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Capital Planning Software in the Modern Finance Stack: What it is and Why You Need It
ERP, EPM, PPM, BPM, ECP, ECM: When it comes to the software essential to the “digital transformation” of the corporate finance department, discerning between them all can be far from “EZ.”
Aside from sorting through a jumble of Es, Ps, and Ms, there is some overlap and “gray area” in their use cases. This is particularly true with capital planning software — otherwise known as an ECP (enterprise capital planning) solution.
So let’s clear that up for you.
To understand exactly what capital planning software is, how it differs from other solutions, and why you even need it, let’s start with the basics. To start, here’s what it’s not: a tool for managing “capital” in the sense of investments in financial markets.
In our definition, “capital planning” refers to dollars used to build an asset. These capital expenditures — or Capex — are absolutely essential to the stability, competitiveness, and growth potential of a company.
As you plan, budget, and execute on your capital projects, an enterprise capital planning software solution enables you to manage and report on the entire investment lifecycle — from project inception through budgeting and approval workflow … forecasting to post-completion reviews.
At this point, you might be asking: “Why can’t I just use an application we already have to do those things?” Well, truth be told, you can — but in very limited ways.
An ERP (Enterprise Resource Planning) solution, for example, is an essential tool for transaction accounting but as such is organized around charts of accounts, not projects. Moreover, its backward orientation and role as the transaction system or record, and all that being so entails, makes it ill-suited for forward planning, scenario evaluation and dynamic analytics and decision support.
Accordingly, most enterprises deploy an EPM (Enterprise Performance Management) solution to provide this forward looking outlook and help them plan, budget, forecast, and report on business performance as well as consolidate and finalize financial results (“closing the books”). The planning modules in EPMs are organized around annual departmental budgeting templates and thus lack the depth of information necessary for capital planning or the ability to move seamlessly from the project perspective to the fiscal year perspective and back. If all you need is a depreciation calculation, they can suffice, but if your capital spend is material and important to your business, you will need more.
PPM (Project Portfolio Management) solutions are built around projects but, having originated in the world of IT project management, are architected primarily for project execution. Specifically, they excel at task and resource management covering the steps and people needed to complete a project and coordinate scheduling of activity. While some PPMs include rudimentary budgeting and reporting features they are, at their heart, an operations tool and lack the ability to do essential front-end planning, ROI modeling, forecasting and post-completion reviews.
To put it all into perspective, consider this illustration of a modern “finance stack” —
As you can see, an integrated ECP like Finario fills a much-needed gap for capital planning. Notably, it enables:
Budgeting – Collect project ideas, in a central location, in a standard format with business case justification to begin creating an annual budget. Compare and rank ideas using a standard submission template and financial model. Create portfolios of projects to measure financial impacts and create multiple portfolios for “what if” analyses.
Approval Workflow – Once project ideas have been proposed, it’s time to vet those ideas. This means providing required details, calculating ROI based on standardized criteria, getting bids from vendors, and routing for approvals based on established business rules. Lost time and biased forecasts translate to missed opportunities and underinvestment, cost overruns, and frustration in the ranks.
Reporting Actuals and Revising Forecasts – Once all projects have been updated for actuals, project owners should explain any variances and enter forecasts for the remainder of the project. Several levels of operational and financial leadership will want/need to see this information. To this end, capital planning software should bring robust reporting functionality. This includes dashboards for high level review by the C-suite along with more detailed, project level reports that allow plant level leadership to manage activities and remain on budget and on time.
Post Completion Review – Finally, dedicated Capex software should include the ability to capture post completion reviews of projects. These are essential to determine if the assets allocated generated the expected results. While learning what went well on a project is important, discovering what didn’t go well may be even more important. You review employees annually, you review why you lost a significant new contract, you review all M&A activity, you receive feedback from customers …. Why wouldn’t you review how the limited capital you have is performing?
In short, if your company has a significant Capex budget, and even a semblance of complexity to go along with how it’s planned, allocated and managed, you should be implementing capital planning software sooner rather than later.
Hopefully, that helps clear things up.
As a “bonus,” here’s a handy glossary of financial related market definitions terms. There are acronyms for all types of technology. They can focus on either the function or level of data that you are looking to analyze. In the context of Financial Systems here is glossary of terms to help navigate around topics of interest [adding this as there are hundreds of acronyms out there to describe software or segments or markets]
BPM Business Process Management
Used to manage various organizational workflows. Examples include: Microsoft Sharepoint and Lotus Notes.
CMS Construction Management Software
Software specifically geared to help manage construction projects, including job scheduling and budget management. Examples include: Procore and eBuilde.
ECP Enterprise Capital Planning
ECP solutions automate and integrate the entire Capex lifecycle, including: budgeting (project ideation/justification/inception, comparison/ranking, portfolio/what if analysis), approval workflow, project actuals and forecasting, and reporting. The system compiles all processes, details, and communication into one “single source of truth” to facilitate decision making, analysis, and reporting accuracy that supports users across the organization. Examples include: Finario.
EPM Enterprise Performance Management
Focused on consolidation, reporting, budgeting and forecasting, EPMs are used to analyze and report on revenue and expenses across the enterprise. They typically have very little functionality related to capital planning beyond depreciation. Examples include:OneStream and Oracle Hyperion EPM cloud suite.
ERP Enterprise Resource Planning
Yes, there can be. That’s the danger. But with some investments you’re going to have to wait. For most projects, I’d say a minimum of three months to six months is about right for a post-completion review. If it’s something large, like a new building or facility, it can be a year or two to see the output. Now, you should have an idea of what is trending if you look over several months, maybe that’s enough. But, you know, the larger the investment, the more complex it is, the longer you’re going to have to wait to do it. Best practice is often to have a few steps to the post-completion review. For example, there can be an initial review relatively soon after spending has been completed that looks at cost and operational issues. Then one or more later steps that focus on ROI, after there has been enough time to observe actual operational performance in relation to the cash flow projections.
Do you have any experience where the absence of doing a proper post-completion review was believed to have contributed to a project that was considered a “mistake” or missed opportunity?
An ERP helps automate and manage business processes across finance, manufacturing, retail, supply chain, human resources, and operations. Helping leaders to gain insight, optimize operations, and improve decision-making, ERP systems break down data silos, and foster information sharing between different departments.
Also worth keeping in mind:
BI Business Intelligence
Used to analyze and visualize raw data, including the creation of dashboards, so that users can extract insights and make more informed strategic and tactical business decisions. Examples include: Microsoft Power BI and Tableau.
P2P Procure-to-Pay
Also referred to as a BSM (business spend management) solution, it Integrates procurement and accounts payable to automate processes of purchasing materials and services and processing vendor payments. Examples include: Coupa, SAP Ariba, Jaggaer, Determine, and Basware.
SCM Supply Chain Management
Helps to execute supply chain, manage supplier relationships and control business processes associated with the purchase of goods and services. Efficiencies include lower costs and increased collaboration. Examples include: SAP, Oracle and Infor.
S2P Source-to-Pay
Expands upon Procure-to-Pay capabilities by including strategic sourcing (discovery, negotiation, contracting, and payments). Examples include: Coupa and Ariba
TRM Treasury and Risk Management
Ensures financial risk management policies and procedures are properly managed. Provides visibility and reporting into cash management, bank accounts, liquidity management, and compliance. Helps finance teams oversee investments, debt and intercompany loans. Examples include Kyriba and (look on old finance stack slide)
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The Art of Building Consensus: Rallying a Buying Group Around an Enterprise Capital Planning Solution
You’ve identified a problem that needs to be solved. You’ve explored solutions to resolve that problem, identified what’s required, and have a supplier in mind that you believe is a great fit.
Now comes the hardest part for many: getting everyone who has a say in approving a final decision on board.
This is where the art of gaining consensus becomes essential – particularly at a time when business conditions can be so uncertain.
Research by the Corporate Executive Board (CEB) suggests that, on average, 6.8 “stakeholders” must sign off on a B2B solution such as a SaaS software investment for it to be approved. Complicating matters: they can come from a variety of roles, functions and geographies, bringing with them differing needs and opinions.
Do you know who these folks are? Do you have open lines of communication with them? Have you made an effort to understand the perspectives/biases that each bring to the table? It’s not unusual for a company to go from needs definition, requirements and vendor selection in a silo … and then come to a grinding halt when the buying group converges to make a decision. Whether or not that’s the case in your situation, there are important steps you can take to make the process smoother, and the outcome as desired.
Shared Understanding
Most “experts” agree that consensus-building actually begins with framing the costs or missed opportunities inherent in the status quo. The more data and strategic rationale you have to create this shared understanding, and communicate it, the better. Two simple succinct documents – a “situational assessment” and “Descartes Square” model – can be invaluable.
In your situation assessment for an enterprise capital planning solution, succinctly outline known factors such as:
Average weeks/months it takes to properly route a project proposal for approval
- Notable missed investment opportunities attributable to flawed internal processes
- Documented history of project cost overruns
- Recent funding of projects that later were regretted or which missed ROI targets
- Organization’s performance experience in pivoting/agile decision making in times of adverse business conditions
- Quantifiable implications of absence of insightful reporting
- Documented forecasting/reporting errors and their implications
Additionally, the “Descartes Square” model is a simple, but effective way to frame action vs. inaction.
Now, let’s say that, in doing this exercise, it’s revealed that 40% of capital projects exceed their initial forecast by 15% or more, with a bottom-line implication of ~$70 million annually. If you’re on the engineering team, you might cast blame on the approval and sourcing processes. If you’re on the FP&A team, you might call out bias in the initial plan/forecast. If you represent IT you could point a figure at being denied the funds to make necessary changes.
Don’t go there. Playing the “blame game” just ratchets up indecision and resentment.
Creating common ground is critical. Focus on solutions and empowerment. Emphasize how the product that’s being proposed will enable key stakeholders to be successful at performing their jobs … and the material implications of doing so.
Empowering your “mobilizer.”
Studies conducted by Harvard Business Review indicate the importance of empowering “mobilizers” – those who are “motivated to improve their organization; are passionate about sharing their insights with colleagues; ask smart, probing questions; and have the organizational clout and connections to bring decision makers together.”¹
Whether that person is you or someone else, being a mobilizer doesn’t make you a salesperson. Which means, it’s reasonable to want help articulating and communicating the proposed solution and its value proposition that’s being advocated.
A good strategy, therefore, might be to ask your vendor of choice for help in this regard – whether it be in providing ROI estimates, sample reports, a customized demo for a particular person/role in your organization, articulation of competitive differences, benefits summary doc, or all of the above.
In short, giving your mobilizer the confidence to become a champion for your much-needed enterprise capital planning solution will go a long way in achieving consensus for sign-off. To be most effective, you want your mobilizer to be less concerned about the risk being tagged as the champion of something that doesn’t work out – for whatever reason – and more excited about the possibility of being lauded for creating consensus around something that positively impacts the business, and the way folks are able to perform their jobs.
Conflicting views on the need for change.
Last but not least, any discussion on consensus is incomplete without talking about conflict resolution. For example, what do you do if you have five teammates who are proponents of an enterprise capital planning solution buying decision, but one who is an opponent – and holding back the entire group? Or, how about a situation where, for example, the finance team is solidly behind it, but IT is pushing back? Or where the C Suite (CFO and/or CEO) says he/she sees the rationale, but not the urgency, of approving the expense?
Each situation is unique, of course, but some well-established rules apply:
- Acknowledge mutual respect for differing points of view
- Stick to the facts; make an argument that is strategic and grounded in metrics
- Speak to the problems you’re looking to solve in terms that are most meaningful to the person/people you’re looking to persuade
- Listen to arguments being made counter to your POV without knee-jerk reactions
- Have a willingness to compromise
- Articulate the win/win
At the end of the day, “getting over the finish line” on an important decision such as optimizing your enterprise capital planning amounts to rallying your team around a common goal, with a clear and desirable outcome. Getting there is rarely a linear process, or necessarily fast. But, when successful, worth the effort.
1. Making the Consensus Sale, Harvard Business Review, March 2015
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The Capex Project Post-Completion Review: How to Go From Theory to Practice
You just completed a multi-phase capital project. The assets are in place and in use. Time to celebrate and chalk up a win, right? Maybe.
There is a final step that often gets talked about but rarely completed: a Capex project post-completion review – which is an essential step in proper project management and creating a culture of continuous improvement. A project review, and lessons learned, should be the final step before a project can be officially closed out, and it should be completed sooner, rather than later, while experiences are fresh in everyone’s mind.
Must every project be reviewed? The simple answer is yes but the “cost” (in time, effort, expense, etc.) should not outweigh the benefits. The size, scope, and cost of the project should dictate the level of review needed. For example, a small project might only require a few minutes for a review, while larger expenditures a more in-depth analysis. Either way, there are some guidelines worth following.
First and foremost, for any review to be useful and effective there must be honesty and trust in the process and faith in the intent of the endeavor. It must be clear that a review is *not* about assigning blame, or hyper-focusing on what went wrong. It is an objective analysis of the effectiveness & efficiency of the process in completing the project and whether the desired outcome was achieved.
What went well? Have we achieved the goals of the project? Did we deliver on budget and with the expected results (some results may take longer to see: increased margin, reduced costs, reduced downtime, lower scrap rates, etc)? In the case of multi-year projects with multiple deliverables, each deliverable should have its own review. And it may take several months to get a clear read (recognizing the improvements in a manufacturing process, for example).
What did not go as well? Were the issues that went wrong within the control of the project team? How can we avoid repeating these problems? If issues encountered were outside the scope of the project team, are there steps that can be taken to mitigate risk in the future?
To be effective, results need to be documented and shared in a searchable archive. As part of standard due diligence, all new projects should start with a review of comparable projects and associated lessons learned, and apply it to project justifications and forecasts.
Here, then, are some of the essential components of a sound Capex project post-completion review:
- Project Summary – Include the scope of the project and enough detail to provide a full understanding of its rationale. What business need did the project address? What would be the consequences of not undertaking the project? This document covers what went right, what went wrong, and lessons learned.
- Team Staffing – A record of who worked on the project and their contact information should questions or issues arise as similar projects are considered.
- Project Deliverables – A comparison of planned vs. actual results. Note any changes from this plan (ie, scope creep). Focus on business needs and outcomes and not project costs. This step may take place over several phases. For instance, the installation of a new gantry crane may be successful once demonstrated the crane can safely lift a specified weight. If you’re replacing and upgrading several 5 axis cnc mills, for example you may need several weeks of operation before you can gauge increased productivity and decreased downtime.
- Project Costs – How did the actual spend compare to the original plan for the project? Any overruns need to be explained: e.g., poor planning, supplier issues, or scope creep. All factors should be documented with the goal of assisting future projects in avoiding these issues.
- Project Schedule – Compare the planned timeline vs. actual execution. This step will help highlight what led to project delays or allowed the project to be completed early. This detail is important in that it can improve future management methodologies and effectiveness.
- Transition and Implementation – Cover any issues or challenges that occurred with rolling out the project. The more complex the project, the more thorough this section needs to be. For example, actions to document for an IT ERP rollout could include: How the rollout was communicated; how testing was performed; how “super users” and testers were identified; and, how training was designed and delivered. This information could be immensely useful in assessing future projects.
- Recommendations – Highlight lessons learned and recommendations for future projects. The knowledge gained is often hard won and should be used to improve future project management.
In Practice: A Real World Example
Several years ago, “Company A” (in the refinery category) spent a significant portion of its Capex budget on an overseas plant expansion. Ultimately, the project failed and assets had to be written down, negatively impacting the company’s results. Several factors led to the poor performance of the project, some within the control of the project team and some outside their control (world economics and local country issues). No official Capex project post-completion review was concluded. It was as if people simply didn’t want to discuss the project anymore.
Fast forward a few years and a new project was proposed for a large plant expansion overseas. The project would take several years to complete and again require a substantial portion of Company A’s annual capital budget. The proposal was well researched and very well documented. While no actual faults were found with the new proposal, leadership was hesitant to approve the project given the failure of the prior expansion project. The new proposal languished in limbo through two annual planning cycles before officially being rejected without sighting solid business reasoning.
The impact of the project failure was significant. The expansion was never fully realized and, due to economic issues, assets were impaired and write downs had to be taken. The project cost the company millions and lessons were not learned from the failure. Without having a proper post-project evaluation in place, leadership was unable to discern the current project’s differences, and how lessons learned could be applied to avoid a repeat performance. In short, a significant opportunity was missed in the absence of an objective evaluation.
So How Do You Make Post-Completion Reviews Standard Practice?
Anyone that has been involved in delivering even a single project knows that a post-project review is a good practice. Yet, as stated earlier, many (if not most) companies fail to complete them routinely for reasons ranging from the lack of a corporate mandate to the absence of tools perceived to be required to adequately do the job.
To change this dynamic, a Capex project post-completion review should be a requirement of the capital process as laid out in corporate policy. Leadership should expect and demand evaluations, including making them a part of performance reviews. Tying them into the approval process for subsequent projects can also be considered.
Moving to a unified capital planning system such as Finario can have a dramatic impact on post-review compliance. Because all project details, including actuals, can easily be accessed and reported, completing the process is not only easier, but more informed. Moreover, because the review “rides” with the project over time, it can be referred to in detail with changes in leadership, reporting requirements, etc. and leveraged when similar projects arise in the future, even if many years down the road.
So, go ahead, chalk up that win. With a comprehensive post-completion review in place, the project is now officially “closed.”
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eBOOK: Developing a vision for unified Capex planning
What is Unified Capex Planning?
Are you frustrated with the amount of time it takes to manage and control capital expenditures across your organization? Unifying the Capex planning process within a single system of record can not only save a substantial amount of time, but also provide greater assurance to the integrity of your financial data and deliver real-time visibility into critical information that drives better project decisions and better financial results.
Top-performing enterprises have been able to bring together Capex planning, budgeting, approvals, project forecasting and post-completion review within a single platform. In doing so, these market-leading companies have gained a competitive advantage.
Where to Start with Unified Capex Planning
Mapping the flow of information across the capital planning lifecycle is a necessary first step. This means giving consideration to:
- Where new project ideas are captured
- How they are entered into the capital budgeting process
- How budgeted and unbudgeted projects are reviewed and approved
- How actual spend data and the latest project manager insights are incorporated into revised forecasts
- How project performance is evaluated post-completion.
For each, you want to know who is involved, what data is captured and in what form (i.e. Word doc, spreadsheet, specific software systems, etc.). Taking these steps will help identify what issues exist at each stage and uncover opportunities to streamline the Capex planning process…
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How do you make your capital investment decisions?
*Originally published by Perform magazine.
Effective capital investment decisions underpin business success. The purchase of a new building, IT system or machine can enable a business to produce more of its goods and services so that it can expand and grow its market share. Depending on the nature of the investment, it may also enable the business to be quicker and more agile, and possibly cut its costs over the longer term. But while a wise investment can transform the prospects of a business, a poor investment can consume time, resources and money at a frightening rate, potentially threatening the business’s cash flow in the short term and even its viability in the long term. What’s more, any business that fails to deliver a healthy return on investment through its capital projects is likely to alienate its shareholders. So how can businesses go about the capital investment decision-making process in a way that increases their chances of success?
With capital investment, as with virtually every other project, it is essential for the business to get off to the right start if it is to minimise the risk that the investment fails to deliver on expectations at a later date. Hence strategy should be the starting point of any good capital investment decision-making process, according to David Tilston, a non- executive director and former CFO of several listed companies. He has had experience of making capital investment decisions relating to property, plant and equipment, as well as IT systems, throughout his career. “Any company is going to have finite financial resources,” he explains. “Therefore you want to try to direct the bulk of your investment towards areas that are consistent with your longer-term strategy.
“If you’re buying a property or making another type of large investment, typically you’re looking at it with a five- to ten-year time horizon, possibly longer. So the first question you ask should be: is this investment consistent with our strategy?”
Facts and figures
If the investment is consistent with the business’s strategy, the next step is to explore whether that investment is also sensible from an economic, financial and technical perspective. This is a big task, but there are various tools and techniques to assist with it, including cost-benefit analysis, cash flow forecasting and – for engineering-related projects – engineering economics.
“A capital budget or discounted cash flow analysis is generally considered the most useful way to think about the benefits of a project,” says Michael Goode, Solution Consultant at capital investment software provider Finario. “Done carefully, it can incorporate all the costs and benefits of an opportunity. Net present value (NPV) is the best return-on-investment (ROI) metric to measure a project’s absolute return, while profitability index (PI) should be used to rank a project’s relative return. With a discount rate that reflects your organisation’s cost of capital, the NPV of your project will give you a concrete measure of its value. PI will give you a simple, but highly accurate, way to compare returns across projects of different sizes. Both metrics should be estimated before budgeting, again at approval, and then during post-completion review…”
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Prioritizing your capital project portfolio
Prioritizing your capital project portfolio
Most organizations categorize potential investments either qualitatively or quantitatively. Qualitative investments typically include strategic projects or those that address new mandates or regulatory requirements. Most quantitative investments have clear financial goals.
To prevent “pet projects”from moving under the radar, managers should be able to compare and prioritize investments across the capital project portfolio on an apples-to-apples basis – even across disparate categories.
One chemical company forced a management discussion to compare quantitative facts with qualitative rankings of its portfolio. The conversation led to informed tradeoffs on productivity, growth and maintenance categories, increasing portfolio net present value (NPV) by more than 30 percent.
This is piece is part of a larger article recently co-authored by Finario and McKinsey & Company. To access the full article, click here.
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How to avoid the Capex “planning fallacy”
How to avoid the Capex planning fallacy
If you have firsthand experience in dealing with a capital project that is years behind schedule and millions of dollars over budget, you’re familiar with the “planning fallacy” – even if you’ve never heard of the phrase before.
The concept, first proposed by a team of psychologists in the 1970s, describes a situation in which projections for the time a task will take to be completed are actually subject to an optimism bias by the projector, and therefore projections almost always result in the underestimation of the actual time needed to complete the task.
Sound familiar?
When it comes to capital projects, there is a tendency to fall victim to the Capex planning fallacy during project forecasting. Often, projects are approached in a near vacuum state, where the specifics of the project are carefully considered, analyzed and problem areas identified without regard for the ultimate fates of projects similar to the one at hand.
Overoptimism on the part of executives can lead to tunnel vision among project managers, who in turn approach projects with an unrealistic set of expectations when it comes to timing and budget.
To avoid the Capex planning fallacy, there must be a transparent system for identifying risks and an understanding of how these risks impacted the performances of similar recent investments. This may require more frequent forecasting so that any overoptimism on the part of analysts is kept in check to produce an accurate projection of spend and time to completion.
To learn more about how to avoid the planning fallacy during capital project forecasting, read Better Forecasting for Large Capital Projects by McKinsey & Co.
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For effective Capex approvals, context is king
For effective Capex approvals, context is king
Organizations of all sizes commonly suffer from a lack of project context when they set out to optimize their portfolio of capital investments. A limited understanding of each project’s relative attractiveness (i.e. its strategic fit and/or financial impact relative to others) essentially leaves a company flying blind, putting investment decisions in uninformed hands.
There isn’t necessarily one root cause of this problem, but it’s most frequently a symptom of a poorly structured system of management where communication and the relaying of critical project information is not effectively enabled.
So, what can be done to avoid this lack of context?
As capital project requests flow in from different business units across an enterprise, there are several immediate questions a diligent organization should pose:
- Do we have the budget to undertake this investment?
- How relatively attractive is this project compared to others out for approval?
- What impact will approving this investment have on the portfolio?
Establishing a clear sense of your organization’s true capital position is the first step towards making effective Capex approvals and optimizing your portfolio. Asking these questions for every proposed investment will enable you to determine this position and proceed accordingly.
To learn more about making Capex approvals in the context of your current capital position versus budget and relative to all the other competing alternatives, explore our latest Capex approval tool, Finario Converge.
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Avoiding project overruns: It’s about evaluation, not execution
Avoiding project overruns: It’s about evaluation, not execution
Are your capital projects continually failing to live up to their desired expectations? Are project overruns common?
You’re not alone –when it’s all said and done, more than 60% of capital projects exceed budget, and more than 70% launch later than planned. When added up, these failures can have profoundly negative effects on your capital investment program, even resulting in multimillion dollar losses for larger projects.
When project overruns occur, the first instinct is blame it on poor execution. In truth, however, the root cause of these failures is actually more likely to be the result of challenges to accurately scope out a project’s cost and risk.
One of the best ways to avoid these issues from the start is to institute a process of scrubbing the business case for every potential investment. For instance, does it fit in with the company’s larger corporate strategy? Is the project subject to any potential regulatory, technical or other risks? How will undertaking this project impact other potential investments competing for funding?
To strength this framework, organizations can even create a multidisciplinary advisory team to scrub projects – this allows for different perspectives to enter the conversation and ensures there’s limited bias affecting decision making on projects across the portfolio.
For additional related reading, download our Managing Capital Project Risk executive briefing.
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How to measure risks & benefits when considering a Capex software vendor
How to measure the risks & benefits when considering a Capex software vendor
New software always sounds like a great idea, but problems with execution can mar even the best ideas. If your organization is like most, you simply want to be able to obtain your specific business benefits without the typical hassles, delays and cost overruns endemic to traditional enterprise software.
The first step is to ask the right questions. Some software vendors may have well recognized brand names and recognizable customer bases, but what does that give you at a practical level? Instead, ask each vendor: What percentage of your software deployments have failed?
As you ask this question, bear in mind that there are really two types of failure:
- Total failure – where the system could not be fully installed and was not put into widespread use, and
- Partial failure – where the system is in use, but deployment took longer than planned or cost more than advertised.
Most likely, the vendor will be reluctant to come clean. Independent verification is difficult, but some industry analysts have estimated that for the well known on-premise enterprise software vendors, total failure rates are as high as 1 in 3, and partial failure rates exceed 2 in 3.
The reasons for these failures are diverse and complex. At the end of the day, the excitement about the cloud is about more than just the subscription model and lowering the total cost of ownership (TCO), it’s also substantively about:
- Eliminating the risk inherent to customizing on-premise software,
- Dramatically reducing the time to value for new applications, and
- Aligning the vendor’s and customer’s interests to promote satisfying and effective long-term relationships.
As you might expect, many traditional software vendors now claim that they have moved to the cloud as well. But beware – do not fall for this claim on its face. Instead, ask the vendor if they:
- Offer the application only through the cloud, not as a hybrid cloud or on-premise solution,
- Have built the application from inception as a multi-tenant SaaS application, and
- Utilize a highly-regarded third-party cloud infrastructure provider operating on a global scale.
If the answer to all three is not an unequivocal yes, then you are dealing with the false cloud. While there certainly are a number of other important factors to consider, weeding out vendors who don’t meet these criteria will spare you a lot of time, effort and agony.
To learn more about the Finario system architecture and the steps we take to ensure a highly reliable and secure application, have a look at our Finario Security Overview.
By the way, being a true cloud or software-as-a-service solution is not in and of itself sufficient. The majority of SaaS applications have been architected for small and medium-sized businesses and thus lack key administrative and security features required to adequately and safely serve a large enterprise. Don’t be misled by reports of large numbers of customers or a few marquee names. It’s more important to understand what percentage of their customer base is similar to your company in size and industry focus.
Another valuable metric that you should request when considering a Capex software vendor is what percent of their revenue comes from the application you are considering, and which is being used for the specific purpose you intend to use it. If it’s not the majority, you may find the level of support and ongoing innovation to be much less than what you really need.
These are just some of the critical factors to consider as your organization begins the search for a suitable Capex software vendor. In the course of this process, be sure to hold each vendor accountable – ask to see proof of customer success, closely evaluate their true cloud capabilities, and don’t shy away from pressing them on their dedication to continuously innovating the product in question. Taking these steps to control the the conversation and develop a complete sense of the Capex software vendor’s legitimacy will ultimately help you avoid surprises, delays, hidden costs and further disappointments down the road.
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Topics Include:
- Improving budgeting/forecasting accuracy
- Injecting actuals into forecasts
- Applying consistent ROI metrics to projects
- Streamlining your approval workflow
- Empowering agile decision making
- Improving cash flow forecasting
- Enabling post-completion reviews (audits)
