell phone, and computer companies and grossed $28 billion in sales last year, selected Workday HCM to replace some 80 HR systems being used by the company in 30 countries, said Flextronics CIO David Smoley. The decision, he said, involved a "direct comparison with all the alternative, on-premise [software] vendors," which likely includes SAP and Oracle.

The deal with Chiquita is also large, covering 26,000 employees.

As a green field development effort, Duffield's company is creating a pure SaaS offering without the encumbrance of a legacy on-premise product. Though such offerings have had some success in smaller organizations, have had a mixed track in larger companies. Salesforce.com is the best known example, in the CRM arena, and relatively successful as a choice for large organizations. On the other hand, Netsuite, which attempts to provide the entire range of ERP functionality, has had some rough sledding even among smaller implementations.

Workday is the latest high profile attempt at establishing an enterprise-class solution on an on-demand platform, this one specifically for human capital management (HCM), with functionality also rolling out for financials, purchasing, and payroll. The projects at Flextronics and Chiquita have just begun, and success is not guaranteed. But if successful, they will offer an existence proof that SaaS adoption is moving up-market to large organizations.

It will be a good sign and a welcome trend.

Update, 4:43 p.m.: Workday's wins are getting a lot of attention from other bloggers as well. Phil Wainewright notes that SAP must be really hurting with the loss of Flextronics to Workday. He also mentions that Salesforce.com is going live internally on Workday's HCM service, "extending its ambition to switch completely to on-demand products for its own internal use."

Dennis Howlett has lots of good insight, coming from his close association with Workday. He explains why Workday has found itself going after large customers, which wasn't its original intent. He also points out the nascent threat that Workday poses to SAP and Oracle:

The customers Workday is winning - it has 40 - are those that want to get off Oracle/SAP. Until now, there hasn’t been a choice that offers enough of an overall compelling package to make the switch....Workday is in the right place at the right time, which is more luck than judgment.

Of course, SAP in particular is not standing idly: its developing its own SaaS ERP offering for the SMB market, its Business ByDesign. But Workday's wins show that it will be facing new competition when it gets there.

Related posts
Dave Duffield debuts new on-demand ERP
All not sweet with NetSuite
Dave Duffield's next thing: bigger than the White House

Custom systems: alternative to ERP

Vinnie Mirchandani brings up an interesting point: outside of the manufacturing industry, the major ERP vendors have a much more difficult time breaking into core operational functions.

Upon returning last week from SAP's Sapphire conference, he writes:

I asked two SAP executives - Jim Hagemann Snabe and Bob Stutz - at Sapphire about such verticals [such as banking, utilities, insurance, and health care]. Jim acknowledged that legacy, typically custom-developed vertical applications, have been tough to displace particularly in the US. In a few deals where I have seen SAP vertical proposals, I can tell you the "displacement" is tough because SAP's [total cost of ownership] (particularly those of its SI partners) has not been compelling. You could custom develop that functionality again for cheaper. Just maintaining the legacy apps is even cheaper.

True ERP is found almost uniquely in manufacturing firms
Vinnie hints at a point that is not widely recognized. In big companies, ERP--real ERP that forms the core transactional processing platform for cross-functional business processes of an organization--is still largely a manufacturing industry phenomena. Outside of the manufacturing sector what you generally have is custom-developed systems, or commercial software for specific business functions, interfaced (at best) with the "horizontal" (cross-industry) modules (e.g. accounting, HR) of the major vendors.

So, when a major vendor speaks of having a strong presence in healthcare, banking, or insurance, what they mean is that they sell a lot of their accounting, HR, business intelligence, or CRM modules into that industry. What they are not doing is replacing all the industry-specific systems for those customers.

Now, to be fair, Oracle is an exception in certain industries. In 2005, Oracle acquired I-flex, a vendor of core banking systems. Earlier that year, Oracle acquired Retek, a leading provider of retail systems. But still, it would be really, really interesting to find out how many of Oracle's customers are running all Oracle software, now three years later. I'm sure there are some, but I doubt there are many.

The reason is that the manufacturing industry has had over 30 years to figure out how cross-functional business functions should look in an integrated system. Starting with the so-called MRP revolution of the 1970s and continuing with MRP II systems of the 1980s, and ultimately ERP in the 1990s, there is now pretty much widespread agreement on the logical architecture of an integrated system for a manufacturing enterprise.

Business case often weak for replacing legacy systems
Today it is rare to find a manufacturing company writing its own material planning or shop floor control systems. Perhaps in some very specialized niches, but it's rare. Not so in banking, or insurance, or retail. Those industries are loaded with examples of companies that continue to run the core of their businesses with custom-developed software. The business case for replacing those systems--especially with those of a vendor that wants to charge 22% of the net license fee, annually, for maintenance (i.e. Oracle and now SAP). Maybe for HR, or financials, where I can justify the cost in terms of not being responsible for regulatory changes. But for my core systems? No way.

Again, for smaller companies, I think packaged software makes a better business case for non-manufacturing sectors. Many have far less investment in legacy systems and have far fewer resources to develop or maintain custom systems. But for large multi-national organizations in, say, banking, insurance, energy, transportation, or utilities, it's hard for me to imagine them standardizing all of their core operational systems on a single vendor such as SAP or Oracle.

I would love to be offered some evidence to the contrary. If you know of any, let me know.

An alternative to ERP
Where does this leave organizations that do not see the value in replacing core custom systems? The answer is to make an investment in refreshing such systems. For a fraction of the cost of ripping out and replacing legacy software, an organization can make a concerted effort to invest in modernization, training, documenting, and even redeveloping these critical operational systems.

Such an approach has its own drawbacks, of course, in terms of an organization's ability sustain a professional software development team. But in terms of overall cost and risk of disruption, refreshing a legacy system can be an attractive alternative.

Update, May 13: Sigurd Rinde writes in the comments section that ERP has not taken hold in certain non-manufacturing sectors because business in those sectors is largely non-transactional:

...the core for health, government, education and consulting is mainly Barely Repeatable Processes where each event/task can lead to many user chosen changes to the workflow path (a physician with an Xray in hand..)

I disagree. Core processes in healthcare, for example, are highly transactional: appointments, patient visits, diagnoses, treatments, patient charges, prescriptions, insurance claims, reimbursements--these are all transactions. The fact that EDI is such a big part of healthcare confirms the transactional nature of the business.

Rather, I think the problem goes back to the history of application development in each industry. I may be not as familiar with the evolution of business systems in non-manufacturing sectors, but I don't believe there has been the same concerted effort in such sectors to establish a standard view of core business processes as there has been in manufacturing. APICS played a big role in this effort, and I don't know of a corollary in other industries. Again, my knowledge may be limited, so I welcome correction on this point.

More discussion between Sig and me in the comments section.

Related posts
Oracle moves into core banking applications

SAP encounters rough patch with Business Objects

There are indications that SAP is not having an easy time with its new ownership of Business Objects. According to a note late last month on DM Review, Business Objects emailed its customers to apologize for "issues related to poor service including delayed deliveries of the company’s technology."

The email originally sent to customers and forwarded to DM Review was signed by Pascal Clement, VP of Enterprise Information Management at SAP/Business Objects. It stated in part, “As we look back at the past several weeks, it is painfully obvious that our internal system issues have brought challenges and unwanted distractions to your ongoing operation of Business Objects software solutions. To be specific, many customers have not been able to receive our technologies in a timely manner. You have our most sincere apology for these issues and also our total dedication toward immediate resolution.”

Responding to DM Review's report, Franz Aman, VP of Business Intelligence Platform Marketing at SAP/Business Objects, then issued a statement:

“Recently a small number of SAP/Business Objects data quality customers have had difficulty receiving technology support in a timely manner. We acknowledge the situation and sincerely apologize for this temporary inconvenience. Issues with migration are currently being resolved and we have put additional resources and staff to address the issues immediately. Customer support managers have all been apprised of these measures and we did not hesitate to contact our customers directly as well.”

It's hard to tell whether these problems are related to the SAP acquisition of Business Objects last year, or whether they would have happened anyway. Nevertheless, they take some of the wind out of SAP's sails, which was recently boasting that Business Objects was taking deals away from Oracle for business intelligence solutions.

Related posts
SAP winning BI customers from Oracle
SAP to buy Business Objects
Oracle hustles Hyperion
IBM buying Cognos
Two more business intelligence vendors are hooking up
Vendor consolidation hits business intelligence sector

Enterprise software sales holding up, despite soft economy

We know that IT spending is not immune to an economic downturn. Our current research at Computer Economics shows a definite softening of IT executive expectations for spending growth in 2008. "Anemic growth" is how we described the IT spending outlook back in December. Preliminary results from our IT spending survey currently underway seems to be confirming that forecast.

Nevertheless, anecdotal reports seem to indicate that enterprise software sales--or at least buyer activity--seem to be continuing at a fairly strong pace. I know of several new deals in the early stages of evaluation here in Southern California, and vendor personnel in this area are reporting quite a bit of activity and interest. It certainly doesn't sound or feel like the early part of this decade, when things came to a screeching halt.

On the other hand, several vendors are reporting quarterly numbers beneath expectations. Oracle, SAP, Epicor, and others missed or came in at the low end of their forecasts. Even Infor, which is privately held, has reportedly told its investors that new license deals are slowing or being deferred to future periods. None of this is surprising in light of economic uncertainty. What is notable, however, is that the misses are not big, and certainly not what we'd expect in a major downturn.

Confirming this view, Josh Greenbaum reports from SAP's Sapphire conference in Orlando that enterprise software sales are better than they appear.

If you look at SAP’s last quarter, and believe the formal and informal guidance they’re making about the current quarter, and catch the buzz on the conference show floor, then the possibility that SAP, and much of the enterprise software market it represents, are relatively recession-proof starts gaining real credence.

He concludes by crediting the shift in vendor attention to how to deliver real business value to customers:

The bottom line is that years of pushing the value of enterprise software in terms of its contribution to productivity and cost-savings is paying off once again. And years of honing a marketing message that focuses on delivering business value to line of business managers — the men and women who are stealing the prerogative of software spending from the CIO — is paying off in real spending on enterprise software. Especially in recessionary times, this spend to save message works well, even if it takes a little more time to make the sale and a few more layers of management to give the approval. SAP is not alone in this trend, but their example is a particularly strong one. It may be that 2008 will be a year of relative abundance for enterprise software vendors, even as belts are tightening at the very customers who are making this abundance possible.

Josh might be overstating the case a bit. I think credit also goes to IT executives that have been operating under quite a bit of spending restraint over the past five years, in spite of economic good times. With fewer excesses in good times there is less pressure for drastic cuts in bad times.

The uneven nature of the current downturn is also a factor. Financial services, consumer goods, and home building sectors are the industries that are hardest hit and where IT spending is under greatest pressure. U.S. companies that have significant export business are actually benefiting from the weaker dollar. Those firms may be actually increasing their investment in IT to support their international markets.

Whatever the reason, signs that enterprise software sales are holding up is good news, for vendors and customers alike.

Rimini Street to provide third-party support for SAP

As if it didn't have enough on its plate providing third-party support contracts for Oracle customers, Rimini Street is getting ready to do the same thing for the SAP installed base.

So says a press release from Rimini Street this morning from SAP's Sapphire conference in Orlando. (The release is not yet posted on the firm's website.) Rimini Street claims much interest from SAP's installed base in having an alternative to SAP's support contracts.

Vendors' money grab
One major driver in the interest from SAP clients is SAP's increase in maintenance fees. Formerly an annual charge of 17% of the client's software license cost, software maintenance pricing now risen to 22%, which just happens to match Oracle's pricing.

From SAP's perspective, I suppose it felt it was leaving money on the table. From the client's perspective, however, it's hard to understand why it is necessary, in essence, to completely repay for their system every four years.

The ability of Oracle and SAP to get away with charging 22% for software maintenance shows how much pricing power is in the hands of the major vendors. They may do whatever it takes in terms of initial license fees to win the deal, knowing that once they are the incumbent, the 22% is a recurring revenue stream. More and more, for these two players, ERP is all about maintenance revenues. I don't know of any customers that feel this level of pricing is justified.

The business case for third-party support
Rimini Street, which claims its revenue quadrupled in 2007, is taking advantage of this gap between the vendors' price and value delivered. Ironically, SAP itself tried to exploit the same situation by buying TomorrowNow, which offers third-party support for Oracle products. (In another twist, TomorrowNow was co-founded by Seth Ravin, the founder of Rimini Street). But Oracle was able to, essentially, shut down TomorrowNow's business by suing SAP and TomorrowNow last year for "massive theft" of Oracle's intellectual property. That case is still in the discovery phase.

How long can Rimini Street avoid being in the cross-hairs of Oracle (and now SAP)? I have no doubt that the firm has plenty of legal advice and all the necessary policies, procedures, and practices in place to defend itself in the event of a lawsuit similar to that brought by Oracle against TomorrowNow. At the same time, you can't stop someone from suing you.

I regret that Oracle's legal action against TomorrowNow is probably scaring away other potential new entrants into the third-party maintenance business for SAP and Oracle. That's too bad. A thriving third-party support industry would go a long way toward keeping the vendor's money grab in check.

Related posts
Rimini Street says no thanks to SAP and TomorrowNow
Court orders mediation in Oracle vs. SAP/TomorrowNow case
Oracle wants to broaden lawsuit against SAP and TomorrowNow
SAP lists TomorrowNow as a discontinued operation
TomorrowNow and the future of third-party support providers