Shelfware

End users are wasting billions of dollars annually on software that they don't use. This shelfware not only impacts on a company’s ability to achieve a return on its investment, but it also raises total cost of ownership. While immature purchasing processes can take some responsibility for the growth of shelfware within the Middle East, the selling practices of many vendors are also to blame.

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By  Vijaya Cherian Published  June 1, 2003

I|~||~||~|In an economy that continues to be sluggish, enterprises are wasting billions of dollars annually on software that they don’t use. Dubbed shelfware, this software is often part of entire suites purchased by companies from vendors at heavily discounted prices. Although seemingly cost effective, analysts warn that this overbuying will, in the long run, negatively impact a company’s total cost of ownership (TCO) and lower its return on investment.

A recent survey by Gartner indicates that 42% of CRM software licenses purchased have yet to be installed. “Of a total of 251,626 licenses that were purchased by our respondents, we found that only 146,200 had been deployed. From these numbers, we determined that about 42% of CRM licenses out there are undeployed, meaning that they are shelfware,” says Beth Eisenfeld, research director, Gartner group.

Through 2005, the analyst house warns that enterprises that continue to buy more CRM software licenses than they need and deploy less than they purchase will incur a 20% to 30% increase in TCO compared to enterprises that implemented what they buy, and although the report is based on a survey conducted in the US, the trend is typical of the Middle East as well.

Research from ITP, for instance, shows that 44% of businesses that have deployed ERP solutions do not use all of its modules. Furthermore, only 20% were sure that they had definitely deployed their entire ERP solution.
While several businesses are ignorant of the issues involved, there are others that have deliberately chosen to buy an entire solution as opposed to individual modules.

||**||II|~||~||~|“We’ve licensed Oracle’s entire e-business suite but we are not using all the modules,” says Hatem Al-Sibai, group IT manager, Al Ghurair Group. “However, Oracle gave us such a good deal on the bundle that it was cheaper to license the whole package rather than license each of the modules separately,” he continues.

Al-Sibai, who heads the team that devised the application strategy for the group, had initially voted to purchase each module as and when the company required it.
“Initially, we had only licensed Oracle’s financial module. But when we started needing other modules like property manager and enterprise asset management, it became obvious that if we continued to license modules on their own, it would be very expensive. It would be much better to just license the entire suite,” he explains.

Although some of the 146 modules in the bundle might sit idle, Al-Sibai is confident that the company will have to roll out most of them to ensure better enterprise management. He therefore feels that the cost is justified.
While the Al Ghurair Group is clearly working towards a massive IT deployment, there are other local businesses that have bought entire suites but only implemented a couple of modules.

“To me, that indicates an unsophisticated buyer,” says Eisenfeld. “They [customers] are not taking the whole picture into account because if you expect to use all of those and buy it as a bundle, the only way you can get the benefits ultimately is if you roll out those software licenses. They are only looking at the initial cost, and are not doing the full TCO, which means they are not looking at the maintenance that goes along with all of that, which is going to be higher over a number of years. If they don’t use it, they are paying maintenance for something they don’t use,” she explains.

Although not the sole reason, the aggressive discounting practice in the software industry is one of the chief causes of shelfware. As Al-Sibai states, his company had paid the price of an entire suite by the time they were ready to purchase the third module, and this cost could not be justified. This often puts customers in a dilemma, and often they cannot resist the pricing.

“Vendors project that it is cheaper to buy more licenses upfront rather than adding them later,” says Gartner’s Eisenfeld. “So customers buy more than they really need.”

||**||III|~||~||~|The analyst adds that when software vendors want to position new modules in the market place, they offer reduced license rates to customers to take the additional modules. And, although businesses may not require these modules, they can often be persuaded to purchase them in the hope that they can be implemented in future. “This is overkill for the customer,” says Venkat Raman, channel director — Middle East, Microsoft Business Solutions, who adds that this typically happens with tier one solutions.

“Vendors use pricing as a basic tactic to confuse the customer. The customer does not understand the TCO, the implementation, the ongoing customisation and the user sophistication required,” he explains.

Furthermore, Raman suggests that unscrupulous vendors bundle all of their modules, from finance all the way through to MRP and CRM.
“Some customers fall into this trap and they buy it. Later, they realise that they are neither going to use it nor are they capable of implementing it because of the cost involved,” he says.

Companies that fail to implement the software that they bought feel justified becuase they purchased it at a discount price. However, most forget that they still have to pay annual maintenance and support fees, even for unused software, which adds up to about 20% of the license fee.

“If you buy [software] that you are not using, obviously your ROI is not very good,” says Ayman Abouseif, marketing director of Oracle Middle East and Africa.

“But buying something that you don’t necessarily need applies everywhere. My notebook, for instance, has a 40 G/bytes disk although I need only 20 G/bytes. But it’s sold as a bundle and I am sure it reduces Oracle’s ROI if I never use it. Still, Oracle finds it easier to buy a bundle as opposed to trying to convince Toshiba to change its disk,” explains Abouseif.

||**||IV|~||~||~|Shishir Srivastava, executive director and general manager of Sage Software Middle East, likewise defends the purchase of bundled software.

“In the space that they [the vendors] are selling, a customer probably requires every element of the software to fully automate his business. Here, enterprises tend to need all these administrative functions, so it makes sense to bundle the whole thing and deliver it to them.” However, he does admit that tier two customers “often get saddled with a lot of apps that they never use and end up paying maintenance.”

Vendor oversell, however, is only part of the issue. There are also customers out there, who scrimp on their implementation effort and therefore end up not deploying the software that they bought.

“A successful project outcome depends on the correct level of internal customer resources being made available, as well as the necessary investment in the consulting services of the software vendor or an accredited and reputable third party. When companies under-invest in this critical area of their project, they tend to defer the implementation of modules or applications to remain within their budget. This is when they end up with shelfware,” explains Trevor Salomon, marketing director of JD Edwards EMEA.

This, in part, can be attributed to problems with change management or business process reengineering. It is commonly seen in the financial sector, government, and the oil & gas industries, according to Oracle’s Abouseif.

||**||V|~||~||~|Typically, a company plans a big project that will take it three years to complete and purchases bundled software at one go because it gets a good deal. After a year, the management’s priorities may change or a new team might be heading the company and the project is no longer deemed critical to the business as another. So the software that was purchased is shelved — sometimes for a while, sometimes forever.

Another factor that has contributed to the growth of shelfware is global recession. Companies initially bought several licenses but later, as the economic downturn kicked in, they had to downsize and therefore ended up with many unused licenses for which they were still paying money.

Software vendors, however, are not washing their hands of the problem. Rather, for those that have already purchased licenses, vendors have expressed willingness to renegotiate and trade in modules. Brian Gregory, director, e-business marketing of Oracle Europe, Middle East & Africa says the company won’t retract licenses, but “we may be interested in doing some license exchange or swapping technology licenses for application licences,” he explains.

Al Ghurair Group used this privilege to swap its module licenses for the vendor’s entire e-business suite. “Oracle has a programme, which is still running today, where they credit you back for what you paid and then issue a new license for the e-business suite and we thought that this would be the right thing to do,” explains Al-Sibai.

Microsoft Business Solutions, likewise, cites the example of a customer that recently reorganised their business. “One of our customers here wanted multiple server installations with different user brackets in different locations like Abu Dhabi, Dubai and Sharjah. Later, they decided to merge all their servers and wanted one big full blown license and we were flexible. We just gave them a new license and took back the old ones,” he explains.

JD Edwards swears by its modular architecture, which enables its customers to select only the applications that they require at that point in time. “In other words, customers only have to purchase what they need and grow from that start point,” explains Salomon.

Sage, likewise, maintains that customers that have bought more modules than they are using can always downsize their license at the time of contract renewal. “We allow customers to downsize licenses both in terms of the modules and the number of users,” explains Srivastava.

||**|||~||~||~|Vendors have also taken an altered approach to maintain the goodwill of new customers. IFS Arabia, for instance, advises its clients to choose its solutions phase by phase.

“Most of our customers usually require only the financial and distribution module,” says Hisham Al-Hussini, corporate marketing manager, IFS Arabia Middle East. “Sometimes a company tells us that they require a financial module. But when we go in, we find out that they require only a portion of that module such as the General Ledger, and we advise them to take only that one component,” he adds.

Microsoft Business Solutions, likewise, offers clients licenses based on the number of concurrent users — people who use the system simultaneously. “If a customer has 100 employees but only 25 people are using the system at an average point in time, they pay only for 25 licenses although they can create 100 or even 1000 users,” says Raman, adding that the vendor has a process within the software to keep track of how many people are logging into the system at a time.

Despite vendor measures and industry awareness reports, Gartner predicts that there will still be an average of 20% shelfware in most enterprises. However, the analyst house predicts that things will eventually return to the normal. “As buyers get smarter and realise how much money has been wasted on shelfware and how much extra maintenance and support they are paying, they will start to build their business case scenario. When they do that, they will be able to better adjust how much they should buy and they will not be so enticed by the initial purchase price discount,” explains Eisenfeld.||**||

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