A TERRIBLE THING TO WASTE
Unused software may be costing you millions of dollars. Here’s how we got here – and what some leading companies are doing about it.
By Peter Krassa

While it may be true that each of us uses only a small fraction of our brain (and slightly less on Mondays), does the same hold true for corporations, and is there anything to be done about it? Several computer industry experts say US companies have purchased billions of dollars worth of software that they don’t use – “shelfware,” in IT parlance – and that this overbuying is now contributing to the current slowdown in IT spending. At the same time, it’s also inspiring some forward-looking CFOs and CIOs to change the way they plan, purchase, implement, and monitor computer software.

While it’s impossible to put an exact dollar figure on the problem, several industry watchers have come close by conducting surveys of CIOs. When, for example, Charles Phillips, managing director of enterprise software at Morgan Stanley, asked 300 CIOs earlier this year whether they had unused software licenses, one-third said they had unused database licenses, 12 percent said they had unused CRM (customer relationship management) licenses, nearly 20 percent reported unused ERP (enterprise resource planning) licenses, and just over 10 percent reported unused SCM (supply chain management) licenses.

Similarly, in a poll conducted recently by AMR Research, of 42 companies that use SCM software a whopping 85 percent reported using only one or two modules (SCM suites typically contain a dozen or more). Of 60 companies using procurement software, only a third told AMR they would use it for direct procurement, the software’s raison d’être. And of 100 companies using CRM software, AMR found that most had implemented less than half their licenses.

Those figures may surprise CFOs, who seem far less aware of the problem. In a survey of more than 250 CFOs conducted by CFO in the US and Morgan Stanley last summer, three-quarters said their organizations had not purchased technology in excess of current needs; only 10 percent responded that they definitely had.

But license fees are only the tip of the iceberg: maintenance and support fees pile on the wasted dollars, too. Typically these fees equal about 20 percent of the license fee. But unlike license fees, which are paid just once, maintenance and support fees are paid on an ongoing, annual basis. Basic arithmetic shows that when annual maintenance and support fees equal 20 percent of the underlying license fee, a company with an unused software license will have wasted as much in support costs as it has on the original software license in just five years.

Many forces have combined to turn the esoteric world of enterprise software into a waste management situation worthy of television anti-hero Tony Soprano. The licensing models and reporting requirements of software companies, the acquisition and deployment strategies of customers, the Y2K problem, and the dotcom boom and bust have all played parts.

It was all well and good for Henry David Thoreau to urge us to “simplify, simplify”. Had he been forced to tame the myriad complexities of the IT world, he never would have left the banks of Walden Pond. Because enterprise software suites are enormous, it’s difficult for companies to know exactly what they have, let alone use it all. “No one uses Excel, Word, and PowerPoint all the time,” says Jacqueline Woods, Oracle’s vice president of global pricing and licensing strategy, alluding to the Microsoft Office desktop suite by way of analogy. “There’s just not enough time in the day for everyone to use everything all the time.”

Adds Brian Vogt, vice president of professional services, e-business, at SAP in the US: “It’s not uncommon that I go into accounts where the business community doesn’t even know that they own the product or functionality that might solve their current need.”

But if customers have at times spent recklessly, they’ve been aided and abetted by the software companies themselves, which, eager to secure the biggest dollar sale possible, often “throw in” software modules that appear to lower the price of individual components. A company angling to pay US$800,000 for a package that normally sells for US$1 million can often be persuaded to write the seven-figure check if additional modules are included for “free”. Often that extra software sits on the shelf.

“New and improved” can also prove to be a bane: software companies often deluge customers with a continuous stream of new or enhanced products that customers buy even though they haven’t yet fully rolled out the older versions. This helps software companies make their numbers for the current quarter, and IT departments feel as though they’re au courant, but meanwhile fundamental economic sense takes a holiday.

Speaking of holidays, New Year’s Day 2000 may not have ushered in the technological disaster many had anticipated, but it spawned a lingering hangover. Many companies “solved” the Y2K problem in 1998 and 1999 by buying new enterprise software suites to replace older programs rather than retool them. Today, many modules within these large suites remain unused. And at companies that let decentralized departments address the Y2K issue independently, the problem can be even worse. Explains Phillips of Morgan Stanley: “A lot of divisions went off and did their own thing. Even though they’re all on, say, SAP, they’re on different versions, using different features, so there’s no consistency.”

Still another reason for the current situation is the dotcom boom and bust, which drove companies of every persuasion to stock up on all sorts of e-business applications whether they needed them or not. “People were in a frame of mind to take risks, to consume technology quickly, and to buy a lot,” explains Phillips. “Some products they eventually used, but others they just didn’t need.”

Corporate decentralization has also wrought havoc. Padman Ramankutty, founder and CEO of Bristlecone Inc., a supply chain consulting firm in California, describes one client that typifies the problem: “They’ve been an SAP shop since 1993, but for manufacturing they chose Oracle, they deployed it, customized the heck out of it, and then HR went out and bought PeopleSoft,” he explains. “Then someone said, ‘I need a sales tool,’ and instead of looking at the ERP suites they already had to see if it was contained in any of them, they bought yet another product.”

That could make a CFO’s blood boil, if he or she were around to find out. A final contributor to the current problem is the short work lifecycle of top-level executives. “The average tenure of a CEO or CFO is probably about 18 months,” explains Michael Gregoire, senior vice president of PeopleSoft Global Services. “Those are the people who approve the purchase of software, yet they often leave before the vision of the intended use comes to pass.” A new person takes over, priorities change, IT investments languish. (Layoffs, of course, also play a part: every departing worker represents a possible “seat” that companies continue to pay for, yet few companies track this
adequately.)

Many of these factors are not new, but they have taken on a cumulative weight and attained critical mass with the downturn in the economy. “When you had unlimited budgets, it didn’t make sense to look at the pennies,” says Patricia Adams, a senior research analyst at industry watchers Gartner. “No one really believes they’re going to get dotcommed out of existence anymore,” adds AMR Research analyst Kevin O’Marah. Now, with plenty of incentive and time on their side, executives are taking a closer look.

Choose It and Use It

Lee Wilbur, COO of US-based Jackson Laboratory, claims he has a strategy that results in no unused software at all. His employer, a non-profit genetic research lab, bought 28 software modules from Oracle in late 1999, when Wilbur was CFO, and has since implemented 22 of them. “We started with the life-sustaining stuff,” he says. Now the lab is working to implement the remaining six modules, which are analytical applications that will help Wilbur and his team transform sales and financial data into useful business intelligence. Wilbur is quick to emphasize that while those six modules were not implemented immediately, they were never shelfware. “Oracle has an incredible number of modules,” he says. “We chose very carefully, based on which ones we need and which ones work together.”

Similarly, US-based retail giant Home Depot, renowned for having what customers need on its shelves, resists the shelfware problem by carefully monitoring what it buys. It employs what it calls a “software license methodology” to guard against overbuying. Key to this strategy is deploying what it does buy as quickly as possible. “Before we purchase anything, we have a rigorous proof-of-concept to make sure it works,” explains Barbara Sanders, vice president of engineering and architecture in Home Depot’s IT department. “By the time we actually buy it, we’re well under way toward getting it deployed.” Experts say that shelfware often results when customers lose sight of the fact that implementation can cost several times the price of the software. Simply put, the money runs out.

Having clear strategies for purchasing and deploying software is vital. Also useful is an approach to ROI that makes unused software a non-issue. Executives at The Scotts Company, the US$1.75 billion lawn- and garden-care products maker in the US, readily admit they’ve implemented only six of the 18 or so modules in the SAP R/3 suite they bought. But Brian Belcher, vice president of information systems, says he drove a hard bargain on the price, and based the ROI only on the “core” modules the company has deployed. In a sense he regards the other modules as gravy, there if and when he needs them. That keeps CFO Patrick Norton, who oversees and ultimately approves every software purchase, happy. Adds Barry Sanders, Scotts’ senior vice president of business development, who works closely with Belcher: “This independent check by the finance department, and final approval by the CFO, puts them in the role of due-diligence auditors.” He says the process of proving the business value of an IT project can sometimes be painful, but certainly guards against waste.

Ultimately, experts say, that increased scrutiny will alleviate the problem of software overbuying. So will customer activism, as vendors are pressured to unbundle multi-module suites so that customers can buy only what they need. Asset management software, which can keep track of hardware and “meter” software usage to provide useful information when it’s time to negotiate re-licensing, can also help. Perhaps most important of all, solid communication between IT, finance, and business unit heads can ensure that projects will provide payback and be executed with all possible speed – lest someone forget what’s sitting on the shelf.

Peter Krass is a freelance writer based in New York, and a former editor at Inc., Planet IT, and Information Week.