With Smaller Providers, Software and Services Can be Hard to Mix (Part 2)

In the first installment of this column examining the plight of smaller and mid-size vendors attempting to pursue software and services together, I examined a bit of Pittsburgh history -- a yinzer's guide to sourcing services if you want to put on the local label 'n'at -- by looking at FreeMarkets' attempt to be all things to all procurement organizations from a sourcing perspective. In the continuation of this post, I'll examine what CombineNet and FreeMarkets' experiences can tell us about how customers should think about leveraging technology and services from the same provider.

On a high level, I think there are a few key lessons that procurement organizations should take away from these observations. The first is that it's important to understand exactly what you're buying from a smaller to medium-size provider. If the vendor has attempted to build a competency in both software and services delivery -- versus emphasizing one to help drive the other -- it's a near certain supply risk sign in my view, if for any reason that they'll under deliver and overcharge in at least one of the areas. It is possible to do software and services together (procurement BPO is a good example here) but you need an industrial scale behind the operation to pull it off and have a serious competency in both areas.

The second lesson is to decide what you really need. Let's take optimization as an example. On the surface, the concept of buying powerful optimization capabilities to bring transportation and freight decisions in-house may sound like a smart move after paying hundreds of thousands or millions of dollars to CombineNet or another competitive solutions provider like Trade Extensions, AT Kearney, Emptoris or BravoSolution over the years, but is it in reality (incidentally, many of these other providers will also sell software as well)? The complexity of data collection, not to mention the rigor involved in good analysis, suggests to me that paying ten to fifty basis points -- maybe more under some circumstances -- when eight or nine figures of spend is on the line is almost a no-brainer under most circumstances, unless you really want to hire the A-team to do it in-house.

The final lesson customers should take away from the example of working with a provider that tries to do both is the importance of negotiating contractual agreements in your favor. By properly structuring software contracts, you can put your organization in a safe position when change of control, bankruptcy or other unexpected vendor events transpire. Moreover, you can also negotiate similar clauses around resources and dedicated account team members as well (e.g., exceptions for non-hire and non-solicit clauses).

In the end, many providers during the downturn have become precipitously close to hitting the financial brink (and some have gone over the edge). While it's great CombineNet is one that will survive and hopefully thrive -- and at least part of FreeMarkets still lives on inside Ariba in solution delivery capacity if not in ethos -- given all the capabilities and innovation they can bring to customers, we should still treat the situation as an opportunity to learn a number of lessons and early warning signs to protect ourselves from a supply risk perspective when buying software, services and solutions.

Jason Busch

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