Software Prices in the Toilet - Is this a Good Thing?

We regularly talk about things in this newsletter that others just won’t, and here’s another one. Prices for most supply chain software applications, from a vendor perspective, are in the toilet. Almost incredibly so.

Virtually every supply chain planning and execution vendor with whom I’ve recently spoken laments the price erosion that they have experienced over the past few years. What’s going on? Several things.

Of course, it’s fundamentally about supply and demand. Capital budgets for IT are simply lower for many companies, especially for new software. In total, there have just been too few deals to go around, and vendors have often been very aggressive trying to win available business. Because the marginal cost of delivering a software app is almost zero (burn the CD), and there are other, very substantial dollars that each software sale drags through (maintenance, implementation services), vendors will get very aggressive on license pricing in such a market.

Relatedly, the whole corporate mindset has changed about buying technology. Most corporations are just much more cautious about buying technology today, and have become better negotiators. The extreme ROI focus of the past few years has also had the effect of pushing down prices because corporate demands for expected return on investment keep going up.

The efforts of ERP vendors to get in the supply chain software game have also had an effect. ERP providers have sometimes offered to “give away” their supply chain modules as they try to gain some market presence. Absent that, from a pure software license perspective, ERP applications sell at prices below “best of breed” levels. That also tends to move overall market prices further south.

Finally, the vendors themselves have often contributed to their own situation, especially in supply chain execution deals (WMS, TMS). In an increasing number of deals, the losing vendor has “gone nuclear,” offering to give the license away, or close to it, if they feel they are losing the deal. This strategy rarely results in a win, but usually drives down the winner’s price, and ultimately undermines the entire market pricing level.

So, is this a good thing for companies buying software, a bonanza something like OPEC dropping oil prices to $16 a barrel?  Well, yes and no. I am reminded of something I learned about back in college, the so-called “Tragedy of the Commons.” In general, the notion was that while having an open commons for animals to graze was a good thing for an individual farmer, across the community it was a bad thing, because with everyone taking advantage of the opportunity the commons itself was ultimately destroyed. In the end, everyone lost.

I think there are some parallels here. It’s great in the short term for any one company to get a low price on software, but collectively it makes it very hard for the vendors to make a profit, innovate with new solutions, and provide quality service and support.

So, what should you do? Well, I may be a little controversial here, but I think you should negotiate hard but still make the deal a win-win for your chosen vendor. Don’t drive down the price to the point where the deal is just plain “ugly,” as the vendors like to say. The reality is that giving the vendor a reasonable price for their solution upfront has a very marginal impact in the total cost of ownership of the system over it’s life.

Of course, that’s easy to say when it’s not my money. And if an outstanding, even outrageous deal simply drops in your lap, I guess you should just take the savings and run.

Is it good practice to have some level of “win-win” price negotiation philosophy with software vendors? Or should you simply drive down the price to the lowest level you can get? Let us know your thoughts.

Microsoft Talks Big RFID Game
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Microsoft continues aggressive efforts at least on the marketing front with RFID, as noted in an article in Information Week, with plans to add “RFID support” to its mid-market ERP applications (Navision, Axapta). It has a potential interest in putting some version of Windows in every RFID reader (surprise), believing it might be able to drive down the cost of readers as a result. The software giant is also doing a lot of research and made some vague comments about creating low cost RFID infrastructure in several Microsoft products.

Because of its clout, Microsoft of course has been able to get a large number of vendors to participate in its RFID Council, formed in April.

What bothers me in many of these kinds of articles though, is that it doesn’t go into any level of detail. It notes Microsoft is adding RFID support to its Axapta product. What does that really mean? And how is Microsoft really going to drive RFID systems prices down, and make implementation easier? The possibility is posed, but the “how” part is conveniently left out. Kudos to the Microsoft public relations group.

This isn’t at all anti-Microsoft, and I think they absolutely should be jumping on the RFID bandwagon. It’s just part of my growing frustration at the lack of real facts and detail in many of these reports and articles. Also frustration at the notion, promoted not only by Microsoft but also to some extent, several of the big consulting firms, that the challenge of RFID has mostly to do with the “plumbing” – data management, integration, adding RFID fields to databases.

I’m not minimizing that work, in many cases, but let’s be real. The challenge (and opportunity) is for someone to really figure out how to use RFID data to drive out costs or increase revenues, which means changes to planning and execution applications to create real value. Forgetting Wal-Mart for a second, if all this hullabaloo is just to eliminate some bar code scans in receiving and shipping, we’ve all got our priorities mixed up.

There’s one thing in here that does make some sense, which is the suggestion that Microsoft could play a lead role in developing standards of how data is communicated from RFID readers. But understand that RFID data processing intelligence will increasingly move into the hardware itself – today’s RFID “middleware” has a very short lifespan.

What role do you see Microsoft playing in the RFID market? Do you agree or disagree that all this RFID plumbing is secondary to finding how planning and execution apps will really be changed to increase value/reduce costs from RFID data? Why do almost all articles on RFID leave out any real detail that could be useful? Let us know your thoughts.

Feedback of the week - on the "weighted average" selection method:

Two quick points:

First, you wrote: "The ratings (say a scale of 1-5 for each category) don't really reflect the differences in vendors. Is a vendor that receives a 4 really twice as good in that category as one which gets a 2? That's how the math comes out."
Doesn't fly statistically...ever! The 1-5 scale is ordinal so there is no math. There is no mean/average for ordinal data. The only calculation is "what percent fell in each category". People continually show their ignorance of statistics by treating a 1-5 scale as interval data when it isn't. [Editors note: that was the point we were trying to make, perhaps not effectively].

Second, the "best of breed" method usually narrows the topic so finely that software that has a broad spectrum of solutions never wins; e.g., SAS. The "best of breed" philosophy merely increases the size of the empire because one needs a software expert for functionality, a integration expert to get all the "best of breeds" to talk to each other, and a technical expert to keep the software working. Multiply that times the number of "best of breed" solutions and you have an IT empire filled with complexity. Integrated packages take fewer human resources and that scares "empire builders."

I agree that weighted averages are just a tool to make one think that a subjective practice has become objective.

Jim Duarte
Anheuser Busch Companies, Inc.