Software Selection Tips
Phase I - Planning & Budgeting for Software
Software Project Planning TipsThe first step in the software selection process is to plan your project and put together a budget. Here are some tips to help you get started!
Software Project Planning Tip #1 - Project TeamMake sure that you set up your project team with a strong project manager and representatives from each of the functional areas of your business. These people should be key members of their respective groups. Make sure that you have buy-in from the organization starting with executive management down to the end users.
Software Project Planning Tip #2 - TimelinePlan the steps and the timeline for both the software selection process as well as the estimated implementation. At this stage of the project, you will not know exactly what the implementation timeline will be as it will depend greatly on the software you select, but you can at least put together a high-level estimate at this point.
Creating a Budget for Software & ImplementationBudgeting for enterprise software is probably one of the most difficult budgets to create because you do not know at the beginning of the project exactly what the final cost will be. There are 3 main components of out-of-pocket software cost - Software License, Software Maintenance, and Implementation Services. Check out our article: How to Budget for Enterprise Software for a more detailed explanation of budgeting information.
Software Budgeting Component #1 - Software License CostThis is the initial cost to buy the software. Although there are as many ways to price software as there are vendors, the software license is typically calculated by estimating the number of users that will be using the system and multiplying that by a per-user license cost. The vendors may also charge a fee for the various modules or areas of functionality that you purchase.
Software Budgeting Component #2 - Software Maintenance CostThis is the annual fee that you pay the software vendor for updates, upgrades, and some level of support. Currently this is typically 18-25% of the "then current list price" of the software, not the discounted price that you pay for the initial software license.
Software Budgeting Component #3 - Implementation ServicesThis is the cost to implement the software. When you talk with the vendors at the initial stage of budgeting, they will typically talk about their implementation ratio. This is the ratio of implementation service cost to the software license. So for every dollar you spend on the software license you can expect to spend X dollars to implement. In the mid-market this implementation ratio is typically in the 1 to 1 range. But more complicated implementations can be in the 2 to 1 or 3 to 1 range (implementation cost to software license cost). The most complex projects can even get up to 10 to1.
Keep in mind that before you sign the contract there will be a lot of discounting to get you to sign the contract. Software license cost is very negotiable, so make sure you review our software contract negotiation tips page.
Software Budgeting - Software as a Service (SaaS)In recent years the SaaS model has risen in popularity. This model is priced differently. Instead of paying an up front software license and annual maintenance fee, you pay a monthly lease fee. The lease fee is typically based on the number of users accessing the system. The monthly fee varies depending on the software vendor and the functionality you are purchasing. The benefit is that you do not need to install the system on your server reducing your internal hardware and IT cost. It also reduces the upfront cost you pay for the software license. However, in many cases we have found that over the long run, the cost to lease the software is very high compared to implementing software in the traditional model. We are watching the adoption of this model with great interest to see if these costs come down.
Phase II - Software Requirements AnalysisIn order to successfully evaluate and select a packaged software application you must first clearly identify the functionality that you are looking for in the product. What do expect the software to do for your organization? A software requirements document specifically identifies the overall business purpose for the software and also includes a more detailed listing of the functional modules, and the general and technology requirements for the software. To create this document you will need to collect, prioritize, and organize the data in a format that will be useable by your internal team as well as understandable by the software vendors so they can assess if their software is a fit for your organization.
Software Requirements Tip #1 - Differentiating CriteriaIf there is one tip we can give you for your requirements document, it is to focus on your key Differentiating Criteria. This means that you limit your initial requirements to not more than 2-5 pages of the most important requirements. If your requirements document is too long, the vendors will be less inclined to respond and you will have difficulty making a decision.
Software Requirements Tip #2 - Business ObjectiveStart out your requirements document with a statement that defines the business reason you are evaluating software at this time. From this statement the vendor should be able to understand how the new software will support you with your business needs.
Software Requirements Tip #3 - Functional RequirementsYour requirements document should define the functional modules that will be evaluated as part of this project. This may require you to translate your business terminology for your processes to modules that are offered by the software vendors. Financial (General Ledger, Accounts Payable, Accounts Receivable, etc.) Human Resources (Time Entry, Payroll, Benefits Administration, Position Management). Manufacturing (Shop Floor Control, Quality Control, Bill of Materials, Inventory). Within each module, list the specific functionality or requirements for that module. It is not necessary to list every single item, but your list should include enough functionality that will allow you to compare and contrast the different software solutions available to you.
Software Requirements Tip #4 - Technology RequirementsDefine specifications your organization has for the technology of the software. These requirements include: database preferences, operating system preferences, programming language, hardware specifications, interface or integration requirements to other applications, and IT support staff.
Software Requirements Tip #5 - Vendor QualificationsInclude a request for information about the company supplying the software and/or the implementation services for the software: vendor size, annual revenue, employee count, target user, customer profile data, certifications or partnerships with supporting technology vendors.
Make sure that you:
- Keep the wording of the requirements unambiguous and with a consistent level of detail; be concise and direct. Avoid vague requirements and word redundancies or paragraphs of information that contain multiple requirements. Use terms and acronyms consistently and define them in a glossary. Avoid the use of and/or.
- Have realistic requirements in terms of functionality a software application can provide. If the requirements are too extreme your only choice may be customization of applications that can be costly and not recommended by most software vendors.
- Develop a rating system so that the document clearly defines what requirements are most critical to your final decision. A suggested ranking system may be Required, Important, or Nice to Have.
Phase III - Software Vendor ResearchAfter you have created your requirements document, you are now ready to research your software vendor options. Software selection is really a process of elimination as you start with a long list of software options and gradually eliminate inappropriate vendors to get to a short list of solutions that appear to be a good fit. Remember, there is no 100% perfect software solution for any company. The key is to get a vendor that handles your most important requirements.
Software Vendor Research Tip #1 - Create a Long ListCreate an extensive Long List of software vendor options. If a software product is not on the Long List, it won't get selected, no matter how good their fit to your company! Do internet searches, browse industry magazines, consider both large general vendors as well as smaller vertical market specific vendors. Sometimes, the smaller vendors offer superior functionality at a lower cost to the larger vendors you always hear about it.
Software Vendor Research Tip #2 - Conduct Software ResearchPerform thorough research on vendors using as many resources as possible such as independent studies, articles, web sites, and consultants. Use the Differentiating Criteria (the 2-5 page key requirements document) to start to eliminate vendors. Begin by using a few high-level requirements. (For example, if you are looking for an Oracle based solution, all of those vendors that do not support that database can be eliminated).
If you are are required to go through a Request for Proposal process, you will send the RFP out to the vendors on your Long List. You will then have the opportunity to review the vendor's responses to get to a Medium List of vendors to conduct vendor clarification calls.
Software Vendor Research Tip #3 - Vendor Clarfication CallsAs you get to a Medium List of about 5-10 vendors, contact the vendors directly and hold in-depth phone interviews to discuss each point of the Differentiating Criteria requirements list. The idea is to understand not only IF the software may be a fit for your unique requirements, but HOW they would work for your company. Because every organization is unique, you can't just rely on a database or an RFP response of yes/no answers. You need to actually talk with the vendor to understand how they would solve your business need.
Remember, you are not actually making a final decision at this point, you are just trying to get the vendors down to a short list of 3 vendors. You will get more information to select the final vendor later during the software vendor demos and final due diligence. The whole idea of software selection is to spend more and more time with fewer and fewer vendors until you get to the point that you can make a decision and you spend the most time validating the final decision.
To illustrate how this works, we were working with a large international heavy equipment manufacturer. They had some very specific multi-national and multi-company requirements. We started with a long list of approximately 40 vendors. We were able to quickly eliminate 20 vendors because they could not handle the multi-national requirements. We were able to eliminate another 15 vendors due to the requirement to be able to plan manufacturing seamlessly across multiple companies. Although many vendors could plan across multiple companies, the way that this company handled that requirement was very complex. This got us to 5 vendors. We then had further in-depth discussions with these vendors and eliminated them down to a short list of 3 vendors who were brought in for demos.
Phase IV - Software DemosWhen you get to a short list of approximately 3 software solutions, you have eliminated most of the vendors and it is time to really dig in to evaluate the closest matches to your situation through a scripted demo process. This means that you will be asking the vendors to show how they will handle your specific requirements, not just the bells and whistles of their standard presentation.
Software Demo Tip #1 - Use a Demo ScriptThe most important part of this phase is to develop a quality demo script. The demo script actually serves three purposes - 1) It allows you to see how the vendor will solve your specific requirements, 2) the script allows you to schedule your personnel so they only need to show up for their specific areas of functionality, and 3) it allows you to compare the vendors in an equal manner.
To create your script you should take the requirements that you developed in the requirements analysis and re-configure the requirements into a demo script. You should also include more details and processes that your users can observe to see how the software would handle their needs. We recommend you do the following:
- Organize the demo by functional area or process. You should be able to have key people come into view only their section of the demo. This allows them to participate in the demo process without having to watch the full demo.
- Put time constraints for the various functions. For example you may have a time constraint of 1 hour for General Ledger. Remember, you are not looking at everything the vendor can do, you are just looking for a good overview and to see the software in action.
- Provide a place for the demo attendees to write notes on the demo script and to rank the functionality that they see. Rankings allow them to provide feedback regarding the solution's ability to handle their needs.
Software Demo Tip #2 - Prepare the Software VendorMake sure that you give the software vendor the Demo Script in time for them to prepare properly for the demo. You should allow at least 2 weeks for them to prepare and ask questions regarding the script. You should also give the vendors an opportunity to come in for a pre-demo meeting so they can ask any questions regarding the script and your company.
Software Demo Tip #3 - Prepare the Demo Evaluation TeamHold a meeting with your evaluation team and people that will be attending the demo to orient them as to how to score and rank the vendor demos.
Software Demo Tip #4 - Assign the Demo PoliceOn the day of the demo, make sure that someone is designated as the demo police. This person will keep the demo under control by monitoring the time and making sure the vendor covers the functionality requested in the script. The demo police will also need to monitor the questions of the attendees for any follow up actions or clarification.
Software Demo Tip #5 - Hold a Demo Review MeetingAfter the demos are complete, you should gather all of the feedback from the user attendees and hold a meeting with the decision team to discuss the strengths and weaknesses of the vendors. You should then be able to come to a decision of one or two vendors to focus your final due diligence and decision.
In our experience, the demos are a pivotal step in the software selection process. In fact, most of our clients are able to focus in on one vendor after this step.
Phase V - Software DecisionNow that you have narrowed your software vendor options down to 1 or 2 vendors, it is time to do your final due diligence and gather the additional information you need to make a final decision. We have found there are six key software evaluation criteria that drive an organization’s software decision.
Software Decision Driver #1 - FunctionalityFunctionality is the most important criteria to evaluate as you consider your software options. Don't forget to focus on your key requirements as you make your final evaluation. In other words, make sure that you re-focus your decision on the most important requirements.
Software Decision Driver #2 - TechnologyThe technology that the software vendor uses must be a match for your situation (or future direction) and the expertise of the IT staff that you have in-house. Remember that you should have a forward looking technology that has momentum for the future.
Software Decision Driver #3 - Software VendorYou are not just buying a static software solution, you are actually buying a relationship with the software vendor you select who will continue to support and enhance the system for your benefit. You will be paying annual maintenance (see budgeting for software) to that vendor so that they will continue to develop, enhance, and improve the product. You should know the direction that the software vendor is going – Does it fit your vision? Will they be making new enhancements that you are interested in? There have also been a lot of mergers and acquisitions in the software market. Is your vendor a strong vendor that even if they get acquired, there is enough momentum that the acquiring vendor will maintain the software?
Software Decision Driver #4 - Implementation Vendor/VARGetting the right implementation vendor is just as critical as finding the right functional product. They will be your partners in implementing the system. They need to have experience with the software product that you are implementing and the industry that you are in. In fact, we have eliminated software solutions for a client when we found that there was not a qualified implementation partner for that software. (See evaluating software implementation partners) Many of the mid-market software solutions such as Microsoft, and Sage sell exclusively through a Value Added Reseller (VAR) or partner channel. This means that you need to select the VAR before you actually evaluate the software product. If you are a tier 1 or tier 2 (see software market overview) organization you will select the implementation partner after selectio of the software vendor.
Software Decision Driver #5 - Maintenance & SupportYou can expect to pay between 18-25% of the then current license cost for maintenance. This entitles you to upgrades and some level of support. Make sure that this investment you will be making on an annual basis is appropriate. Reference checks are a great way to make sure that the vendor’s current customers are satisfied with the development and support of the software.
Software Decision Driver #6 - Total Cost of OwnershipConsider the total cost of ownership of the software solution and not just the big discount that the vendor may be offering for the up-front license cost. There are 3 main components of out-of-pocket cost that should be considered. The software license, software maintenance, and implementation services. You should look at the cost for the next 5-7 years in order to understand the long term cost of the solution.
How to Get the Information You Need to Make the Final Software DecisionThere are many different ways to get the information you need for the 6 key decision drivers. In fact, every company we have worked with approaches this phase differently. Here are some of the common tasks that may be helpful to you.
Software Decision Task #1 - Follow Up DemosFollow up demos allow you to take a more detailed look at functionality and capabilities of certain aspects of the software. The initial general software demo should have given you a good overview of the capabilities of the system. There may be certain groups or areas of functionality that you will want the vendor to show you. This may be on-site or via internet demos, and should be focused only on areas of functionality critical to the decision.
Software Decision Task #2 - User Reference Visits/CallsUser reference calls are very important part of the evaluation process. At a minimum, you should talk to 3 similar organizations that implemented the software you are considering. Even better, if you can actually do an on-site visit, you will learn much more about the implementation, the challenges they faced on implementation, and their take on the software vendor. You will be surprised how honest the references will be. This is one of the most important tasks of the software evaluation process.
Software Decision Task #3 - Headquarters VisitsHQ visits are a great way to meet the vendor's executive team, assess their product development and product support, and get a general feel for the vendor's operation and culture fit. Keep in mind that the willingness of the vendor to provide an HQ visit will depend on the size of the vendor, the size of your organization, and the vendor's interest in winning your business. If the software is being sold through a Value Added Reseller (VAR) channel, you may want to visit the VAR offices.
Software Decision Task #4 - Additional Due DiligenceThis includes additional due diligence such as follow up questions, additional discussion with the vendor, analysis of the vendor's financial strength, etc.
Software Decision Task #5 - Initial Proposal ReviewAfter the demos, the vendor should have a better idea of your requirements to create an initial proposal that is much more detailed. This will need to be reviewed and discussed. Pay particular attention to the implementation team that will be assigned to the project and their experience.
Software Decision Task #6 - Making the Final DecisionAfter you have gathered and summarized the information you need for your decision, you should meet with the project team, review the materials, discuss the strengths and weaknesses of the vendors and make a decision. When we help our clients through this process, we list out the key areas of consideration and rank the vendors together as a group. This is a great way to build consensus and is amazing how this process brings people together on the decision.
As we mentioned above, every organization has a different method for gathering the information they need to make a final decision. You need to select the activities that your organization needs for your unique situation.
Phase VI - Software Contract NegotiationNegotiating software license contracts can be a very tricky process. Because the software vendors typically have an army of lawyers write their contracts, you need to be very careful to negotiate key terms and clauses that will protect your interests in the contract. As we mentioned in the software budgeting section of this site, there are actually 3 separate contracts you will most likely sign with the software vendor/implementer. These contracts are: 1) Software License, 2) Software Maintenance, and 3) Implementation Services. If you end up going with a Software as a Service (SaaS) solution, you will be negotiating a Service Level Agreement (SLA).
Here are some key software contract negotiation tips to keep in mind as you negotiate your contract:
Software Contract Negotiation Tip #1 - Negotiate the PricePrice is very negotiable for the software license. Almost every one of our clients over the past 14 years has had some software license discount. You can get some great deals at the end of the quarter and especially at the end of the software vendor's fiscal year.
Software Contract Negotiation Tip #2 - Define the TermsMake sure that the terms of the contract are specifically defined up front. Pay close attention to the definition of a "user," "installation", "go-live" and other terms. For example "installation" can mean loading the software onto the server, or it can mean completed implementation. This is important because milestone billings can be based on when "installation" occurs.
Software Contract Negotiation Tip #3 - Define the Payment PlanDefine when progress payments will be made. The software vendor likes to get as much of the license cost as possible up front, but you can negotiate progress payments with retainage payable upon final acceptance.
Software Contract Negotiatin Tip #4 - Transferable LicenseIf you plan on making acquisitions, make sure you are able to transfer the license to the acquired companies. You don't want to have to pay full license fees for every new company or acquisition.
Software Contract Negotiation Tip #5 - Negotiate the Statement of WorkMake sure that you negotiate the Statement of Work (SOW) before you sign the contract. The SOW defines the scope of the project.
Software Contract Negotiation Tip #6 - Write the TermsMake sure all of the negotiation and changes to clauses are written into the contract, exhibits, and addendums. This contract should be in effect for 7-10+ years and you want to make sure that if something were to go wrong that your protections are written in the contract. You have the best leverage with the vendor until the contract is signed, so make sure you take advantage of that leverage.
Software Contract Negotiation Tip #7 - Get Consultant HelpSoftware contract negotiation is one area where it can be very helpful to have a consultant involved. There are things that are negotiable in the contract that a consultant well versed in software contracts will help you get the discounts, key clauses, terms, and protections negotiated in the contract.
Every software contract is negotiable. The software vendor writes the contract to protect their interests, you need to negotiate to protect your interests.
Implementation Vendor SelectionSelect the right implementation vendor/VAR with experience in your industry and the software product. You may have dozens of implementation vendor options for each software product including the software vendor's own implementation team
One of the most overlooked aspects of software selection is the evaluation of software implementation partners. For most of the major software vendors on the market you will have a wide range of implementation partner options available to you. This is a critical step in the software selection process! In fact, selection of the implementation team can make or break the succes of your software implementation. You need to find an experienced partner that understands not only the software you have selected, but also your industry. In fact, in our software selection work, we have actually eliminated software vendors solely because there was not a good implementation partner for their situation. There are basically 3 implementation strategies offered by the vendors:
- Direct Implementation – This form of implementation comes direct from the software vendor. Some vendors will only implement directly, while others allow you to select either direct implementation from the software vendor, or a separate implementation partner options.
- Implementation Partners – Tier 1 and Tier 2 software vendors (See Tier Chart) like SAP, Oracle, and Lawson will sell the software direct to their customers. At that point you have the option of selecting a separate implementation partner. For example in the US alone, there are over 200 SAP implementation partners. This implementation partner selection is done after the selection of the software.
- Value Added Reseller – Some of the Tier 3 (See Tier Chart) mid-market ERP software vendors sell through a channel of resellers. In fact, if you were to call Microsoft or Sage, you cannot even buy software from them, they will immediately refer you to a reseller that will demo, sell, and implement the software. In this case you actually have to select the VAR before you evaluate the software to see if it is a good match for your business.