December 15, 2016Doug Hadden
The upcoming Inter-American Development Bank workshop next week, The Cutting Edge on Information Technology on Public Financial Management, has a comprehensive agenda. The agenda recognizes the “growing interest in using commercial applications” like the FreeBalance Accountability Suite. What seems to be missing is a discussion of vendor lock-in.
It’s Business School 101: find ways to lock customers into your products for long periods of time. This is done in the consumer market from coffee pods to bundled telecommunications contracts. The calculus of lock-in means that companies give away coffee machines and smart phone for reliable, predictable and sustainable revenue. The coffee machine as platform is considered a clever business strategy.
Software “Platforms” and Lock-In
Enterprise Software, including Enterprise Resource Planning, can exploit numerous platforms to make switching difficult. This market has been characterized by consolidation. The consolidation of business applications means that large vendors acquire more customers. It’s as if the strategy is to own customers. It’s called “cross-sell” and “up-sell.”
And, own they do. That’s because of the proprietary platforms that are controlled by Tier 1 vendors. Consider the cost of changing an application like procurement. It’s somewhat difficult to replace the application when it’s part of a set from the same vendor. Doable, but painful.
The Enterprise Software lock-in problem can be even more painful thanks to proprietary platforms. You can buy ERP today with: proprietary “engineered system” hardware, proprietary database management systems, proprietary middleware, proprietary programming languages, proprietary application servers and proprietary user interfaces. If you want the nice user interface, you need to engineered system and the proprietary database.
The cloud doesn’t necessarily change the situation. The largest ERP vendors have acquired major cloud providers. Lock-in is part of the cloud strategy.
Escalating Impact of Lock-In
There are compelling characteristics in Enterprise Software platforms. Proprietary is sometimes better than open systems in some areas. The long-term consequences of lock-in are positive for vendors, negative for customers.
The problem with proprietary is that negotiating leverage goes the vendor. I’ve seen the following over the past few years:
- Forced maintenance contracts
- Increases maintenance costs
- Software audits to increase revenue at the expense of customers
- Increased costs for new modules
- Increased costs for improved usability even though annual maintenance paid
- Charging for any interface as if it were separate users
- Charging to attend user conferences
- High cost to hire or contract experts
- Use of public cloud deployment to extend lock-in
The Truly Open World
Tier 1 vendors pay lip service to open systems. They claim that systems are open. They’re open enough to claim some standards support. Yet, they litter systems with proprietary functionality. It’s true that these vendors support open systems and open source if only to prevent customers from using competitor proprietary products.
We recommend a planned approach to prevent lock-in. The consideration of open source middleware that is often superior to proprietary. The degree of openness of enterprise software should be evaluated.
Personal Action Item
My FreeBalance Latin America and Caribbean colleagues will be paying close attention to lessons learned at the workshop. Follow my @dalytics Twitter feed on the 19th. and stay tuned to my observations later next week.