On Economics and Enterprise Software - Comparing Apples to Asparagus
By Kem Butller-Oracle on May 20, 2013
Lyle Ekdahl, Group Vice President General Manager, Oracle’s JD Edwards
“Substitute your lies for fact I can see right through your plastic mac…” The Who
In recent discussions in the board rooms of some of my customers and as discussed in various media outlets from current age Twitter posts to classic WSJ articles, there seems to be a common discussion based on a fundamentally flawed premise. OK you ask, “What the devil are you talking about?” Well, maybe I should start with the basic proposition. “Why would anyone in their right mind pay a vendor $X for a good or service when they can get the exact same thing for $½X?” Why indeed? If people are handing out bowls of free money why would you not want to belly up and drink deep?
Unfortunately that is where the discussion goes awry. As your dad used to tell you, “Money does not grow on trees.” At least I hope that is what he told you. In fact, the reason why the other good or service is cheaper really falls into just a few categories – there a cost advantage, a technology applied, etc. The first category that always needs to be explored is the economic concept of substitutes. Specifically meaning, do two compared products or services have a positive cross elasticity of demand. Classic economic examples are margarine and butter or petroleum and natural gas. Now the substitutability of any two compared goods is always a matter of degrees but if one is really trying to get to the heart of the matter, again why would I pay a premium for one offer over another, you need to start with the concept of the “perfect substitute”. To define the “perfect substitute” is to say that utility is perfectly equal such that the marginal rate of substitution is constant and I would add without any loss in value or increase in risk.
“Why go through that trouble of comparison?” your CFO may say. “Cheaper is good.” That is when you pull out another old adage, “You can have cheap or you can have good, but seldom can you have both.” To put a finer point on it, try this comparison, “ A personal auto and a bus ticket are both transportation and a bus ticket is a lot less than half the price of a car, so why are there so many dang cars on the road?”
The answer of course is utility, or the total satisfaction and or value received in consuming the good or service. Now the classically trained economists are going to jump on this one as they see I equated utility with value. Please keep your Menger, Wieser and Bohm-Bawerk out of this discussion for now. We can address the higher order of mans’ needs and desires in future blog posts.
So now the beef or perhaps the chicken of the matter, let’s take for example the fees associated with Oracle’s JD Edwards maintenance. For theory sake, let’s just say that there were “agents” in the market that make a claim they have a perfect substitute that costs you 50% less. Again intriguing until you break down the actual offer and the utility or value received.
So what do Oracle’s JD Edwards maintenance fees buy you anyway? Well, there are actually multiple categories and layers of valuable deliverables in the offer. The most succinct list of value categories that I can find includes ten as delivered by Oracle’s JD Edwards Development and Support:
1) Future rights to product & technology releases
2) Technical Support (Trouble shooting, issue identification & resolution)
3) Knowledge Base Access (Exposure to the issues and resolution across a broad community – 1000’s of customers)
4) Updates, patches/fixes (Both new features and fixes to bugs)
5) Proactive security, data integrity, performance and scalability testing & resolutions (Yes we are watching what the “hacksters” are attempting and we have your back)
6) Tax, legal and regulatory updates (Yes we are watching what governments are attempting and we have your back)
7) Upgrade Scripts (So that you can exercise your rights)
8) Certifications with New Oracle Products (Oracle buys lots of stuff)
9) Certifications for existing third party products and versions (Have you noticed the rate of change in browsers?)
10) Certifications for new third party products and versions (Yes technology marches on)
A pretty impressive list if I do say so. However, there is one additional factor that needs to get on the table. To oversimplify a bit, JD Edwards’ products come in two chunks– that which is non-compiled and that which is compiled. I bring this up to make sure you are aware that certain functions in the list of ten can ONLY be performed at the factory, so when assessing value and making a comparison be aware of what is and is not possible.
For example, if you are willing to take the 50% off pitch you should be prepared to freeze your technical infrastructure. So to paraphrase Seinfeld’s infamous Soup Nazi, “No new browser for you,” even if it becomes the corporate standard or plugs a security hole.
More later, but for now I will leave you with this thought: have you ever asked yourself what is the difference between a can of chicken purchased at your local grocer conveniently located down the canned meat aisle and that which you can find five rows over in the cat food section? Looks to me like a can of chicken designed for your family’s cacciatore is about two times more expensive then the chicken you put on the floor for Fluffy - Caveat Emptor or perhaps I should say, Bon Appétit.