Manufacturing ERP Software for SME

A series of primers for prospective implementers

Rent Or Buy? - investment strategy

Background

An initial survey of the Enterprise Resource Planning (ERP) software marketplace reveals a dominant financing model, involving up-front software licence purchase, service invoicing, and recurring re-licensing and support fees. Within this model, variations in the proportion of total costs allocated to the various elements exist, but the basic model is almost universal.

Look a little harder however, and occasional short-lived examples of software "rental" options can be found, where no initial investment is required and a regular subscription is paid instead. These can appear superficially attractive due to a number of claims made for them, along with explicit and implicit criticisms of the established model.

The main sales thrust of this approach plays to the fears of prospective implementers regarding the high degree of commitment involved . Subscribers are told that they can abandon the project at any time with no financial penalty beyond past rental payments, and that this in effect gives them an opportunity to try the software out at minimal external cost. Criticisms are often made of the standard investment model's usual approach to pre-sales, which typically involve comprehensive consultancy services (largely free at the point of delivery) to establish compatibility and build confidence before purchase.

The Reality

However, a careful analysis exposes some apparent weaknesses in the promotion of the rental model. Essentially, it relies on exploiting the perfectly reasonable concerns of prospective implementers, then rather than providing resources to materially assist them in making what is a complex and crucial decision, it offers them an illusory escape from serious investigation and commitment.

This philosophy extends into the initial implementation phase, where the new user is largely left alone to "try things out". While this can reduce external consultancy expenditure, it risks wasting internal resource effort and is hardly conducive to a well-optimised implementation. To make matters worse, to achieve this the software has to be kept relatively simple (in effect dumbing-down) which can limit the configuration options available to the implementation project team for the purposes of fine-tuning business processes, and for future process development.

It appears that the rental solution provider is actually shifting more of the selection and process testing functions on to the user, in return for reducing financial liability in the short term. It is clear that the main beneficiary of this approach is the rental provider, not the implementer. Successful implementation is usually the product of a co-operative project, drawing on the skills and experience of both internal team members and vendor consultants - largely excluding the latter risks shallow integration with the organisation, disappointment and even failure.

What about financial benefits? Comparing long term costs shows that after 3-4 years, the rental option Total Cost of Ownership (TCO) overtakes and rapidly diverges from the standard model. As the typical ownership lifecycle for this type of software is 10-20 years, simplified software with arms-length support, at a much greater TCO, does not look attractive. Might this be why, in a mature market where trade-offs between customer and supplier have stabilised, the standard financing model is dominant?