Software Value - What is it and How is it Measured?

A paper discussing software value and who reaps the benefit of that value.

What is the value of a piece of software?

What is a piece of software worth? How do you go about measuring it? How do you know before committing your budget? These are questions that we all frequently called upon to answer. The answers, I suspect, may well depend on who’s asking the questions. If your boss is asking and you’ve just spent (or about to spend) a large amount of your budget on something, then clearly it’s money well spent. If it’s software you’ve had for some time or if you’re discussing it with your work colleagues the answers may be different. But are there more objective ways of measuring the value?

Who sets the value?

Manufacturers and vendors decide, by which they mean the price to charge you. From their point of view this is the same as the value of the software.

Everybody knows that the potential profits in selling software are huge. Production costs are very low and profit margins can be very high. The price you pay depends on what the manufacturer needs to charge to generate revenues, or to maintain market share, or to beat the competition, or to suit any other standard business measure. It has very little to do with you or your needs.

Selling software is really a kind of pyramid selling operation. When you buy a piece of software you are really depending on others following you and buying it too. If they don’t the chances are you are going to be left with an unsupported product that will rapidly go out of date. Continued support depends entirely on enough new customers joining you in signing the purchase orders.

Effectively you are paying up front for the research and development time that the manufacturer has expended to get to this point. Further development, enhancements and updates, will only be forthcoming if lots of others (and you of course) continue to give the manufacturer more money.

Of course the product could be dropped at any time, or the company could go bust. If either of these things happens the result for you is the same, you are left with an unsupported product. Of course you are (relatively) safe so long as the sales keep growing, so perhaps you could argue that it’s in your own interest to keep paying!

Manufacturers are very happy with this state of affairs and would like it to continue. From their point of view it couldn’t be better, they charge what they like and you keep buying it.

Once a critical mass of paying customers is reached then things are even better for the manufacturer. Now you have to keep buying it because everyone else is using the same software and you need to exchange information with them. A standard has now been established and you are tied in to the manufacturer and the endless cycle of paying more and more. This has been, up to now, an extremely successful business model and many people have become very rich on the back of it.

Unfortunately it does not help your business much. You may or may not be getting value for money, you may or may not be getting top quality software, you may or may not be getting features that are of use to you. It makes no difference, you still have to pay for the privilege.

You may not think this is big risk for you, and indeed for commodity software it’s probably not too serious. You need a word processor and so do most people. If you buy a popular one the risks of it becoming obsolete or unsupported are indeed fairly small. The fact that everyone you know uses the same one means you can exchange information easily, so what have you to worry about?

The real problem is more likely to hit you when it comes to buying more specialist software, the very sort that is expensive to buy in the first place.

Specialist software cannot benefit from the economies of scale of operating systems or word processors or spreadsheets. By definition their specialist nature means they have little mass market appeal.

The traditional response from manufacturers has been to charge very high prices so as to recoup their development costs as quickly as possible and to generate profits from what will be in global terms, a small number of sales. Production and support costs are relatively higher so you have to pay more for support services as well. Unfortunately the risk that a specialist company will be taken over, drop or re-engineer a product, or go bust, is proportionately higher. Consolidaton of suppliers in specialist areas is a constant and ongoing force and showing no signs of diminishing. Your exposure to these risks is much higher too. Not only do you risk being abandoned with an expensive, unsupported piece of specialist software, but it will be obvious that you have made a poor choice and that the money has not been wisely invested. No matter how you look at it the balance point of value for money versus the use you get from the software is shifted well in favour of the manufacturer.

A different way?

What if there were a different way to measure the value of a piece of software? One not based on a manufacturer’s idea of worth, but one based on your idea of worth? How about the value of the software being dependent on the use you make of it? Even the most expensive and best featured product is worthless in these terms if you don’t have a use for it. Well all of this is possible, and for even the most specialist applications too.

Open source software offers a different way. There are many advantages to the open source approach, but the most immediately obvious is that the software is completely free to download and use. This means that the only measure that matters to you, the user, is how useful the software is.

With no manufacturer’s business to support you have complete freedom to choose any product you like. You no longer need to use something just because you’ve spend all your budget on it, you will never look silly buying something that quickly becomes shelfware. If it doesn’t do what you need then you can try something else.

You might think that open source software would only be developed for commodity items, operating systems, word processors and so on, but you’d be dead wrong. Profit is by no means the most powerful motivation in open source. The requirement to solve real problems is. Given the choice I know what kind of developers I’d prefer, those that are motivated by getting things done. As a result a great deal of very specialist software is produced, much of it of excellent quality.

It’s not all sweetness and light of course, open source has it’s problems too. Some projects are totally opaque to non-programmers. Some of the documentation is unintelligible to outsiders. Some projects are so specialised that it’s hard to see any use for them at all. Some are of interest only to a closely knit academic audience. Its not at all easy to find out what some of the projects actually do, it can be time consuming trying to get things to work, and at times it may appear that the obscurity is deliberate to keep novices out.

But the principle remains sound, the software is developed by highly motivated individuals with real problems to solve. They crave the respect of their peer group, they respond to the approval of others and to feedback from users, and they make all the source code freely available so that others can build on their work.

Why has business been slow on the uptake?

Business has been slow to take up open source in some areas, but not in all. The Internet runs on open source, Apache servers, name resolution, databases, email and many other applications show that open source can be a real contender for corporate use.

Linux, another open source project is currently riding high in the server market. Red Hat has become very successful with it by combining the best of open source with professional levels of support. This gives corporate users the backup they need to begin using open source solutions with confidence. The end result is increased efficiency and a significant cost saving for many business users.

But business has been slower in its take up of open source alternatives in more specialist areas such as network management and systems administration.

In this market the lack of professional levels of support is seen as a serious failing. Despite the very obvious, and very large, cost savings that are possible, the support gap between open source and commercial software has, until now, been too wide. For corporate users to base their network management strategies on open source solutions this gap needs to be narrowed. With the advent of companies like OPENXTRA this issue is, finally, being seriously addressed.

The combination of the best open source solutions, packaged, installed, and supported to professional standards, and the availability of a single point of contact, has the potential to deliver better and lower cost network management and system administration. And at the same time to shift the balance point of value for money versus the use you get from the software back to where it really belongs, in favour of the user rather than of the manufacturer.

About the Author

Denis Laverty Denis Laverty possesses more than 17 years experience in network management and communications, Denis has been involved with network management applications from the early DOS days; as product trainer, technical author and QA Director. In 2003 he co-founded OPENXTRA together with Jack Hughes and serves as its Managing Director.