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Cloud computing has changed the fundamental economics of business software, bringing new capabilities within reach of large numbers of small and midsize companies for the first time. Cloud-based ERP, for example, enables many midsize companies that in the past might have continued to use an entry-level accounting package to have more capable and sophisticated systems. The investment in software and IT capabilities to implement an ERP system on-premises is considerable enough that midsize companies often put up with a less-capable one. As well, midsize companies can now have their own call center operations because cloud-based offerings that support these operations require substantially lower up-front investments and have significantly lower operating costs than their on-premises counterparts. Consequently, a company that once outsourced all of its call center activities now has a greater degree of control of this strategic capability, often at a lower overall cost. The economic aspects of adopting the cloud are compelling, but there are other reasons as well. In some business software categories, even if the company has the IT resources and money to manage it on-premises, it makes better business sense to obtain this capability as a service in the cloud. For example, expense management is not a strategic process, and software users are often operating outside the company firewall.

Professional services automation (PSA) is another category in which I expect many companies or divisions of companies to move to the cloud. Most professional services firms have fewer than 50 employees and lack the scale, cash or profit margins to pay for an on-premises system and the IT skills to support it. Professional services divisions that are adjuncts of companies in other lines of business (such as industrial equipment or software itself) are in a similar position because the economics do not justify an in-house investment. Cloud-based software as a service (SaaS) is the best economic and operating model for these groups. Moreover, today’s professional services organizations are likely to be mobile and distributed, which makes the cloud architecture’s Internet access a better fit.

While the details differ from one offering to the next, PSA software suites typically support the three sets of capabilities professional services companies need in an integrated package: front office, back office and project management. Front-office processes include contact, opportunity and client management; back office includes invoicing, time and expense reporting, and project accounting, and may incorporate a full accounting suite; project management capabilities include engagement management, scheduling and assignments, work tracking, skills management and project forecasting. In addition, PSA functionality may also include collaboration and knowledge sharing capabilities. 

PSA software adds value by facilitating record-keeping and billing, improving project planning and management and increasing the effectiveness of a company’s sales and customer service efforts. By integrating the project management with front- and back-office functionality, it’s possible for professional services organizations to plan, staff, execute, bill and (most importantly) collect using a single system. The software must be tailored to the needs of the primary users: the consultants who don’t have time to master complicated software to manage projects and who are apt to neglect their record-keeping duties.

Today there are many, often-new cloud-based PSA entrants offering most or all of the functionality needed by services organizations. These include Atlantic Global, Autotask, ConnectWise, FinancialForce, NetSuite OpenAir, PlanMill, ProjectHelp, Projector and Unanet Technologies.

More than a decade ago I was writing about the need to automate professional services and provide professionals who work in project-type jobs with better tools to organize and manage their tasks. However, the uptake in this category has been slower than analysts had forecast despite the many sizable potential benefits. To be sure, bits and pieces of this existed then as now. People use their calendars with task lists and reminders, some of which is integrated with their email system. Many use spreadsheets to handle schedules and track costs; some (especially those in IT departments) use formal project management software. In the past, part this might have reflected a reluctance to be an early adopter or to put sensitive information “out there.” However, I suspect that an enduring issue is the need to take time from day-to-day business, learn a new way of doing business and entrust the business to new systems. However, given the potential to stream operations, accelerate cash flow, reduce time spent on administration and improve utilization rates, I expect professional services organizations and consultancies to increasingly adopt PSA software.

Best Regards,

Robert Kugel – SVP Research

I was reminded by a recent piece in InformationWeek about the need to manage the mounting cost of software more carefully that this issue never seems to become old news. I have read variations of it in IT trade publications for two decades now, reminding me of the quip attributed to Mark Twain: Everyone talks about the weather, but nobody ever seems to do anything about it. (Like many of Twain’s “quotes,” he wasn’t the author of this one either.) I believe that at the heart of this issue is a lack of oversight on software contracts, at the time of signing and especially in subsequent billings. Some companies don’t let these costs get out of hand because they have defined processes and responsibilities for managing them. The careless ones are fodder for the aforementioned articles, while the rest are somewhere in between. 

There’s no doubt that larger companies have a challenge in managing software licensing costs. Our research has found that organizations continue to have significant number of technology vendors to manage across the enterprise of business processes. Large numbers, yes, but they can be dealt with. Unfortunately, not many deal with it successfully. Only one-fourth (26%) of the companies we assessed do not overspend on vendor-supplied software maintenance while 54% do (the rest aren’t sure). Almost three-fourths (72%) of those that say they overspend also say that it’s not a problem, which, when you think about it, is an important part of the problem. 

We advise finance and IT executives to ask themselves whether they have the right people and processes to handle software contract life-cycle management. These managers need to have a defined process for managing both initial and recurring contractual issues such as tracking which and how many people are using the software, or considering the impact of new hardware purchases on the maintenance charges. 

I’ve heard it said in some cases that people feel “there isn’t enough time to review and evaluate all of the contract terms” before signing. I suppose this can happen from time to time, but most major software purchases involve a lengthy evaluation process and a healthy amount of dickering as companies try to run out the clock to secure better, end-of-the-quarter terms from vendors. Demanding a version of the licensing contract in advance that will serve as the basis of the marked-up final version is not unreasonable (many companies do just that). And it’s important that the people charged with reviewing and negotiating the terms covering future billing structures have an understanding of the financial impact of likely deployment scenarios. In other words, you need expertise regarding how software gets used as well as monetary sense. 

A related problem is that many companies do not assign responsibility for assessing the contract for ongoing annual costs or don’t have someone on staff who is expert enough to be of much use. There is no good excuse for this neglect. A corporation that’s going to spend $100,000 initially to license some software will probably pay the vendor two to three times that amount over the life of the contract for maintenance fees and additional licenses. Given the amount of money involved, it’s certainly worthwhile to have someone look over the contract and summarize key provisions that will affect annual maintenance and other charges. This summary must then be available to those who periodically review bills from vendors. 

Then there is the problem of not having the right people assigned to the task of reviewing vendors’ maintenance charges and other fees to determine whether they conform to the actual contract. Moreover, there’s the associated process issue of ensuring that these people have ready access to accurate information with which to do the review. Too often these elements are simply afterthoughts, and therefore overcharges slip between the cracks. 

Our research confirms that companies that closely track costs are less likely to overspend on maintenance and support costs: 41 percent of companies that have this capability do not overspend on maintenance and support, twice the share of companies that are aware of only some of the costs and just 16 percent that do not track them at all. About half (48%) of those that are spending too much said that establishing a better review process is the most important step they can take to address this issue. 

The research also suggests that it’s in the CIO’s best interests to track all costs of supporting applications. We found that those who do so had faster budget growth than those that do not: 43 percent of those that track all costs recorded 5 percent or more annual increases in their budget in the previous three years compared to 25 percent that tracked only some of them. In short, IT departments that demonstrate they manage resources competently and are good stewards of a company’s resources are rewarded. 

Companies that do not have people, processes and information resources in place that help them manage software costs easily and accurately should invest in them. CIOs must actively manage these costs and the factors that drive them more aggressively and intelligently. There is ample evidence that this is money well spent – unlike the sums lost through neglect. 

Best Regards, 

Robert Kugel – SVP Research

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