MRO Magazine

Acquiring software in the new age


Industry

December 14, 2000
By PEM Magazine

It used to be simple. You needed a new maintenance management system, and you had two choices: build something small or, if your need was larger (a few or more users, some robust features, and you didn’t know how to write software), you bought a specialized package.

And whether you built it or bought it, it generally did what you wanted. It had a nice little "database" in it, it gave you some information, answered your questions, and made some historical reporting easy. Whether the problem was maintenance management, work order tracking, spare part inventory, or whatever, it was contained in your department and your local solution offered you some benefits.

No longer. Now everything needs to be integrated. That was two years ago. Last year someone told you it needed to connect to the Internet. And this year, it needs to be connected with applications you’ve never heard of — some on the Internet, some because of the internet, and some because of other developments in the company. And everyone needs to know everything. That nice little work order tracking system you had suddenly isn’t connected to the company ERP, and the integration is leading to duplicate entry, some errors and is a growing nuisance.

More importantly, it’s also becoming clear that by putting in all the information there are some big wins available. Everything is becoming more competitive, and big wins are good.

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Historical choices — make or buy?

Make
Making software, or the usual software development process, was typically only practical if the need was small, or necessary if the problem was unique. The proliferation of little database systems to track everything from certification and credentials to work orders is nothing short of rampant in most medium and large companies. Talk to almost anyone about the tools they use, and at least a few of these tools show up.

The other case where you needed to build software was where no reasonable commercial product exists. While this is becoming less and less the case, it is useful to remember that most commercial products have their roots in some innovative idea launched in the bowels of some company’ s operations, and later became commercialized. There are still lots of useful things that commercial products don’ t do that help innovative companies to move the yardsticks forwards. But that represents a good test.

Buy
The case for buying software was sometimes tricky too, but generally got approved. When you needed a tool, you could usually find either an inexpensive point solution, or a more easily approved module to a larger company investment, like a special module of their ERP. But often that ERP module didn’t seem such a good choice — it was often more expensive than the point solution, it had higher maintenance costs, it did new things you didn’t need to do, and the kicker was, it usually didn’t do everything you wanted quite as appealingly as the little point solution to which you compared it. The benefit of integration that the ERP vendor may have also promised seemed nice, but it may have been unconvincing at the time. But at least the path was clear. You knew where to go to find products, you knew the choices and you never really worried much about what was coming in a year or three.

New choices, new issues

Making software
This choice continues to exist, though it is becoming increasingly difficult to build meaningful larger tools as the software explosion offers new tools for just about every problem ever imagined — though admittedly not always great tools. In those pockets where there is some software development talent, and where good modern tools are put to use, it is possible to develop robust applications that make a meaningful difference to operations and management of industrial plants.

Buying software
This has undoubtedly become considerably more complex for your average support function. While the principles remain the same, all the dimensions have become more multi-faceted. Where you go to get software has grown (see below — Sourcing software becomes more complex). What software can do for you has become harder to evaluate. Less tangible benefits like integration have become more tangible. And the pricing formulas have become more sophisticated. And everyone is talking about software helping you to modify your processes — with rich promises, and while you are convinced your processes can be improved, which vendor is right is becoming part of the question. And finally, it’ s no longer even clear you need to buy the software.

Renting software
This is the newest idea, and while it’s been around for a while for big companies with big problems, it has become widely practical only with the Internet. It is increasingly becoming a viable option and offers a number of benefits:

– Monthly payment models, avoiding the large capital requirements;
– Forcing the adoption of more "vanilla" implementations, which lowers costs, increases time to market, and prevents the customization which often re-introduces older, less effective practices;
– Typically rented software will run as part of a service, offered by some form or other of "outsourcer" and what you are buying is really the service of using the software. This has the further benefit of freeing you from owning and maintaining the hardware.

In times of rapid technological innovation, software becomes obsolete in short time frames and new versions come with high upgrade costs. The costs come typically from needing more hardware and more labour to implement the new versions. In this scenario, renting software often provides a net cost advantage when considering the total cost of ownership.

The biggest concerns with this model generally revolve around the concept that if you don’ t own it, you don’ t control it. With rented software you can’ t make it exactly what you want it to be. What if it goes down? What if your communications fails?

There are of course a host of new issues:
– Organizations are no longer inspecting software agreements to see their rights and obligations, now they are signing software service contracts, and measuring performance;
– You select a supplier on features, but you evaluate the supplier on service. We need new evaluation models and new performance monitoring models;
– Things you completely controlled before, like your security environment, are now shared and integrated with your supplier. This can expose you to new risks, but can also bring some benefits (many organizations really don’ t do that good a job on security — you can mandate it when it’ s a service.);
– You are, even more than before, consigning key tasks to a supplier. You are looking for a good partner to assist you — and should be evaluating a potential supplier on that basis;
– Finally, the financial case is generally more complex. While the purchase agreement was a relatively well understood transaction, the rental/outsourcing deal will be a somewhat more sophisticated agreement with some continual tugs.

Sourcing software also becomes more complex

The next issue that has become more complex is the whole notion of where to go to get potential software and services. Assuming you are buying or renting software (i.e. somehow exploiting a package), there are many more choices than before. The following sections describe the range of choices.

Point solution vendors
There is a vibrant market out there in many areas of specialty suppliers, making a unique software product to fill almost any niche. The problem is finding it. Usually you identify a point solution vendor in either of three ways:

– They’ve come knocking on your door;
– You scanned your competitors or other companies with like challenges and solicited their vendors; or,
– You used a consultant. Your consultant will attempt to scan the landscape, identifying the key packages, and pointing out your options. And the vendors are likely courting the consulting firms (certainly if it’s a big consulting firm) so the consulting firm should have some awareness of the product.

But beware, your consultant will likely only be aware of the larger, more important players in any niche. They might see it as too risky to recommend a product that is new, precisely because it has no track record.

ERP vendors
The ERP vendors are increasingly offering a full service package, with specialized modules that are delivering continuously increasing coverage. If there is an ERP vendor established in your firm, it will likely have a module or a partnership with someone who does, to address your need. This is a good place to go looking for important modules.

Hardware vendors
Your hardware vendors have almost certainly also formed relationships with software suppliers of almost every stripe. The hardware vendors of note here are the ones who sell specialized hardware that are used in maintenance, planning or other similar activities.

Often highly technical test or other plant equipment will support data feeds, and these vendors will often be able to offer either their own software or partner’s tools to support your application needs.

Competitors, partners & suppliers
The final category of software source may well be other players in your industry. There are many examples, in many industries, where a large player has developed software that is used by its suppliers or customers. In some cases, the software has become so well entrenched that it has become a de facto standard, and may be offered on a commercial basis.

Renting software — different models

Given that you’ve now found the software you want, and if something other than buying it outright appeals, there may be some preferred model to rent it. The vendor may have a preference that it presents to you. Or you may have a wide-open field. There are at least five different models to rent software, with more and more variations on them, emerging all the time.

Outsourcing
The first, and still a common one, is to strike some sort of custom or unique arrangement with a firm that can offer you the service. Generally the firm in this case will only offer the "hosting" of the application. The hosting service will offer you some hardware capacity, some performance guarantees, but you will be responsible for installing, tailoring, and operational efficiency. While this is a growing business, it is the lowest level of outsourcing.

ASP (application service provider)
A middle ground position is the Application Service Provider (or ASP). In this option, the firm knows the software you are choosing and will run it and manage it for you. Their responsibilities will include, in addition to the hardware, the software installation, tailoring to your specifications, and the monitoring of the ongoing application to ensure it continues to perform as required. They will typically manage upgrades, ensuring seamless cutover of your operating environment as appropriate. Your responsibility is to use the system, and this is an increasingly attractive and common option for many firms.

This model has been made much more attractive by two forces: the increasing market presence of leading products in key niches, and the widespread availability of internet-based connectivity.

BPO (business process outsourcing)
This is a considerably farther-down-the-continuum option. In the BPO (or Business Process Outsourcing) case, the company outsources the whole business process. The people who do the function on behalf of the company actually operate from the outsourcing provider. This option generally involves a transfer of staff and technology to the BPO supplier. This option requires different contracting approaches again, but is generally attractive under a variety of conditions, such as:

– are essential to the business, but not core to the company’s competencies (e.g. oil companies use BPO to deliver some accounting and finance functions);
– internal support in some cases is reasonably provided by staff from an external supplier in a number of cases (such as technology support, or some hardware maintenance functions where the hardware is very specialized).

This option is often particularly interesting where large technology (or other) investments are required for a host company. In these situations, a BPO supplier who will have expertise with the function may be able to offer the function for a more stable pricing model, and provide a comparable or superior service, all for a predictable cost.

Exchange-based services
Given the recent emergence of internet-based B2B (Business to Business) exchanges, it is appropriate to point out that most of these services offer at least two forms of outsourcing services:

– Outsourcing services, in which the exchange will provide on a pay-per-use basis whatever its core service is generally some form of market making. On that basis, there is a service agreement to use certain functions offered by the exchange, with some level of performance expectations, and some level of fee recovery. These arrangements are not yet standard, though the terms are slowly becoming somewhat more standardized.
– ASP services, in which industry participants can access a shared implementation of software that is required in the industry or by the exchange. For instance, it is common for some of these exchanges that are, say, focused on procurement, to also offer a full ERP if the company needs that function. These are often referred to as value-added services.

Vendor-based rental models
The final rental model is based on vendor-offered services. Increasingly, a software or hardware vendor will offer software on a services basis, either itself, or in partnership with a third firm. From large ERP vendors, to special test equipment manufacturers, software and hardware companies are starting to offer interesting value added services. In this model a vendor will typically use the internet to 1) offer a hosted service for its software and services, and 2) offer a value-added support service in which their people manage or simply maintain the system.

These are becoming increasingly common with complex and specialized systems. Indeed this model is expanding to encompass quite a wide range of services, including in such technical areas as computer network management, and computer network security, and plant equipment maintenance. In a world where a coke machine can call for more coke when it empties, and where a car can diagnose itself, it is no longer unusual for sophisticated test and measurement equipment to contact its manufacturer when it detects that it needs servicing.

Key decision criteria

So, given all of these dimensions, how do you choose your approach? What factors will be most important as you consider rental arrangements? There are at least three key factors, described below.

The business case
The big question, of course, is "which is cheaper — buying or renting?" The answer, like buying or leasing a car, is that it’s not always a question of cheaper, and in some ways the cost differences are a bit of a wash. Renting is not usually a way to get something cheaper, but it can offer a different model for incurring the cost, and avoiding other components.

Indeed, for many organizations who outsource, the reduced need to acquire hardware and maintain sophisticated technical environments is more than enough reason to pay a reasonable premium over the cost of the software — all to get a stable pricing model and a reliable service.

In many cases, the business case should assess the "total cost of ownership"or TCO, of both approaches. When considering all aspects of the outsourcing arrangement, the payback can be quite attractive on some outsourcing arrangements. In other cases, where the payback is less compelling, operational simplicity may be a desirable factor.

Internal integration
Any product you pick will almost certainly need to be fully integrated with other key systems in your organization. The degree and ease of integration should be a key element of your investigation into potential products.

A particularly important element will be the degree to which the product has an open architecture and is "Internet-capable". The open architecture means that it can share and access data in other related applications with ease, preferably invisibly to users and without manual intervention.

This level of integration will make future operations considerably simpler. Internet-capable means the product can interact with other applications when connected via the Internet.

For example, test equipment that can notify the manufacturer when it falls out of spec would be Internet-capable. Even better, perhaps the manufacturer can adjust it for you remotely, and avoid a service call, or at a minimum call to schedule a service call for when the machine will be down next. (If you share the machine’s schedules with them, they may even know when it will be down next.). Now that’s Internet-capable.

The vendor as partner
The last criterion is to assess the vendor as a true business partner. This is no longer a one-shot transaction — you will be doing business with them for years. You care about three things:
– You like doing business with them;
– They’ll negotiate a reasonable contract; and
– They’ll be around for a few years.

The combination of these criteria reminds us of the partnering nature of outsourcing arrangements. These deals are more sophisticated than pure software purchases, but they offer a number of benefits explored in the article, ranging from managed, sometimes lower costs, to superior service or capability, and sometimes the ability to rent software that might otherwise be unaffordable. While the choices have become more complex, and the considerations more multi-faceted, the nature of the many different software rental forms now available serve to help many different companies achieve more sophisticated goals without needing to be an expert in every aspect of every complex tool and product they use.

These non-trivial benefits ensure that the many different rental models will flourish and become ever more compelling in the near future.


Ron Schwartz has national responsibility for consulting services in E-Business technology solutions with PricewaterhouseCoopers, where he has worked since 1987 in the information technology practice. He holds an M.B.A. from the University of Ottawa, jointly issued by Northeastern University (Boston) and the Ecole Superieur de Commerce (Reims, France). You can contact him at ronald.schwartz@ca.pwcglobal.com.