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Risky business: How to assess risk during software purchases

Get advice from industry expert Andy Hayler on assessing risk during technology purchases. Will the product be retired or acquired? Learn how to spot the signs.

When purchasing software, there is an old adage: "No one ever got fired for buying from IBM" (these days, substitute...

SAP, Oracle or Microsoft as appropriate). The implication is that you are always safe buying from giant vendors, thanks to their stability and financial strength, even if their software is not quite as innovative or you pay a little more. It is a cute saying, but it happens to be wrong.

I worked for many years in two of the largest companies in the world (Exxon and Shell), and for much of that time I was involved in one way or another with assessing vendors and purchasing software. I still recall the day when, as a focal point for IBM's "strategic" 4GL called ADF, I heard the news that IBM was about to drop ADF in favor of another product (CSP). A more recent example was SAP's launch -- to much fanfare -- of its master data management product line in Q3 2003, only for the company to drop it a year later (in July 2004) when it acquired A2i.

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 Software vendors are like undertakers in some ways and are delicate about the language of death. Products are not "dropped" but "functionally stabilized," just as a beloved relative is said to have "gone to a better place." Yet software products in this situation have not gone to a better place as far as customers are concerned. This is not to criticize IBM or SAP but to point out that giant vendors drop support for products all the time. This may be because the technology is not working well and needs replacing, because it is not succeeding in the market for some reason, or because the priorities of the company have changed.

Small software companies typically have just one product, so they have a strong interest in that product's success. Small companies can certainly fail commercially, but at least they are unlikely to drop their one and only product because of a switch of management priorities. Moreover, there are compensations in dealing with smaller vendors, which may be a lot more responsive in terms of fixing bugs and listening to your requirements.

When buying software, it is important to look not just at the vendor but at the progress of that particular product in the market. A software product that meets a real customer need and has a rapidly growing customer base will attract investment, whether it be internal investment in a large company or venture capital in a startup. So a key question you should be asking your software salesman is how you can talk to other customers. This is to check that they are actually happy with the software, but it can also be used to make some assessment of how rapidly the customer base is growing. Few software salesmen will share this information with you unless you resort to using a blunt object, but a good indication can often be gained by talking to the product user group. User groups are typically outside the control of the vendor, and members are usually happy to talk candidly about the numbers of people attending. A product user group with flat attendance -- whether from a small startup or a large vendor -- should be a red flag.

Of course, small companies can be risky too. A severe market downturn, such as that in late 2001, can kill off companies with perfectly sound technology. The risk that you should assess, however, is not just the risk of the company itself folding but the risk that the product you are about to purchase will be dropped. The worst that is likely to happen to a product that has a rapidly growing customer base is that the company building it may be acquired, which is by no means always a bad thing (an acquirer may have greater resources to invest in the technology). Even if you regard acquisitions as inherently awful, there is almost no way to insulate yourself from this risk anyway. (PeopleSoft was a very large company, but it was still bought by Oracle.)

Software products all eventually die. When buying, you need to consider the lifecycle cost of that software (not just its purchase price) and match this against the benefits you confidently feel you will get from using it. If you really do get a payback from the software of less than one year, it makes perfect sense to go with a product from a smaller vendor rather than wait years for one of the giants to eventually "get it right," thereby missing out on those benefits. You should not cut yourself off from products that can bring you real business benefits because of an incorrect assessment of risk. That in itself would be a risky decision.

About the author: Andy Hayler is an established software industry authority, an independent strategy consultant advising corporations, venture capital firms and software companies. He is the founder of Kalido, which under his leadership was the fastest growing business intelligence vendor in the world in 2001. Kalido was recognized as an innovator in data warehousing, and then launched arguably the first true master data management product, a market which at the time did not exist but is now a well recognized and fast growing industry. Andy was the only European named in Red Herring's "Top 10 Innovators of 2002". He was a pioneer in blogging with his award winning "Andy On Enterprise Software" blog. Andy started his career with Esso, working in a number of technology roles before moving to Shell. He was Technology Planning Manager of Shell UK, then Principal Technology Consultant for Shell International. He later established a global information management consultancy, which under his leadership grew to 300 staff.

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