Analysis of Acquisition of New Software

Acquisition of every new more or less major software product is an investment project. And as such, it must create the maximum amount of financial value and have its KPI – payback period, NPV, IRR/MIRR and economic profit acceptable to your finance department. For them, acquisition of a software item is just another investment project. Fundamentally no different from any other.

A software item (like any other object) creates financial value by doing one or more of ‘IRACORACI’ – Increase Revenue; Avoid Cost; Optimize Risks (which usually means decreasing them) and/or Avoid Capital Increase (working capital that is). This comes directly from DCF (Discounted Cash Flows) model for calculating financial value of a business entity.

With some software categories (e.g operating systems, database and Internet servers, middleware, etc.), it will be more accurate to say that acquisition and deployment of a new software item allows the whole system to do IRACORACI. Or reduce the needs for working capital. In this case, your new item must be an excellent fit for your overall software system (and into your hardware system as well).

Speaking of acquisitions. We live in a very fast-paced world; but computer software changes (and improves!) even faster. Therefore, to stay competitive (and a top-notch software system can be a very powerful competitive advantage), you will need to keep your system up-to-date.

Which will require development and implementation of a highly efficient corporate process of upgrading existing software and acquisition of a new one – as the addition to or replacement of the existing one.

Development of requirements and requests for proposals, selecting the right equipment type, the right product, vendor and actual supplier (distributor, dealer, systems integrator), acquisition terms (purchase vs, leasing), financing, service and support, etc.    

For a major software acquisition (such as a serious CRM or especially an ERP system), you must first develop a comprehensive financial and operational plan for this investment project. Supported by all relevant corporate documentation.

This plan absolutely must support extensive training – offered by a software vendor or a third party - to make sure that your employees get the most out of a new software (or a major upgrade). Lack of proper training is one of the primary reasons why software deployment projects have low IRR (or even lose money).

As selection and acquisition of a major software requires a lot of specialized knowledge, skills and expertise, you might need to employ a highly competent software acquisition manager. If you are doing significant software acquisitions on a regular basis, of course.