Enterprise software and service vendors are a tricky bunch. Like skilled magicians, they use sleight of hand and misdirection to pull cash from your company’s coffers.
How do they do it? It starts with the demo (which always works perfectly). Then they offer a price that sounds too good to be true (because they plan to make up the difference in change orders and maintenance fees). Once they’ve got you, they’ll lock you in using every tactic they can muster. Better check your bill, because odds are you’re getting charged for stuff you didn’t actually buy. And just when you’ve got everything running smoothly, you’ll be hit up for an upgrade — whether you need one or not.
We dove headfirst into this nefarious world and identified some of the worst practices. Due to the sensitive nature of this material, some people’s names have been changed. Though we don’t call out the specific vendors for their dirty deeds, you’ll probably recognize the tactics they employ.
Dirty vendor trick No. 1: The magic demo
Here’s a classic from the sneaky vendor bag of tricks. Whatever your company needs, their enterprise software package can deliver it — and they’ve got a sweet canned demo and an impressive collection of PowerPoint slides to prove it.
Yet you wouldn’t believe how many organizations — including Fortune 500 companies — fall for this, says Natalie Petouhoff, a senior analyst who covers CRM, customer service, and social media for Forrester Research.
“I think the software industry is kind of dirty,” says Petouhoff. “The people who are buying the software may only see this kind of dog-and-pony show one or two times in their careers. They don’t know that the demo is rigged. They think this is how the software actually works.”
Most vendors don’t start out intentionally trying to deceive customers, says Petouhoff. But they often find themselves competing with companies that do. And the vendor who does an honest warts-and-all demo risks losing that sale to another vendor that promises the moon, even if it can only deliver moon pies.
Some of the blame also falls on the customer, she adds. Many decision-makers don’t have the experience to know when they’re being snowed or enough interest in the technology to learn what it can and can’t do. And the stakes for confusing the demo with the actual product can be huge.
In March 2008, Waste Management — the largest garbage collection company in the United States –sued SAP for US$100 million after an ERP implementation went completely into the dumpster. In the suit, Waste Management claimed SAP faked the demo it used to convince its top executives to go with the SAP solution.
Five months later SAP countersued, claiming that Waste Management still owed it millions in maintenance and service fees. Last May the allegedly rigged demo mysteriously vanished, with each side blaming the other for its disappearance. Waste Management says it took a $30 million hit on its first-quarter earnings this year thanks to the ERP failure.
“I don’t want to necessarily pick on SAP,” says Petouhoff. “The entire software industry needs to clean itself up. When companies are spending millions on your products, promising to deliver something you can’t deliver is fiscally irresponsible. If companies would just be straight and say something like, ‘Our software isn’t doing that yet, but we’re working toward that,’ at least customers would know what they were buying.”
Or as they say in the waste management business: Garbage in, garbage out.
Dirty vendor trick No. 2: Underbid, then overcharge
Hand in glove with the fake demo is the deliberate underbid. Enterprise vendors come in and offer an extremely tempting price to a customer, with every intention of making up the difference in added charges after the contract has been signed.
Petouhoff says she witnessed this firsthand when working for a major systems integrator early in her career. As someone who had to implement the solution, Petouhoff would regularly go on sales calls with the software vendor.
“Whatever the customer wanted, the salesperson said, ‘We can do that,'” she says. “One time a vendor bid on building an entire call centre for a large entertainment company in Southern California. The salesman said they could do it for $250,000, when he knew the actual cost was $2.5 million. I said to him, ‘$250,000 won’t pay for the computers, desks, and headsets, let alone the software.’ My partner said, ‘Shut your mouth.'”
Petouhoff says she was told to make up the difference in change orders and blame the customer for changing the scope of the project as it went along.
“It’s like selling someone a car, and they come back and say, ‘This car you sold me has no wheels,’ and you say, ‘Oh, you wanted wheels? That will cost extra,'” she adds. “It was an embarrassment for the people inside that organization who had to go back up the chain and sell the changes to their bosses.”
And when vendors are counting on implementation to boost their profits — and the fees don’t materialize — they can get downright nasty, as Connie Elliott can attest. As owner of Data Net, a small maker of bar-code and RFID data collection systems, Elliott wanted to buy a CRM system to integrate with her firm’s accounting system. So a few years ago she spent about $5,500 for a CRM system from a small company that shall remain nameless.
“One of our requirements was that the system reside on top of an SQL database that we could set up and modify ourselves,” she says. “The vendor wasn’t happy about not getting lots of implementation money.”
First, they wanted her to buy service contracts, which Elliott was unwilling to do. Then they tried to force her into an upgrade to their new SaaS (software as a service) offering (see Dirty vendor trick No. 5: The forced upgrade march, below). When she said no again, things got ugly.
“Once we got the data importation problems worked out with the vendor, we found out that all the SQL tables were password-locked,” she says. “They wouldn’t give us the password unless we paid several thousand dollars for an upgraded version. We decided to not pay it. It wasn’t worth the headaches.”
Instead of an integrated CRM and accounting system, Data Net uses the software as a simple contact manager. Four years later Elliott says she still hasn’t found the right solution for her data problems and suspects she never will. “But I still think uncharitable thoughts about those folks.”
Dirty vendor trick No. 3: The customer headlock
Once some vendors have you, they will do everything in their power to keep you — even if that sometimes means crossing an ethical line.
“Vendor lock-in is a fundamental issue for companies that purchase enterprise software,” says Michael Krigsman, CEO of Asuret, which studies and prevents IT failures. “That’s because another term for ‘lock-in’ is ‘Grab the customer by the b**** and squeeze.'”
Krigsman, who writes a blog about what causes IT projects to fail, says a typical way software companies ensure customer loyalty is by making the cost of switching to a new vendor’s solution impossibly high.
“It starts when the company sells its software for a low price, but the buyer then has to spend lots of money to implement the software,” he says. “When it comes time to pay upgrade or maintenance fees, the buyer has already spent so much on implementation it really has no choice. That’s vendor lock-in at its finest.”
But sometimes vendors stoop to a new level of subterfuge. Just ask Bob Davis (not his real name), VP of marketing for a software vendor that competes against some of the biggest names in the networking business.
Davis says vendor lock-in can take several forms, not all of them exactly by the book. The first one happens when the networking vendor brings in its own system engineers to implement the software. Many organizations then become dependent on the vendor’s SEs to keep the network running.
Level two occurs when the engineers proceed to turn on every single proprietary network service, sometimes without the customer’s knowledge or consent. That makes moving to a new vendor nearly impossible without starting over from scratch.
Still, those are just hardball tactics, says Davis. The dirty tricks come in when the networking vendor’s personnel become so entrenched within an organization they become de facto employees, with badges and full access. Davis says he knows of several instances where reps from a well-known vendor attended sales presentations given by competitors, then tried to torpedo the deals later. And if an employee at the customer’s firm goes to bat for a competitor’s product, he or she may find himself looking for work.
“Sometimes these vendors will go so far as to mess with the careers with people who are advancing an alternate agenda,” says Davis. “They’ll go to the CIO and say, ‘Your network manager is really playing with fire by trying to get other vendors involved in the network.’ They’ve been known to go directly to the network manager and say, ‘Stop pushing this agenda or we’ll get you fired.'”
Davis says he knows someone whose job was threatened and another individual who was “shifted to the job equivalent of Siberia” because they tried to introduce a competing technology solution.
“Everyone overplays their specs and uses their feature set to their best advantage,” he adds. “That’s just part of the game. But messing with someone’s career is just unethical.”
Dirty vendor trick No. 4: The billing “mistake”
Sometimes it’s not what you bought that cost your company money; it’s what you didn’t buy but got charged for anyway. In the telecom industry alone, 7 to 12 per cent of all charges are a mistake, according to Aberdeen Research. There’s an entire industry devoted to finding errors in telecom bills and collecting a per centage of the money recovered.
Phil Stone (not his real name), director of IT operations at networking systems vendor, says his firm was getting billed $30,000 to $50,000 a month for a data circuit with a leading telecom provider. There was just one problem: His company didn’t have any data circuits with that provider.
“We get bills all the time from vendors for circuits that aren’t ours,” he says. “We had one that accrued to over $300,000 over nine months before we finally got it cleared up. It turned out to be a circuit used by some company in Texas. Two months later the charge started showing up again. Different circuit, same Texas company. The telecom company says it will be fixed in the next billing cycle. Sure, I believe that. Their billing is so bad we stopped using them even for voice.”
Sometimes, says Stone, the “mistakes” are more deliberate. One time he negotiated a deal for some T1 lines with another telecom who quoted a price of $3,000 a month. In the process of signing the contract his attorney noticed his company was being asked to pay $60,000 per annum, or roughly $24,000 more than they’d agreed to. When Stone asked why, he says the telecom reps told him that its data circuits were so good they were sure his company would order more.
“I said, ‘I appreciate your optimism guys, but I don’t do business with companies that operate this way,'” he says. “I tore up the contract and went with someone else.”
The biggest problem with billing mistakes, genuine or deliberate, is that fewer than one in 10 customers notice the error, says Steve Roderick, CEO of GoToBilling, a payment management service for small businesses.
“The common statistic heard in the payment industry is if you misbill 100 people, eight of them will call and complain,” he says. In other words, companies that deliberately add false charges get away with it more than 90 per cent of the time. Though Roderick says most companies in the payment industry are on the up and up, a few bad actors have given it an enduring black eye.
“Some of the abuses are outrageous,” he says. “I’ve seen payment processing companies charge businesses annual fees of $95, even though that fee is not stated anywhere in their contract. They’ll charge 30,000 customers $95 each and wait to see who squawks. When people call they say, ‘We’re so sorry, it was an accident, let us refund your money.’ Then they walk away with the rest. It makes it harder for companies that are trying to do the right thing.”
Dirty vendor trick No. 5: The forced upgrade march
It’s a subtle transition. One day you’re a valued customer; the next day you’re a cash cow ready to be milked. And one of the most common ways to wring more money out of you is coercing you to upgrade, even if your software is relatively new.
A few weeks ago Dave Jackson purchased a handful of licenses for a personal information manager for $400 apiece. As executive director for Awake in America, a nonprofit devoted to helping people with sleep disorders, he wanted the PIM to help manage donor lists and other data.
“We had spoken with the salesperson several times, as well as others inside the company, and had taken the product for a 45-day test-drive,” he says. “We spoke with the company about upgrades and updates, and everything sounded great. So I whipped out the corporate credit card, called the salesperson, asked a few more questions, and then placed the order.”
Three weeks later, he gets an e-mail. There’s a new 2010 version available and they want him to upgrade. They’re even willing to offer a $50 discount — $75 if he buys more than one copy. So he calls and asks why they never informed him a new version was imminent.
“One guy tries to pull a Sergeant Schultz on me and says, ‘I know nothing,'” he says. “Another person in senior management says it was company policy to not divulge such information because it could ‘give the competition an edge.’ I told them I’d stick with the ‘antiquated’ version until it breaks down and dies, or until the government comes up with a Cash for Clunkers program for software.”
Forced upgrades are fairly common, says Stone, but “it still chaps me no end. We’re working with VMware, who decided to end-of-life their Enterprise license and make us go to Enterprise Plus for another $26,000 a year. Our options are to go down to Advanced, which doesn’t have the features we want, pay the money to go with Plus, or convert to Hyper-V and put it on a Microsoft Server. We’re seriously discussing the latter option and might just bite the bullet and switch.”
Dirty vendor trick No. 6: The clueless customer
The last trick in our bag isn’t really a vendor trick at all. It’s what happens when customers put too much trust in systems integrators and vendors, and fail to do their own due diligence.
Most failed IT projects fall victim to what Michael Krigsman calls the “Devil’s Triangle”: the customer, the systems integrator, and the vendor, all of whom have their own, often conflicting, agendas.
Sure, the vendor may overpromise and the integrator might pile on charges, but the customers are hardly faultless, says Krigsman.
“Customers have their own internal schizophrenia. You sit down in a meeting with them and they present a unified front. They want A, B, C, and D. It all sounds great. When you drill down and talk to them, you realize that the IT department doesn’t have a clue what the sales or accounting departments need, while the sales and accounting departments are clueless about the technology. But they present this seamless RFP to the systems integrator and the software vendor, and they all sign the contract anyway.”
When projects go bad, it’s usually “a shared responsibility between customers, integrators and vendors,” agrees Forrester’s Petouhoff. “I think everyone in charge of buying software should work for a software company or a systems integrator at some point in their careers. If they actually sat in those seats they’d understand the secrets of both worlds and be better prepared to ask the right questions.”
As more vendors move to delivering software as a service, says Petouhoff, some of the problems will go away. With SaaS, customers can see how applications really work, and they can back out of a bad fit without sacrificing a huge investment.
“To be fair, you have to blame the business owner too,” says GoToBilling’s Roderick. “They don’t like to read the fine print on agreements. And even when faced with the truth, they still sometimes go off and agree to something that sounds too good to be true.”