How to Buy Software on a Tight Budget

Your business is growing. But the data you are gathering is overwhelming your systems and your people. To top it off, your bank and venture partners have been subtly suggesting that your internal reporting needs to become more sophisticated. It is time for your company to invest in new software and reporting.

So you and your IT staff do a little homework on software and pricing and after the smelling salts have been administered all the way around, you come to a quick decision. There has to be a better and cheaper way to buy the software you need. And there is -- if you start out by performing your own application review.

What is An Application Review?

Mechanically speaking, application reviews are a combination of analyzing the information needs of a department or company and then researching available software to find a fit. But there is also a strategic component to an app review. You will want to look at the overview information picture while you are performing your review. For example, a large part of our strategic consulting engagements focus on the information technology systems and staff that exist in our clients. We look at which departments are gathering or receiving data and how that data is (or isn't) turned into information that is useful to the department and the overall organization. We also look at the reporting needs of outside agencies, partners and institutions. Basically, we are performing an application review as part of our strategic planning engagement.

Take A Broader Approach

The easiest way to perform an application review is to take a much broader approach instead of undertaking a costly, in-depth analysis. Our first question is: what is the key information you need to do business? Then we ask: what problems are you trying to correct? Third, while you are collecting this information, have an experienced outside advisor such as your accountant or banker analyze the company from a financial viewpoint. That way, when you see an area that is underserviced in terms of information flow, you can concentrate on how important that area is to the company's primary goal of making money.

Results of Your Review

You never know what your review will find. As an example, we once had a manufacturing client whose cash flow had declined significantly over a twelve month period. Originally they came to us looking to restructure their bank financing and had a goal to update their inventory systems to increase cash flow. But our analysis of the income statement showed three things: revenues increasing higher than pricing increases, no apparent unit gross profit margin decline and no build-up in ending inventory. So it didn't look as if inventory was the culprit. 

During our detailed financial analysis of the balance sheet items, however, we found that the key problem was that the days-in-receivable ratio (a measurement of collection time) was nearly 2.5 times higher than in the past. It seems that the company had changed its product mix and had introduced a product line with both ongoing service features and a warranty. The existing billing system was hopelessly inadequate to the task of capturing the sale contract information and reporting that detail to the customer. To make the problem worse, there had been some turnover in key accounting personnel during the year.

So, not only was billing going out late, the bills went out without sufficient detail for customers to understand them. Not understanding the billing, the company's customers held off paying. They were waiting to be called by our client about their payments being late before asking about the invoice detail! Not only was this a customer service and collections nightmare, it was also the biggest contributor to the company's underlying cash flow problem. The receivables were just not turning fast enough. But it is a good example of how our financial review told us where to look for information problems.

Your Budget - How Much Is Too Much?

While there are no hard and fast rules about the amount you spend, common sense should be your best barometer. But it is difficult for entrepreneurial companies with few in-house IT resources to know what to expect in terms of pricing. Jason Hare, President of MadTek, LLC, a Web application integrator and developer, relates that even today many of MadTek's new customers come in with very high budgets relative to the resulting benefit they are likely to receive. He states, "It is not unusual for us to cut back on a customer's budget by showing them alternative ways to do the same job for much less money by using other software. Although we develop or install any kind of software, we are principally an application service provider shop [application service providers (ASP's) typically rent software to companies over the Internet for a monthly fee], so we know that the Internet is a much cheaper way to provide even mission-critical processing and reporting for a fraction of the in-house cost." NOTE: We, too, find more and more people turning to ASP's for their software solutions due to both the cost savings, built-in technical support and the ability to maintain or reduce IT staffing levels.

TIP: To analyze the differences in cost between in-house software and that provided by an ASP, take into account all the costs, including new people, hardware, ISP costs, etc., it takes to operate new software. 

Quantify The Benefit

If you are looking to spend more than 5% of your annual revenues on new or upgraded systems, make sure you analyze the expected benefits. To figure the benefit of your new software purchase, calculate the savings or expected revenue generation from the software, subtract any increase in operating expenses and that should give you your net monthly (or annual) benefit. Now divide the total investment in systems - hardware, software, training, installation and consulting costs associated with the new software - by your net monthly or annual benefit. This will give you your estimated payback in terms of time.

Rules of Thumb

Our rules of thumb? We have only a few. If buying new software means that you are adding people, look harder at the purchase. If your estimated payback is not measured in months, look harder at the purchase. Before buying new software, check with your existing vendor(s). It may be that new features have been added to your existing software. 

Granted, there are lots of reasons why you will buy new software, but a central concern should be that it pays for itself with permanent savings or some ability to help capture or manage new business opportunities. The way to increase your chances for success is to perform your own application review.