Price Clouds Everything
Consider the Canadian government's recent Phoenix payroll software debacle. They elected to have a payroll system custom developed by IBM and have had nothing but problems with it. According to one assessment:
"... the Harper government put so much emphasis on saving money that it undermined efforts to ensure that the system would function well....instead of saving the government 70 million Canadian dollars this year, as promised, Phoenix has cost the government an extra $50 million (about USD$ 37 million), including $6 million in additional fees paid to IBM to fix it."
When participating in an IT system evaluation and you find your team leaning toward the low-cost choice instead of the high-value solution: beware. No one wants to pay more for something than they need to. In particular in government, you may even have the obligation to choose the low-cost solution. This default preference/requirement is understood by the IT solutions sales representatives and is often relied upon to accelerate the sales cycle and "close the deal." Even if you're not being exploited by sales teams, the Phoenix case shows how this low-cost bias can lead to dysfunction. Here are two questions to ask yourself to avoid a bad deal when considering the "cheap" IT solution:
1) Is it truly cheaper?In one respect it is obvious; if the number at the bottom of the RFP response or quote is lower, then it's the less expensive option. While technically true, that is only a valuable assessment if you are comparing apples to apples. Before you look at the price, you need to know that you are getting the same thing for the money.
2) Why is it cheaper?
There's no such thing as a free lunch.
- Milton Friedman
You've assessed fit first. Then you calculated ROI and the cheap solution comes out on top. What now?
RECOMMENDATION: Treat the low-cost solution with extreme suspicion. This is your warning sign to increase your due diligence. We are currently watching one such "low-cost" vendor in the reporting automation industry cease operations and advise their existing client base they are on their own. For some of these folks, this is happening DURING their implementation of the software.
The Action Plan - 7 Steps to Better Due Diligence
- Double check fit-assessment. If you have any doubt, have the low-cost vendors re-demo to confirm they meet your needs.
- Double check standard pricing variables:
- number of users,
- number of people being trained,
- duration and extent of the support period,
- Assess the vendor track record. How many clients do they have? How many times have they solved the problem(s) you have? Ask about failed implementations and what causes their implementations to fail. Be suspicious of anyone who says they don't have any.
- Closely assess their implementation team. Does the vendor have in-depth knowledge of not only the tool but your business process? Have they been "on your side of the table"? Have they been an HR manager or comptroller or auditor or finance officer and done the tasks that their tool addresses?
- Contact numerous clients that are currently using their product. Spot check the specific features you are counting on using to see if the reference is using them. We have seen vendors provide references that did not even use the product being evaluated!
If the vendor can not provide an extensive list of clients who use the product, or they do not have extensive experience solving your exact issue, determine if your organization is prepared to be a Guinea Pig. We have encountered numerous organizations that have been stuck in limbo for years while their vendor tries to build what was promised.
- Go back to the expensive vendor(s) and ask why they are so expensive. Do they charge a premium because of their brand? Did they consider something the others didn't? Was there an error in one of the pricing variables (point 2 above)?
- Assess the low-cost vendor's stability. One way to do this is to consider their financial health, if possible.
- If the company is publicly traded, have they ever shown a profit? Do their financial statements look like a stable, successful company? Now, if the vendor provides their software as a service (SAAS) there are (arguably) some other considerations when evaluating performance. You can find some interesting articles on SAAS performance here and here.
- If the company is not publicly traded it can be hard to do this analysis, and you may need to rely on 1 through 6 above more heavily.
Many of the steps outlined above are a great idea even when there is not a major pricing disparity. They become absolutely essential when it seems like there is a great deal to be had, and you want to avoid the cheap solution trap.