Knowing what you want and how to convey it is only half the battle. There is still an overwhelming number of software vendors to choose from, with differing specialties, many of whom offer variations on the same solutions. With so many options and variables to weigh, how do you qualify vendors based on your priorities and what does it take to earn them a seat at your table?
Here is how I like to approach the process, based on what’s worked for me.
Apply the Goldilocks rule.
There are several ways to put a list together, from word of mouth to reviewing the latest analyst’s reports, like IDC MarketScape, Gartner Magic Quadrant, or Forrester New Wave, to see whom they consider as viable contenders. For the most comprehensive sense of what your options are, seek out as many sources as possible.
In our example, we prioritized a Control Tower for internal and external end-to-end visibility throughout the supply chain, enabling remedial action. A capability like this is meant to enhance multi-party collaboration, so you can start by searching vendors in a report like Gartner’s Magic Quadrant for Multienterprise Supply Chain Business Networks.
Finding the best company is trickier than focusing on the upper right Quadrant. Many choose bigger players to avoid risky and career-limiting decisions. The job will get done, but it can be costly and cumbersome and probably won’t push the envelope. These providers are more often effective generalists with a plain, vanilla offering.
In this regard, market leaders are usually too homogenized for my purposes. They tend to strive for ubiquity – to be a “jack of all trades” – whereas our requirements were niche-specific. On the other hand, less established vendors, though agile, more affordable, and innovative, can be a gamble. Some providers offer better niche solutions but are under-resourced. Moreover, while inventiveness – when successful – delivers an incredible competitive advantage, it requires risk-taking.
I’ve also favored vendors who could do exactly what I needed without having to compromise too much on my vision. I’d aim to find the sweet spot between market leaders and cutting-edge vendors. That way, you manage risk, but also invest in someone with a fresh perspective and forward-thinking methodologies — a provider who will propel you with a sustainable competitive advantage for the next several years.
Some legacy providers have been overly mired in the status quo. For instance, some were slow to recognize the transformative potential of SaaS in the cloud and have only recently adopted it. Finding a software vendor that is “just right,” if you recall, involves “future proofing.”
Start the vetting process.
Once you’ve compiled a preliminary list, start thinking about how to conduct the vetting process. By now, you will have cherry-picked the best-fitting contenders, so start contemplating and mitigating risk factors by learning the following details upfront:
Company history. You may learn some interesting insights by delving into prospective vendors’ histories. I once wanted to license a best-in-class returns and repair management software system. During that time, the firm was sold, renamed, and sold again to an industrial conglomerate, who sold them shortly thereafter to a private equity group. The group bundled them with other holdings and sold the entire collection to yet another company.
Throughout all of this – and in spite of it – we hired them. In hindsight, the constant shifts in control should have made us question the vendor’s focus. Everyone’s preoccupation and distraction with the constant changes of ownership likely affected product development and service delivery. They once had a good lead in their category, but they’re not in the pole position today.
Whether a company had a financial or strategic owner is telling. If a firm you’re considering is the sum of serial acquisitions, check whether their codebase is a stitched-together collection of applications. Opt for those that have transformed from a monolithic codebase of mixed maturity to natively optimized modular design.
Staying Power. You want a provider who has financial viability and will be around for the foreseeable future. Request the latest financial reports, such as the most recent fiscal year income statement and balance sheet. Private companies may balk at this but will usually do so under a non-disclosure agreement.
Many companies have favorable income statements but poor balance sheets. Review R&D spending versus depreciation. My rule of thumb is R&D spending should be at least as much or more than depreciation. Since software companies don’t have much plant and equipment investment, their depreciation will mostly be R&D expense amortization. I take comfort in knowing they spend more on new product development (i.e., R&D) than writing down past product development (depreciation). Be wary and fully understand non-GAAP adjustments that appear for consecutive years.
Note that the “size” of a company doesn’t always indicate ‘staying power,’ as large firms with multiple products can always stop investing in the software package you want for business reasons. If you’re interested in an innovative startup, supplement income and balance statements – which usually show a loss, as they are investing in their future – by asking to speak with their external investors, directors, or advisors to see what they like about the company and what the investors’ long-term visions are.
Also, ensure your vendor’s legal contracting entity is registered in your jurisdiction and has assets. I once made the mistake of dealing with a contracting party that was a limited liability entity with no assets and structured to shield the parent company from claims. You don’t want to be left holding the bag if something goes wrong and there’s no way to hold the vendor accountable.
The service delivery model. How will you and the vendor work together? What kind of group will support you? Software vendors, like many other companies, leverage sales and business development reps and introduce subject matter experts as needed. To avoid a disconnect in the hand-off between the pre-sales “courting” and the post-sales implementation process, get better acquainted with their model. Secure a list of names, titles, practice specialty, hourly rates, team size, travel and expense policies (yours or theirs), sample contracts (to scrutinize their customary terms and conditions), and what’s typically included in the startup period.
Schedule a kick-off meeting.
I’ve always favored inviting the prospective vendors to a Kick-off Meeting. Having everyone in the same room at the same time ensures they all receive consistent information about your plans for managing the process.
During the gathering, you can present your current situation, what is and isn’t working, the systems and processes in use, and your vision for the future. It’s also a good time to explain the “rules of engagement,” the timetable of events, introduce team members and their roles, and respond to any vendor questions raised in the session.
Coming up next, we’ll take a deeper dive into the kick-off meeting, vendor discovery process, what the various members of your team will be focusing on, and how to continue qualifying your options.
Missed the previous posts in the series? Start here.
For more resources on this topic, please visit our Digital Transformation Toolkit.
Bryce Boothby is an MPO board advisor and former executive of Flextronics, Celestica, ModusLink, Regenersis PLC, and Lulu.com. His blog series, “Making the Case for a Digital Transformation,” will investigate the topic of “Achieving the perfect order” and how companies can differentiate between solution providers, calculate returns on investment, choose a vendor, integrate with legacy systems, sponsor and sell the business case, and ‘try before you buy.’