Keep options open with a 'best-of-breed' software strategy

While integrating different software applications is always a challenge, it is easier when the different components come from the same vendor and are designed to fit together. But don't assume the path of least resistance is always best for your organization, says Julie Smith David, associate professor of information systems at the W. P. Carey School of Business. David has been studying whether it is better for a company to buy its enterprise systems from a single source or to choose a composite. Her study shows that in many cases, using one vendor's offerings to provide all of an enterprise's functionality is not always the best for the bottom line.

IT Integration. Those two words are enough to tie most CIO's stomachs into knots. And with good reason: the costs of integrating a new software package with other systems can soar way above the cost of the new software itself — and that doesn't even include the intangible hair-pulling moments inherent in the process. A 2004 Information Week study found that nearly 30 percent of companies that use Enterprise Resource Planning  applications "aren't buying new applications because they're too busy integrating the ones they already own."

While integrating different software applications is always a challenge, it is easier when the different components come from the same vendor and are designed to fit together. Thus it's hardly surprising that, according to research conducted by Supply Chain Digest, technology managers would prefer to get all of their software from one vendor versus owning a patchwork of programs. But don't assume the path of least resistance is always best for your organization, says Julie Smith David, associate professor of information systems at the W . P . Carey School of Business.

David, a former senior consultant with Andersen Consulting (now Accenture) and IT director for Schwarz Paper and Delwyn D. DeVries of the University of Tennessee, have been studying the vexing issue of whether it is better for a company to buy its enterprise systems from a single source or to pick and choose to get a composite known as "best of breed." Their model, based on three years of conversations with users and vendors, shows that in many cases, using one vendor's offerings to provide all of an enterprise's functionality is not the best for the bottom line.

Maturing technology

Just as markets mature, so too do segments of the software industry. A vendor working to exploit a certain horizontal or vertical market niche (say inventory scheduling or utilities, respectively) will typically be ahead of the curve in providing clients in that niche with software that is better suited to their needs versus bigger one-size-fits-all packages. Such big enterprise packages are often ERP systems put out by a dominant market player like SAP or PeopleSoft. In a Supply Chain Digest 2005 study, respondents rated best of breed providers better than single source providers in nearly every major category, including functionality, domain expertise and ease of use.

However, it is only a matter of time before bigger players are able to dramatically improve their offerings in the niche; after all, the learning curve is fast because, as David says, "they just copy" the niche player. As IT buyers know, more specialized software may be significantly better at first, but it may only be marginally different from what is offered by the dominant packages after only a year or two. Advanced Planning and Scheduling functionality was a legitimate best of breed need a few years ago but David says that it has now been effectively stitched into big ERP systems to many customers' satisfaction.

Single source vs. best of breed

In many instances, companies don't have the luxury of choosing between a single provider and multiple vendors. David says that companies are often forced into cobbling together products from different vendors either because they have absorbed other systems from a merger or acquisition, cannot quickly roll out larger holistic solutions to multiple locations all at once, or individual locations have, in the past, made their own IT decisions in line with what was best for one site and not what was easiest for the whole company.

Yet even for companies that are not saddled with unchangeable legacy systems, David still believes that drawing on multiple vendors has merit. A single-source provider makes sense if the functionality you want is already mature and has been refined in the marketplace. When new types of software or new functionality mature, the differences between those who solely provide such offerings and those that offer broader suites are often marginal and not worth the headache and cost of integration.

In their theoretical framework based on the "real options" model that is commonly used in financial analysis, David and Devries outlined two basic paths that a company may take and then computed the Net Present Value of the decisions. The equation calculated the value of Benefits minus Software Costs minus Integration Costs minus Ongoing Costs.

On one hand, the company may elect to buy CRM functionality from their existing ERP vendor and then later add on a PLM (Product Lifecycle Management) module either from the same vendor or one that is best of breed. On the other hand, the company may elect to buy a best-of-breed CRM package from a different vendor and pay to integrate it into existing systems. Later, the company would make the decision to buy best of breed PLM functionality from the same CRM vendor or from yet another supplier. Computing the potential costs and benefits that would accrue to the company, the model arrived at a theoretical first stage where the single-source CRM implementation netted $123,000 while the best-of-breed option — with costs assigned for putting integration architecture in place — put the fictitious company $160,000 in the red. When only considering this level, David says it is easy to see why companies are tempted to use one provider extensively throughout the enterprise.

However, there is value in not painting yourself into a corner in terms of what choices you can make later on when you have different needs, says David. By leaving doors open when it came time to add on the PLM capability, sticking to best-of-breed providers offered a potential value of $128,000 — slightly above that afforded by the single-source option. Going with a product that can significantly improve how a company does business (be it through the automation of tasks or through the analysis and dissemination of data) can significantly improve its fortunes.

"In general, best-of-breed implementations will increase relative costs, but will produce greater benefits to firms, especially when the software market is immature and the firm can compete on the functionality provided by the best-of-breed supplier," says David in her current working paper on the topic.

Strategic advantage

In David's model, the best-of-breed architecture only made a difference of a few thousand dollars. Still, she says, it underscores how having a wider range of superior software options can benefit a company in the long run.

In fact, some companies not only rely on best-of-breed systems to fatten their profits but depend on the strategy for their very survival.

For companies looking — or needing — to differentiate themselves in the marketplace, deciding which software products they implement can make a huge difference. Consider two companies that produce similar products, but one sets itself apart by promising faster delivery to its customers –- a point of differentiation made possible by superior IT systems.

Super shipper DHL is a company whose whole business is speed. When it needs to address new software needs, the preference is for existing systems — but not if customizing them to be the best fit doesn't make sense next to specialized packages better suited to the job at hand. Sanjeev Kumar, e-commerce program manager, notes that the size and reach of DHL make standardizing too cumbersome for a company that needs to be so nimble. Choosing the best application for the job has helped DHL "to move faster" when it comes to both deploying and using a new functionality. Typical of a multinational company, Kumar notes that it is particularly cumbersome and time consuming to standardize one package across scores of countries and divisions rather than implementing a package that is already localized.

David advises companies to "identify a strategic functionality that makes a big difference to your organization, then identify whether or not one of the leading best-of-breed vendors can enable you to do it uniquely and better than anybody else."

To this end, many industries are standardizing their enterprise systems so, for example, most oil and gas companies have implemented SAP's offerings. On one hand this is good for the companies because, with more deployments, software firms can (over the course of upgrades and new versions) aggregate experiences and needs from more customers in order to effectively implement best practices for the industry. On the other hand, David says that when all of a company's competitors are using the same standardized software systems, it becomes very difficult to differentiate. After all, despite some degree of customization, enterprise software packages tend to mold users to their standardized image of how a company should do business.

Looking toward a day when business moves faster than it does today and the market is more demanding, David believes that companies will prosper based on their ability to quickly adapt their enterprise systems to new developments. As specialized vendors will have the edge in innovation — at least in niches — David gives the advantage to companies that make the decision to keep their options open and not rely too heavily on one vendor's product line. To this end, she says Fortune 500 companies can be at a disadvantage because standardizing on big, all-encompassing systems shackles the corporations to their respective vendor's ability to rapidly deliver effective products … and IT executives know that it is a fool's game to trust a vendor's claims that its new product will be delivered on time and match the advance hype about it.

Laying the groundwork for best of breed

David acknowledges that it is often difficult to compare enterprise software products to find the best one. After all, they are far more complex than personal software programs which may be quickly and easily installed on a computer and effectively trialed for a few weeks. And, woe to the customer who makes decisions based solely on glossy marketing materials. However, vendors — particularly those selling mid-market products — are often willing to set up demonstrations using a client's data and processes. In addition, those shopping for enterprise software should be sure to outline specific needs and desired functionality in an RFP in order to better compare apples to apples between multiple vendors. And while they may be expensive, objective third-party opinions from technology research firms like TechnologyEvaluation.com can also help level the field.

David sees companies adopting a strategy where they will implement a robust ERP platform as a backbone, and then pick and choose complementary products that are plugged into it. Apparently seeing the same pattern, the providers of these big backbone systems are making their applications more user-friendly. David says that even though they aim to "get all of your money," they also recognize that some business is better than no business. Now that such systems will increasingly play nice with competing products or modules, it makes a best-of-breed strategy more tenable.

Indeed, companies are not shying away from weaving different systems together; a recent study by Gartner found that the total application integration and middleware and portal markets grew 5.8 percent to more than $6.7 billion in 2004. There may be a lot of headaches wrapped up in all that integration, but David says it's often the best path — even if it seems like it isn't worth it at first.