In the previous Industry Insight in this series, I looked at how South African companies can exploit cloud computing. In this, the third Industry Insight in this series, I will look at how to bring a customer's requirements, satisfaction and benefits in line with solution delivery. For me, this is the best manner in which to approach cloud computing.
It has been one of the enduring facts of the IT market - and in particular the software market - that vendors sell goods and then transfer the onus of responsibility to the customer to ensure value is obtained. In many cases, the customer has to hire a team of costly consultants for several months if it wants to see implementation and get some value. This adds hugely to the cost of the software - up to 10 times, according to industry reports.
This scenario led to much unhappiness on the side of customers, who quite rightly feel they have got the messy end of the stick. In extreme cases, this has led to lawsuits against software vendors, some of them among the world's largest.
In the spotlight
Let's look at a few of these, which have gone public:
* From Texas comes a report that trash disposal giant Waste Management was suing SAP, saying top SAP executives participated in a fraudulent sales scheme that resulted in a failed ERP implementation. The lawsuit alleges software to handle tasks including billing, collections, pricing and new customer setup were pitched as a "tested, working solution that had been developed with the needs of Waste Management in mind", with no customisation required, according to InfoWorld. However, the complaint alleges, the German company's US version of the software had never been tested at a US company that hauls waste and handles recycling and actually was a beta version. It was asking for its money back, as well as damages.
* Connecticut-based Ferazzoli Imports of New England is suing Epicor for a system it says never worked as intended or promised. The dispute dates back to 2007, when Epicor sold more than R1.4 million worth of software to the company; it failed to work, and Epicor "induced" Ferazzoli to buy additional software and services meant to make the system operate properly, but none made it "functional or usable". To date, Ferazzoli has paid Epicor the US equivalent of around R2 million, and it does not have a functional system.
* Dell went public with the cancellation of its SAP ERP implementation after two "gruelling" years and expenditure exceeding $200 million.
To arrive at an arrangement based on risk requires more than selling a CD with some software on it.
Richard Firth is CEO and chairman of MIP Holdings
* Fox-Meyer was once a $5 billion drug distributor, the fourth largest in the US. It paid $100 million for a SAP R/3 system and Pinnacle computerised warehouse system. The new systems were simply unable to cope with the volumes, they crashed frequently and they returned incorrect results. Customers were compromised; the company filed for bankruptcy; and was bought by a competitor for $80 million.
* Allied Waste Industries turfed its $130 million SAP system after saying the cost of maintaining the software and the constraints it placed on the business could not be justified.
* Other major ERP hitches include Hershey Foods, WL Gore & Associates, WW Grainger (earnings down 18% after an ERP implementation), Goodyear (it had to restate its financial results from 1998 to 2003 and saw $100 million in profit wiped out) and Whirlpool.
This may seem like a public beating up session of ERP vendors, but it's a list (partial, it must be said) of highly public failures. Note the commonalities: all the customers paid up-front for their systems; they assumed all the risk and in many cases found their businesses shrinking as a consequence (in one case actually going out of business); and they had to modify their business processes to accommodate the software, rather than aligning the software with the key performance indicators (KPIs) of the customer.
With a difference
I recommend a new approach, one that is aligned directly and intimately with the success of the customer.
Payment here is not simply a set fee that is paid irrespective of the performance of the technology, but it is based on one or more of the customer's KPIs. The better the customer's business performs - assisted by its IT systems - the more it pays. Conversely, if IT does not play its role in improving and streamlining the business resulting in lower revenue, the customer pays less.
To arrive at an arrangement based on risk requires more than selling a CD with some software on it. The vendor needs to get close to its customer and to understand its business and processes well enough to be able to make a difference.
It is only by knowing what makes the business tick that risk-based billing can work and the customer can be charged according to KPIs.
The fundamental idea is that the vendor knows the business and processes so well that it in turn understands what makes the business grow; therefore, the vendor knows what business KPIs should be used to measure business growth or success. The KPIs should mimic those used by executives in the customer company to measure their successes or failures. This ensures, for the first time, that the vendor is pushing in the same direction as the customer board or executives.
* In the next Industry Insight in this series, I'll dig deeper into the issue of alignment of software solutions with a customer's business drivers.
* Richard Firth is CEO and chairman of MIP Holdings.