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.
Peter KrassOctober 15, 2002

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 U.S. 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 E. Phillips, managing director of enterprise software at Morgan Stanley, asked 300 CIOs earlier this year whether they had unused software licenses, fully 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.

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Those figures may surprise CFOs, who seem far less aware of the problem. In a survey of more than 250 CFOs conducted by this magazine and Morgan Stanley this past summer, three-quarters said their organizations had not purchased technology in excess of current needs; only 10 percent responded that they definitely had. (For full results from the survey, see “Numbers, Please.”)

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 Tony Soprano. The licensing models and reporting requirements of software companies, the acquisition and deployment strategies of customers, the Y2K problem, and the dot-com boom and bust have all played parts.

It was all well and good for 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 Microsoft’s 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 America: “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 $800,000 for a package that normally sells for $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 dot-com 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 Santa Clara, California, describes one client that typifies the problem: “They’ve been an SAP shop since ’93, but for manufacturing they chose Oracle, they deployed it, customized the heck out of it, and then HR went 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 worklife cycle 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 dot-commed 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 Jackson Laboratory, in Bar Harbor, Maine, claims he has a strategy that results in no unused software at all. His employer, a nonprofit 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 6 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 6 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, 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 nonissue. Executives at The Scotts Co., the $1.75 billion maker of lawn- and garden-care products, readily admit they’ve implemented only 6 of the 18 or so modules in the SAP R/3 suite they bought. But Brian Belcher, vice president of IS, 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 Scotts’s senior vice president of business development, Barry Sanders, 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 multimodule 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 relicensing, 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 will be executed with all possible speed — lest someone forget what’s sitting on the shelf.

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

Off the Shelf: Getting Unused Software Back into Action.

Brace yourself. If your company has software, rest assured that it also has unused software. Also known as shelfware, unused software can be thought of as an asset with an ROI of zero. How to transform your company’s unused software into a fully functional member of society? Here are nine ways to get started:

Hook up. Join a software users group. Driven by its members, many have recently become less a showcase for vendors and more user-centric, making them good places to learn the latest software-utilization tips and tricks.

Get your hands dirty. Don’t delegate it all to the CIO. Instead, oversee and review major software purchases, asking: Will this software serve the organization’s strategic goals? If so, do we already have software under license that could perform this function?

Count ’em up. Conduct an inventory of your organization’s software and compare it with your licensing documentation. Your company licensed accounting software for 1,000 seats but now has only 500 people in the accounting department? There’s only one way to find out.

Unbundle. Whenever possible, buy only the software you actually need — not simply what the vendor offers. That might mean asking a software vendor to let you pick and choose modules from a complex suite. If the vendor won’t play along, try to negotiate a big enough discount on the total suite so that you can get the ROI on the modules you will actually use. Just remember to factor in implementation costs.

Centralize. If your company has a decentralized IT function, now might be a good time to rein it in. Times like these call for negotiating enterprisewide volume discounts, avoiding duplicate purchases, and buying only what you need. Centralization can also help you leverage the most suitable implementation expertise for a given package, helping you to use what you’ve got before it becomes obsolete.

Use what you’ve got… One way to pare down unused software is to consider it first when departments request new software. You may have exactly what’s needed already sitting on the shelf.

…But not always. On the other hand, don’t install unused software just for the sake of getting your money’s worth. First ask whether there’s a good reason to use it. Then remember that the cost of implementing the software can greatly exceed the cost of licensing the software — figure as much as $9 in implementation costs for every $1 worth of software.

Be late. Make your vendors’ quarterly budget pressure work for you: hold off on major purchases until the end of the quarter and drive a hard bargain.

Walk away. If the numbers don’t add up on an early-stage implementation, walk away. Home Depot, for example, recently “parked” a wireless project after deciding the technology wasn’t ready. Now it’s spending a year working with vendors to address its needs. On the bright side, when it’s ready, it will be used. — P.K.