Software's After-Sticker Shock

By Adam Stone | Posted June 26, 2003

Many small-business owners find that they can stomach the price of new software. It's only later that they realize just how much an application is going to cost them. Service contracts. Maintenance fees. Lost time and productivity. All these hidden costs add up, and they take their toll on the bottom line.

Call it "after-sticker" shock.

"Software is a lot like a boat," said Scott Testa, COO of intranet software company Mindbridge. "The most expensive part of software is not the purchase price. Like with a boat, the real price is in the maintenance, and in all the other ancillary things that happen after you buy it."

In fact, analysis say companies typically spend one to five dollars in consulting and technical support for every dollar they spend on software.


"The biggest hidden cost is the learning curve for employees, even those who are familiar with the software package," explained Scott Paley, CTO of software development firm Abstract Edge. "Even with something as simple as Microsoft Office, nowadays it has all sorts of group-ware functions to it, and if an organization wants to take advantage of those things it will have to get everyone trained on those features."

Some businesses will shy away from the outright expense of formal training, instead relying on employees to tutor one another. This may save cash up front, but it typically will generate other costs in terms of lost productivity. Either way, the business pays.

The same may hold true in the area of support contract. On a high-end application, a support contract might run 18 percent of the $15,000 purchase price each year. Even smaller software products often will come with costly service contracts that end up being all but mandatory.

"They are going to give you a new version of that software every year, but they will only support two versions of the package," explained Bruce Franklin, founder and owner and CEO of document-management solutions provider ManaSyst. "So if you ever want to be able to ask questions of somebody, you will have to pay that 18 percent a year and keep getting those upgrades, whether you want those new features or not."

This issue of ongoing support is one of significant concern for small-business owners. While the manufacturer's 90 days of free support typically will get them through the initial getting-acquainted period, many business owners find that longer-term support is needed. They may pay out of pocket for support contracts, or they may gamble on the manufacturer's pay-per-call support lines. This can be a risky proposition, though, with rates ranging upwards of $25 per call.

Sure, there are less expensive ways to pay for support, and other hidden costs also can be controlled. Buy a training video, for instance, rather than letting staff members waste time stumbling through software. Outsource crucial maintenance, rather than trusting the job to a less-experienced insider.

At the end of the day, though, software will always come with added costs beyond the price tag. Still, these costs don't have to be hidden.

Before buying new software, "talk to existing customers," said Testa. "Ask them about their experiences with service and maintenance. Ask about the learning curve." It might not bring down the cost, but at least it will enable you to budget for those expenses.

For larger purchases, Paley encourages entrepreneurs to hire an independent consultant who can guide the purchasing decision. "This should be someone independent," he said. "Not someone who is there to implement a system or sell you a system, but just to help you evaluate what the costs are."

Better still: Don't buy any software at all.

"I believe we are going toward a subscription-type pricing model, and for a small-business owner I think that may not be such a bad deal," said Franklin. In this 'computing-on-demand' model, "you sign up, pay a subscription for the software and they charge you every month. That will be the best for the small business in the long haul, because you won't have to put out the money for that license in the first place, and you won't have any of those hidden costs later on."

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

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