Trust Me: Buyers Worry Too Much About Software Costs

I ranted a bit the other week about buyers who focus too much on software license fees and not enough on differences in productivity. The key to that argument is that software costs are a relatively small portion of companies’ total investment in a business intelligence system. This is self-evident to me, based on personal experience, and seems fairly widely accepted by others in the field. But it’s always nice to have hard numbers to cite as proof.

In search of that, I poked around a bit and found several references to a 2007 study from AMR Research . The study itself, Market Demand for Business Intelligence and Performance Management (BI/PM), 2007 will cost you $4,000. But statistics from it were quoted elsewhere, and showed the following distribution of estimated spending for 2007:

31.4%...internal labor costs
24.7%...software costs
16.2%...integration costs
15.4%...hardware costs
12.3%...outsourced services

The most relevant tidbit is that software accounts for just one quarter of total costs, while labor and outside services combined account for over 40%. I’m not sure what counts as “integration” but suspect that is mostly labor as well, which would raise the total to nearly 60%. This confirms my feeling that people should focus on more than software costs.

A February 2008 study from Aberdeen Group, Managing the TCO of Business Intelligence (payment required), addresses the question of whether buyers do in fact focus primarily on software costs.

The short answer is yes. The long answer is it’s often hard to interpret Aberdeen findings. But when they asked buyers which direct cost criteria were ranked as critical at the time of purchase, the highest rating was indeed software license cost. Looking just at what Aberdeen calls “best-in-class” companies, the figures were:

42%...software license cost
37%...implementation consulting costs
15%...user training services offered
10%...additional hardware costs

Aberdeen also reported priority rankings for indirect costs and ongoing costs. Software fees don’t play much of a role in those areas, but, even so, people still didn’t focus on labor. Instead, the top priorities were “ease of use for end users” for indirect costs and “scalability of data volumes and users” for ongoing costs. Ease of development and ongoing support costs did finally show up as the second and third ranked items under ongoing costs, but that’s digging pretty deep.

Of course, you can’t really combine these two sets of figures. But if you could, you might argue that they show a clear skew in buyer priorities: 42% give highest priority to software costs even though these account for just 25% of expenses. Even though the numbers don’t really prove it, I’d say that’s very close to the truth.