Wednesday, 29 May 2013

Canadian Businesses Spend Far Less on Software than US Firms

The Globe and Mail's Economy Lab looks at a study that found Canadian businesses spend less on software than US firms.

Barrie McKenna wonders why this might be, and I think I can provide some answers.

Canadian firms are, on average, a lot smaller than US firms. This simple fact often comes up as an impediment when I am involved in selecting software for the Canadian multinational that I work for. All software licensing is priced in tiers. The more you buy, the higher the tier you are placed in and the better discount you receive. On a per employee basis it will cost less to purchase the software. Even though I am negotiating 1,000-2,000 seat licensing deals, those are still considered small. Since they are so small(!) we often do not qualify for the significant discounts that a company purchasing 5, 10 or 20 thousand seat licensing deals. So as a smaller firm, we pay more per employee for the same software that a General Electric, General Motors, Wells Fargo, etc. would pay. It is a weird and sad fact that IT investment costs are heavily biased towards large established firms. Smaller firms pay a higher price for the same performance/features than larger firms.

This size factor also affects the add-in services that are offered. Trial periods, training, implementation assistance is either not available or cost more than what a larger firm would pay. If you are too small, sometimes the vendor of the software you need won't even talk to you, because you just aren't worth it. (I've actually had that call: "The minimum purchase we allow is for 2,500 seats, we won't sell anything less than that.")

Another factor affecting sales is the size of the entire Canadian market. Many software firms do not have a dedicated Canadian rep, never mind regional reps dedicated to a region or even an industry. I've had sales reps whose territory is New York state (excluding the city of New York) and all of Canada. So even when you want to talk to someone, they can be hard to get in contact with. Chasing down the expert that can match a software package with your particular needs is often an exercise in frustration. If you can't even find what you're looking for, how do you buy it? And then if you do find the software you need, even in bulk, Canadian pricing is higher than US pricing. Having a US office helps, because if you can purchase as a US firm from a US reseller, you save money. For the same damned software that you then download(!) from their servers. Nobody actually distributes CDs/DVDs anymore, but it often costs more to purchase in CDN dollars from a CDN reseller. Even when the CDN dollar was higher then the US dollar. Parity was possible, but you have to negotiate damned hard to get it.

If packaged software isn't available, then the only route available is custom development. And that is a costly exercise. Writing up requirements, testing, development, user acceptance etc. can be a long expensive process for an intricate software package. there's a reason why packaged software is popular, those costs have already been absorbed by the vendor providing the software. Rolling out a new implementation is a lot faster when someone has already invented the wheel (so to speak).

Then there's the size of the IT Dept. This can go either way as larger IT Depts. can be less agile and less responsive, but a smaller IT Dept. can often lack the critical skills or personnel to support a new solution. Software costs are ongoing, especially from a support perspective. Leveraging existing in-house expertise results in lower support costs and more successful implementations. In an ideal world, the IT Dept. is small and knows everything about anything. The closer you can get to that impossible goal the better the return on any IT investment.

One last strange fact is that there often is only one vendor with the software you need. It is amazing the areas of specialty that can exist in a company that essentially is an untapped market. And these single vendors are the thiefs and cheats of the IT world. When they know they have a monopoly, they jack up prices to the point where they are quite frankly, extortionist. They've got you by the balls and they don't hesitate to squeeze. I'm just glad I am not the business process owner that has to justify or decide if that cost is worth it. Are the operational efficiencies worth this ransom demand? This impacts smaller firms because these costs take a huge percentage of the available IT budget. A larger firm either experiences less of an overall impact, or can afford to write their own solution in house. Scale matters.

So to summarize, just being a CDN firm means you face the following disadvantages when purchasing Software (or hardware, or services for that matter).

1) Bulk purchases save money. Per employee costs are cheaper when you have 5,000 employees than if you have only 500. Most Canadian companies are very small compared to US firms.
2) Overall Canadian market is small, affecting availability of expertise and resources
3) Canadian pricing starts higher than US pricing
4) Smaller companies have smaller IT depts with fewer skills. If the skill needed is not in house, must pay to get it. This increases overall project cost.
5) Critical products can eat up budgets, leaving no money to invest in other IT infrastructure, especially if you exist in a small unserviced market.

Despite all these disadvantages, Canadian companies can and do succeed, but these are real disadvantages that our southern cousins don't have to account for.

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