By all indicators, the adoption of cloud-based financial and EPM applications is accelerating. One of the key advantages of cloud-based solutions vs. on-premises alternatives is the lower up-front costs and lower on-going costs of ownership.
However, not all cloud-based applications are created equally. Buyers should beware of the hidden costs of what appears to be the lowest-cost cloud solution.
It’s the same idea as the old FRAM Oil Filter commercial from the ‘70s. Remember that? The point was that paying a little extra for your car’s oil filter could save you hundreds in repairs down the road. It’s a bit of a dramatization since you wouldn’t typically remove a car’s piston from under the engine, but the point is valid – and it applies to cloud-based EPM software as well.
Matching Requirements to Solutions
As I’ve mentioned in other articles, 2015 may have been the tipping point in market adoption of cloud-base financial software applications. And in 2016, evaluations of cloud-based enterprise performance management (EPM) solutions for areas such as budgeting, planning, consolidation, reporting, and modeling are accelerating. But there's one theme we occasionally hear from prospective customers – "All of the products we evaluated can meet our requirements, so we are selecting the lowest-cost solution."
Seriously? After months of defining requirements, engaging a consultant to help drive the evaluation, creating a short-list of vendors, issuing an RFP, and reviewing responses – and weeks of detailed software demonstrations – the final decision is based on price?
This seems shortsighted to me. If a prospective buyer evaluates 4-5 vendors and concludes they can all meet the requirements, that tells me that the buyer’s requirements must be fairly limited – maybe just financial budgeting to start. And it’s true, just about every EPM vendor in the market can deliver those capabilities to some degree. But companies grow and evolve. Over time, there will be a need for additional, more advanced capabilities. Examples include detailed sales or revenue planning, financial consolidation and reporting, financial and operational modeling, advanced analytics, profitability analysis, etc.
So when defining requirements and evaluating EPM solutions, companies should focus not only on their short-term needs, but their longer-term needs as well, looking 2-3 years down the road. Choosing a solution that meets the company’s current needs, but has to be replaced in 2-3 years because of lack of functionality or scalability, will not make the evaluation team look good. It could end up costing the company more over the long term – and it could put the leader of the evaluation team out of a job as a result.
Watch Out for Hidden Costs
Another issue to watch out for in evaluating and selecting EPM software is “hidden costs.” Lower-priced software solutions often have limited or incomplete functionality and may need more custom development or implementation services to get up and running. So be sure to compare apples and apples – including the software licenses/subscriptions and the implementation services and support costs. And check references to find out how close the vendor’s initial implementation estimates align with the actual bills. A more expensive software solution with more complete functionality may cost your company less over the long-term vs. a less functional, lower-cost solution.
Other things that will impact costs are the amount of support the software vendor will provide as part of the solution, and the long-term customer relationship. Is the software vendor truly committed to customer success – and willing to commit the resources to ensure this with a “customers for life” approach? Or is the vendor more of a “hit and run” operation – selling the software and turning the customer over to its services organization or partners to implement and support? This consideration, in addition to the ability of the software to meet your current and future requirements, should be part of the vendor evaluation process.
Examples in the Consumer Products Market
Plenty of examples exist of the pitfalls of the “lowest cost” product approach in the consumer products market. Many of us have fallen into the trap of purchasing the lowest-priced product, only to have it fail after a short period of usage, costing us more in repairs or having to replace it. Think about your experiences purchasing these products at the lowest price:
- Gas grills
- Washers and dryers
- Plumbing parts
- Electrical fixtures
- Computers and peripherals
You only need to make that mistake once or twice to learn the lesson – paying a bit more for a higher quality product typically leads to better reliability, longer lasting value, lower repair and replacement costs – and fewer headaches. This is especially true with the “assembly required approach” vs. purchasing a fully assembled product. You only have to go through the assembly of a gas grill one time in your life to appreciate the value of paying more for a fully assembled product.
Not All Cloud-Based EPM Solutions Are Equal
As Finance executives have become more comfortable with cloud-based applications, market adoption of cloud-based EPM solutions has accelerated. As a result, every EPM vendor in the market now offers a cloud-based solution, even the ones who historically have delivered only on-premises solutions. But not all cloud-based EPM solutions are equal, and this may be reflected in the price. Here are some key differences you, as well as any evaluators, should be aware of:
- Single-tenant hosting vs. multi-tenant applications – I’ve covered this in other articles, but multi-tenant cloud applications offer a number of advantages over single-tenant, hosted versions of legacy on-premises applications. And these advantages often impact the long-term costs of ownership.
- Toolkits vs. packaged applications – The cloud-based EPM solutions available in the market offer a broad range of functionality. Some are really “toolkits” that enable the development of a budgeting or financial reporting solution, while others offer a high degree of pre-built functionality. The degree of customization vs. configuration the solution requires will have a big impact on costs.
- Incomplete solutions vs. comprehensive suites – Not all cloud-based EPM solutions offer the same breadth of functionality. To use terminology recently coined by Gartner, some solutions are more focused on “strategic” EPM functions – such as budgeting, planning, and modeling – while others are more focused on “financial” EPM functions, such as financial close, consolidation, reporting, and disclosure.
Pay Me Now – or Pay Me Later
Hopefully this article gives you, as a prospective buyer of EPM solutions, some key factors to consider in the evaluation process. Selecting the lowest-cost solution might feel like the right decision for your company in the short-term. But evaluators should also think about longer-term requirements. You need to consider the services needed to deploy and maintain the solution over a 3-5 year period. And don’t forget about the vendor’s commitment to your long-term success.
As the FRAM oil filter commercial reminds us, paying a little more up front may save your company hundreds of thousands of dollars over the longer term. It may also help improve your job security.
To learn more, read the white paper entitled “Selecting Enterprise Performance Management Software.”