When Free is Too Expensive
Over the years I’ve come across a number of organizations who have expensive software sitting on the shelf not being used. Not necessarily because they bought a product and chose to not implement but rather they were given the software for free and didn’t know exactly what to do with it.
ERP vendors have been known to throw in HR software as a giveaway when an organization commits the entire enterprise to their platform. Buy a supply chain and financial solution, get payroll for free. It sounds reasonable, right?
All too often CIOs and CFOs make decisions like this and it ends up costing far more than they ever realize. So why is free expensive?
Imagine a company being “given” $500,000 in Premise-Based software in the scenario below:
- When a ERP vendor provides you with a free license for their software, you typically still pay for maintenance. This is typically at 18-22% of what the license fee would have been. If the software should have cost $500k, the maintenance fee is roughly $100k annually added to the fees you pay for the other software you bought and are using.
- You will still need to implement the solution if you plan on using it. Typical implementation costs range from 1x-3x the solution cost – and sometimes much more. Conservatively, you’ll spent $1m to implement
- Premise-based software still needs to be maintained and upgraded periodically. Assuming you can go four years on the most recent major release of the software (3 years is the norm), you’ll likely spend another $750k – $1m for the upgrade project
Over five years that piece of free software has cost you upwards of $2,250,000 or more.
This cost assumes that you actually implement and use the product. If you simply sit on it, you’ll still pay $500,000 for something that is collecting dust. Now I might not be a Rhodes Scholar, but I am smart enough to figure out when I’m paying for something that was supposed to be free.
So why do vendors give away software? They do it for two primary reasons – first and foremost, to prevent you from evaluating competing solutions that could erode their foundation within your organization. The second reason is a bit more sinister – its a money making ploy. With maintenance revenues exceeding license revenue at many software companies, its an amazing way to create a highly valuable annuity. This is simply the high-tech version of a razor blade company giving away free razors which require a proprietary razor blade.
While accepting free software may be the right thing to do in some situations, it shouldn’t be viewed as a decision with no downside. If you plan on actually implementing, and the solution being provided for free is a viable option – by all means consider it. But don’t just blindly accept the free licenses without realizing the costs associated with what you think is free.
After all, nothing in this world is truly free.