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What to Look For: Spotting a Healthy, Enduring Software Vendor
December 14, 2017

Most RFPs are focused on highly detailed feature and functional requirements. This is a great measure of the current state of the software, but it is just a snapshot of what the software can do now. Software should be purchased with a goal of creating a long term, multi-decade relationship with the software vendor. To that end it is important to understand the ownership structure and stability of your potential vendors as well as comparing features and functionality. There are three general types of structures:

  • Privately held, proprietorship, partnership
  • Privately held, private equity
  • Publicly traded

Software vendors earn revenue from license, services, and maintenance sales. How this revenue is utilized by the three types of ownership will vary widely.

Key Keys to a Successful Relationship with Your Software Vendor

The reason the ownership model is important to you as a customer is that there are two keys to a successful relationship with your vendor.

Key 1: Vendor Stability

First is stability of the vendor both as a company and in its relationship with you the customer. Organizations that are underfunded or have very strict margin targets (as most private equity firms do) may be unable or unwilling to invest in optimal customer service. Having a staffed help desk available in your local language at any time is very important. Also, having highly knowledgeable staff to implement and support your software is extremely critical.

A real risk to the stability of the relationship is ownership that is entirelyfocused on creating profit margins based on the maintenance revenue from existing customers. This business is known in the software industry as ‘maintenance mode,’ often pursued by privately held companies. Risks to your organization include reduced service levels as greater profit margins may be dependant on staff reductions and/or the hiring of less qualified staff.

Key 2: Software Investment

The second key to a successful relationship is investment in the software. Your RFP is capturing requirements you know of today, with perhaps a list of functions you may think you need in the future. Technology is advancing at a rapid pace and it is impossible to predict the future. It is important to select a vendor that invests more than a nominal amount of revenue in Research & Development (R&D). R&D is critical to the long-term health of a software company. With the ‘maintenance mode’ business model there is minimal to no investment in the product. This means there are typically few new releases of the software that include new functionality. This puts the burden on you, the customer, to fund enhancements to the software you use to process critical daily functions within your organization. In addition, as the technology ages, your IT staff will be challenged and burdened to support that old technology, such as old browsers or old releases of applications like Java.

Another R&D related risk is that there is investment, but the investment is not targeted to your needs. The private equity model of ownership typically targets underperforming companies. They cut costs and attempt to aggressively grow sales to increase the valuation of the company – with the intent to ‘flip’ the company in a few years. The R&D investment is targeted to technologies and features that will make a big impact in the marketplace to attract new customers, but don’t necessarily include the features and functions your business needs to keep moving forward.

What to Look For: Spotting a Healthy, Enduring Software Vendor

Healthy, enduring software vendors are profitable organizations that create long-term relationships with their customers by investing maintenance/license revenue in R&D, and hiring/supporting industry-expert staff. This philosophy supports a model that adopts and releases new technology, along with business-relevant new features and functionality to customers on a regular basis.