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February 1, 2003

The Enterprise Software Buyers Club

The reasons why companies buy software may not be what you think

by Joshua Greenbaum

One of the software industry's myths is that features and functionality are what make or break a vendor, new or old. This enduring myth is part of another high-flying fantasy: The software industry is largely a meritocracy where good ideas will always find a forum, if not a multimillion-dollar market cap. While we're having a laugh, how about the myth about technology being the ultimate justification for any software purchases?

The problem with these worldviews is that they clash so starkly with reality as to be almost comical. But even in this cynical, post-Enron, post-Microsoft vs. the Department of Justice era, these myths are still so prevalent that it's worth answering this fundamental question once and for all: What motivates companies to make the enterprise software purchases they do? Sadly, it's often not what many vendors — and the coteries of consultants, marketers, and flacks — would like to believe.

Who Knows Whom?

Every time I meet a bunch of eager entrepreneurs who want to launch a new company, the first question I ask isn't about technology; it's about the company's Rolodex. Who in the startup knows a CIO, CEO, or high-level manager at a marquee company well enough to place a call and make a sale based on friendship or prior track record alone?

This motivation isn't just about incumbency, although more and more software vendors are finding that a foot in the door is the best guarantee for future sales. It's also about mutual back-scratching and the continual cross-pollination of people across the industry. I always say, only half-seriously, that 35 people comprise the entire industry, and we just keep circulating from one company to another. It's a slight exaggeration, but one sure way to get companies to buy your software is to make sure they're your old buddies first. So much for the meritocracy.

The truth behind this fact is that software is often bought as a favor to someone — former boss or employee, future manager, or golfing buddy — independent of how truly useful it will be.

Public Perception

A software company's public perception is worth its weight in gold. That's why so many vendors spend so much time and effort trying to get on the radar screen of analyst firms, large and small, even though it's acknowledged that the firms' "objective analysis" can be influenced by money and, of course, who knows whom. The difference between this buying motivation and the who knows whom issue is that public perception is often used as a means to justify a software purchase to higher ups. That's where the value of the analysts can be huge: A glowing market study by an analyst firm can be particularly useful in convincing your techno-illiterate boss that product X is the one to go with.

Of course, many of these same analyst firms are now scrambling to rationalize all the justifications they made in the last few years about companies, products, and strategies that, shall we say, didn't stand the test of time. But persuading the influencers is still a key way to sell software, particularly when a product's functional merits aren't as strong as they could be.

The "Me, Too" Imperative

This buying impetus is the purview of the customer satisfaction survey and the return on investment (ROI) study. As I noted in "The Paradox of ROI" such studies and customer surveys are problematic. (One vendor, Siebel Systems Inc., has made a whole market position out of its stratospheric — and highly questionable — customer satisfaction ratings by playing with the wording of key survey questions.)