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Reviewing ERP Vendors’ Pricing Proposals: Does the Proposal Reflect the Demo? Does the Demo Reflect the Proposal?

Thursday, September 17th, 2009 by Alex Smith

When engaging in an ERP selection process, it is important to require ERP vendors to provide pricing for all demonstrated software functionality and the associated implementation and service fees for such functionality in their pricing proposals. An unfortunate tactic frequently deployed by many software vendors is to demonstrate the full scope of their respective software’s functionality and provide pricing estimates for only a fraction of the software functionality that was demonstrated during the sales process. Some vendors, for example, will demonstrate their software’s ability to allow manufacturers or distributors to operate their warehouse in a completely paperless environment through the use of RF and barcode scanning technology. When these same vendors draft a formal proposal for the selection team, however, the price estimate in the proposal does not reflect a warehouse management system that includes RF and barcode technology. The intent of the software vendor, sadly, is to mislead the selection team, make the selection team believe they are purchasing an ERP system that meets all of their business software requirements – both current and future – and then demand the manufacturer or distributor pay for additional software functionality after the fact. The software selection team should view such practices as completely unacceptable.

There are two ways for software selection teams to ensure that the functionality that was demonstrated to them is reflected in the vendors’ proposals. First, the selection team should require vendors to guarantee, in writing, that all demonstrated functionality is included in the proposals. If a vendor is not willing to agree to honesty and straightforwardness, then why would the selection team ultimately choose to select that vendor as their preferred solution provider from the selection process? Secondly, as part of the software evaluation process, selection teams should look for a software vendor who has provided consistent, straightforward answers to questions and pricing throughout the sales process and has a proven track record of providing upfront pricing for all demonstrated software functionality.

Requiring software vendors to submit proposals that reflect all demonstrated software functionality will provide the selection team with the necessary information to select a software solution that is free of hidden or unexpected software costs.


Gauging Long-Term Viability of Software Vendors – Examining Revenue-per-Employee

Monday, August 17th, 2009 by admin

One of the key areas companies attempt to gauge as part of their ERP selection projects is the long-term viability of potential ERP software companies.  On the surface, one might initially assume the vendor’s annual revenue is the key element to consider, but is it really?

In recent years, Oracle bought PeopleSoft, who had previously acquired JD Edwards.  In using Software Magazine’s Software 500 as the data source, PeopleSoft reported corporate revenue of $2.27 billion in 2004 – the last year they reported data as a separate business entity prior to their acquisition by Oracle.  Likewise, JD Edwards reported corporate revenue of $904 million in 2003.  Assuming revenue alone could be used to gauge long-term viability, would anyone have come to the conclusion that these software vendors would be gobbled up?  Some other large entities that have been acquired in recent years with their last reported annual corporate revenue from the Software 500 include Siebel at $1.34 billion, Hyperion at $765 million, SSA Global at $712 million, Geac at $444 million, and Intentia at $425 million.

Rather than merely reviewing revenue, it is our recommendation that potential buyers of ERP systems and consultants with whom they work take a good look at the various vendors’ revenue-per-employee ratios.  For example, let’s examine this in light of the recent announcement that SoftBrands was being acquired by Infor.  SoftBrands reported corporate revenue of $93.4 million with 775 employees in 2008.  This equates to a revenue-per-employee ratio of roughly $120,500.

In reviewing a series of twenty-five software businesses (including ERP, supply chain management, CRM, and financial management software companies) which have been acquired by other ERP software businesses since 2002, seven of these had revenue-per-employee ratios between $100,000-150,000 in their last year of reporting, nine were between $151,000-200,000 (including PeopleSoft and JD Edwards), five were between $201,000-250,000, and three were between $251,000-280,000 (Hyperion, Mapics, and Siebel).

So, what are the revenue-per-employee ratios of some of the familiar ERP software vendors in the market today?  For 2008, Microsoft led the pack at approximately $647,000 in revenue-per-employee, followed by SAP at $344,000, and Oracle at $240,000 respectively; however, these numbers include these organizations’ complete portfolios of products and services rather than ERP software sales and associated services revenue alone.  In reviewing data for the top ten big name Tier 2 ERP vendors included in the study – using 2008 data if they reported or their most recent reporting in 2007 or 2006 otherwise – four of these businesses reported revenue-per-employee ratios between $100,000-$150,000, while the other six were between $151,000-200,000.

Based on the percentage of employees with strong technical talent that software businesses must attract and retain, and considering a typical employees’ salary and benefits, ERP software companies whose revenue-per-employee ratios are at or below $150,000 may start to raise some serious questions about their long-term viability.

Businesses that are selecting new ERP systems are doing so with the knowledge that they are making a long-term commitment to run their businesses on the new software packages and to work with the associated software vendor for roughly 8-12 years, on average.  In doing so, gauging the long-term viability of the software vendor is a key element to this long-term success.  We encourage software selection teams to examine potential vendors’ revenue-per-employee ratios and trends over the past several years before making a final commitment to move forward together.

Note: Software Magazine’s Software 500 has been the source of all revenue and employee data for this article.


The ERP Selection Process: Developing Your Initial List of Potential ERP Vendors

Wednesday, July 1st, 2009 by Alex Smith

Developing your initial list of potential ERP vendors is a critical step in the ERP selection process. Your initial list of potential ERP suppliers will serve as the basis for which suppliers you will send Request for Information (RFI) documents. Suppliers’ responses to the RFI will in turn help you to eliminate some ERP vendors and move forward with others to conduct initial remote software demonstrations. The vendors’ performance during these initial demonstrations will then help you to select which suppliers you will send a Request for Proposal (RFP), invite to conduct on-site scripted software demonstrations, and ultimately make a final supplier selection. In other words, your initial list of software suppliers should (hopefully) contain the supplier you will finally select as your software supplier. To help generate an initial long list of potential ERP companies (roughly 25 companies is usually a good start), there are a number of resources available to the software selection team.

Google – Google is a great place to search for potential ERP software vendors. For broad searches, use keywords such as “ERP software,” “ERP system,” and “ERP systems.” These search phrases will provide you with a large number of companies to consider. For manufacturers, “process manufacturing software,” or “discrete manufacturing software” are great phrases to search on when looking for potential software suppliers. You can also search on phrases that are more specific to your industry. Companies in the food and beverage industry, for example, can search for phrases such as “food ERP software,” or “beverage ERP software.” Pharmaceutical distributors can search on phrases such as “pharmaceutical distribution software.” You get the idea. Google is an incredibly powerful tool and provides highly-relevant information in its search results.

Industry Publications and Associations – Various industry publications and trade associations are also a great place to find potential software vendors. Members of the National Association of Manufacturers, for example, can check out the software section of the online NAM Buyer’s Guide. Cheese and dairy processers can look at Dairy Foods Magazine’s supplier guide or the Dairy Foods website, while organizations who specialize in plumbing wholesale distribution can frequently find potential software suppliers in The Wholesaler or at www.thewholesaler.com. No matter what your industry may be, your industry’s leading associations and publications are a great place to start looking for potential ERP vendors.

Independent Consultants
– Independent consultants are a great resource for not only developing a list of potential ERP vendors but providing assistance and guidance in other steps of the software selection process as well. If you decide to use a consultant throughout the selection process, be sure to select a consultant who truly is “independent” and does not have a partnership or financial agreement with any software provider. Selecting an independent and unbiased consultant will help you select the best ERP vendor for your business.

For more software selection resources from TGI, please see the “ERP Software Selection Process” within the “Resources” section on our website.  This area provides tools to assist in the software evaluation process, as well as an option for obtaining a list of ERP vendors based on your company’s industry, revenue, and manufacturing process where applicable.