Ventana Scorecard: Evaluating Software Investment

After the “hair on fire” IT spending spree driven by Y2K and the dot-com boom a decade ago, corporations imposed a more disciplined approach to software acquisition. They began once again to treat it as the capital investment it is. Nonetheless, despite the broad acknowledgement that greater discipline was needed, companies today still make similar mistakes both in and after the software acquisition process.

All finance executives understand that when considering the purchase of any capital asset, it’s important to have a disciplined process for evaluating its strategic importance and the kinds of financial and other returns that it will produce. Too often, though, in practice they focus the return on investment (ROI) assessment of their business case on cost reduction or cost avoidance. Inevitably, too little attention is paid to the software’s value in supporting more competitive products or service offerings, making information available sooner, or improving the consistency or timeliness of core business processes.

Since these are “soft” values, ones that are hard to quantify and open to manipulation, they get short shrift in the assessments, especially among those who saw them misused in the dot-com era. These days, however, much of the value of software comes from its ability to enhance a company’s effectiveness, not simply its efficiency. Rather than ignoring or downplaying this important source of value, companies should use a rigorous systematic approach to factoring in these benefits.

Part of such an approach is formally enumerating the expected benefits, which brings us a second mistake that companies make: They don’t do post-acquisition ROI assessments. In the hundreds of interviews Ventana Research has conducted with company executives to validate software vendors’ products, we haven’t once found a company that followed up on the pre-purchase business case to determine whether the anticipated benefits were achieved. Although there may be political reasons why people avoid such evaluations, post-purchase assessments are important to achieve more effective software asset management: As part of the process, organizations also can examine whether they can achieve greater value from their existing software, such as their ERP system.

A third mistake companies make in purchasing, especially in the case of costly and long-lived software, is not managing the contract effectively. Typically, corporations will dicker over many points during contract negotiations but then fail to follow up after the contract is signed to ensure that the terms are met over the life of the agreement. The main reasons for this are twofold: This is nobody’s job, and there is no periodic process in place to manage this systematically. For example, few companies create a quick abstract of the agreement and make this information readily available so that those reviewing an annual maintenance bill can quickly determine if there has been a billing error.

CFOs and controllers may feel satisfied with their software acquisition review process because of the numerous hoops they make people jump through to justify their proposed investments. However, this often is nothing more than an illusion of control, and one that may well prevent their company from buying and implementing software that will improve a company’s performance. An illusion of control that blinds executives to the need to follow up after buying software to ensure that it is being used effectively — and that the terms and conditions of the contract continue to be met by the vendor — is no control at all.