CHAPTER 10

METHODOLOGIES FOR PURCHASED SOFTWARE PACKAGES

The decision to build a custom application or purchase a software package should involve both
business managers who need the software and IS professionals who will assess the technical benefits and
risks.

Advantages of Packaged Software

1. Packaged software is often more cost-effective as development and upgrade costs are
shared among multiple organizations.
2. It can be implemented faster as the software already exists, which is an advantage
especially in rapidly changing business environments.
3. Internal staff can work on other applications since the core functionality is already
provided by the package. It allows internal staff to dedicate their efforts to developing
other applications to provide a competitive edge to the organization.

Disadvantages of Packaged Software

1. Packaged software may not exactly match an organization’s specific requirements.

2. Customization is possible but can complicate future upgrades and is subject to software
license limitations.
3. Organizations may need to change their processes to align with the software’s
capabilities.

● The Purchasing Steps

Definition Phase
 Definition Phase marks the beginning of the software package acquisition process. Its primary
objective is to define the organization's specific system needs and set the stage for selecting the most
suitable software package. This phase lays the foundation for informed decision-making.

Steps in Definition Phase:

1. Needs Identification
● This initial step involves identifying and articulating the specific needs and challenges within the
organization that require a software solution.
● It's crucial to engage both business stakeholders and IT professionals in this process to ensure a
comprehensive understanding of requirements.

2. Feasibility Analysis
● assesses whether it's economically, technically, and operationally viable to purchase a software
package instead of developing a custom solution.
● It involves evaluating the availability of suitable packaged systems and conducting a preliminary
investigation of potential vendors and their offerings.

3. Requirements Definition
● focuses on specifying the functional requirements of the system to a level that allows the creation
of a Request for Proposal (RFP). This includes outlining what the software should do in terms of
inputs, data storage, processes, outputs, and performance criteria.

4. Create Short List of Packages

● after gaining clarity on the organization's needs, create a shortlist of potential software packages
that could meet these requirements.
● Consider factors like the vendor's reputation, the package's features, compatibility with existing
infrastructure, and its ability to address specific business challenges.

5. Establish Evaluation Criteria

● Determine the criteria that will be used to evaluate both the software packages and the vendors.
● This includes identifying mandatory requirements and desirable features.
● Establishing a weighted scoring system can help objectively compare different packages based on
these criteria.

6. Develop and Distribute RFP (Request for Proposal)

● Once you have identified potential software packages and established evaluation criteria, you
create a formal RFP document.
○ RFP Document
■ sometimes called a request for quote, or RFQ
■ a formal document sent to potential vendors inviting them to submit a proposal
describing their software package and how it would meet the company’s needs.

7. Evaluate Vendor Responses to RFP and Choose Package

 ● Involves a comprehensive analysis of the proposals and vendor capabilities.
● takes place after the RFP responses have been received from vendors.
● In this phase, you evaluate the vendor responses, compare them against your established criteria,
and select the software package that best aligns with your organization's needs and objectives

8. Negotiate Contract
● a distinct phase that occurs after choosing the software package.
● Once you've selected a vendor and package, the next step is to negotiate the terms of the contract
with the chosen vendor.
● This includes specifying details such as software pricing, licensing, payment schedules,
acceptance testing procedures, delivery timetables, support and maintenance responsibilities, and
more.
● Contract negotiation is a critical step to ensure that both parties (the purchasing organization and
the vendor) have a clear understanding of their respective obligations and expectations.

CONSTRUCTION PHASE
Three Steps of Construction Phase:
1. System Design
2. System Building
3. System Testing
Note: The extent to which system design and system building are needed depends on the package’s
complexity as well as whether or not the purchased package is modified. Considerable time and and cost
reductions can be achieved when there are no major modifications made to the package’s code.

Turnkey - software packages that are fully developed and ready for immediate use without the need for
customization or major modifications.

Cost Savings in Purchasing vs Building

● Construction phase costs are the major contributor to cost savings when choosing to purchase a
package instead of building a custom application.
● The Construction phase costs for a purchased package are significantly lower even when the
software purchase price is added. It is often less than half of the Construction costs for
customized solutions

If no modification to the system are to be made:

- The firm can proceed directly to system testing after signing the purchase contract.
- Off-the-shelf packages, especially for standardized functions such as accounting are often left
unmodified.
- Packaged systems are usually beta-tested within the industry before being sold.
- User acceptance testing is essential to ensure the system works with the company’s data and
hardware.
- New procedures may need to be developed to align the system with the organization’s needs.

If the package needs to be modified:

 ● Some options for accomplishing the changes include: contracting with the vendor,
contracting with a third party, or modifying the software with in-house resources.
● If the vendor provides machine-language code instead of source code, contracting with
the vendor may be the only viable option.
● Testing is essential when modifications are made by the vendor or an external supplier.
● When the purchaser modifies the package, the SDLC methodology’s system design and
building activities are typically followed.
● IS staff often require significant efforts to understand the package’s design.
● The project scope may extend to modifying existing company systems to interface with
the new package.
● Creating interface programs can be challenging and costly.

IMPLEMENTATION PHASE
The Implementation Phase includes:
● Installation
○ The installation process includes: installation planning, training, data cleanup, and
conversion.
○ The quality of vendor support plays a crucial role in the successful installation of a
packaged system.
○ The size and complexity of the package can also significantly impact the installation plan
and project costs.
○ Special attention should be given to the training needs for a purchased system.
○ Active involvement of business managers and representatives is essential in order to
resolve problems that may arise.
■ Many consulting firms have developed expertise in “change management” to
help organizations that will be making significant changes in the way people do
their jobs.
● Operations
○ Ongoing operations tasks for a new application are similar, regardless of whether it’s
purchased or built using the SDLC.
○ The key to a successful start for a packaged system is effective communication with the
vendor to swiftly address issues.
○ Long-term success relies on how well the organization integrates the system into its
ongoing operations.
● Maintenance
○ It’s common for vendors to handle package maintenance, a detail that should be clearly
defined in the software purchase contract.
○ A well-crafted contract can result in significant cost savings for the company throughout
the system’s lifespan.
○ However, a potential drawback is that the purchasing company becomes entirely reliant
on the vendor for future system modifications.

PROJECT TEAM FOR PURCHASING PACKAGES

Project Team includes:
 ● Business managers
● Users
● IS Managers/Specialists
● Software vendors

Key Roles in Successful Implementation:

● Implementing packaged applications often requires a major commitment from business
managers and users.
● Extensive changes in business processes and procedures are needed to effectively integrate
purchased software.
● Business managers may be called upon to assume project management roles due to their
familiarity with organizational needs.
● IS managers are also crucial, as they provide technical expertise in managing package
implementation.
● Small organizations without IS specialists may need to rely on software vendors or external
consultants for technical support and guidance.
○ Software vendor initially provides information on the package capabilities in response to
an RFP.
● In the case of large enterprise system packages, companies commonly contract with consulting
firms, often certified by the software vendor.
○ These third-party partners play a crucial role in implementing complex enterprise
systems.

MANAGING A PURCHASED PROJECT

How to successfully manage a purchased project:
● A successful purchased system project relies on selecting a product and a vendor that is capable
of meeting both a firm’s current and future system needs.
● An effective project team with members possessing the necessary business and technical skills
and knowledge is essential.
○ The project team must include the right business managers, end users, and IS specialists.
○ Their involvement ensures the selection of the best package from the most suitable
vendor, taking into account the possible technical and business risks.
● Adequate attention to the initial Definition phase is crucial for managing the life cycle of a
purchased system project.
○ Neglecting the definition phase or step can lead to discrepancies between the company’s
needs and the package’s capabilities, increasing investment risks.
○ Contracts with external vendors are less flexible than agreements with internal IS
developers, emphasizing the importance of a well-executed Definition phase.
● Business team members with implementation responsibilities such as business managers and
users must be present.
○ Their commitment to project goals, including time schedules and budgets, is vial.
● The success of the Implementation phase is closely tied to the thoroughness of the Definition
phase, where organizational changes needed for successful implementation are assessed.
PURCHASING ADVANTAGES AND DISADVANTAGES
1. Purchasing Advantages
● Less time is needed to implement the system
○ The primary project advantage is that, compared to customized application
development, less time is needed to implement the system.
○ Nevertheless, for midsized systems, the entire process will still require several
months
○ For large-scale enterprise software implementations (with packages such as ERP
systems), the process can take several years to implement enough modules of the
software to achieve a net benefit
● Packaged software implementations can be very attractive from an economic standpoint.
○ Small businesses can acquire a complete accounting system for under $25,000, a
cost significantly lower than developing a custom application. When the vendor
has over 10,000 installations of this package, generating substantial revenue, they
have an incentive to invest millions in improving it with new releases.
■ This benefits both purchasers who save costs and the vendor who
remains profitable while offering ongoing support and upgrades.
○ The initial purchase price of a software package is often just a small part of the
total cost of acquisition and installation.
● Reduced need for internal IS resources
○ Implementing software packages can temporarily free up in-house Information
Systems (IS) resources for developing mission-critical applications, which have
the potential to provide a competitive advantage.
○ This advantage occurs when software packages are used for common processes
that do not offer a unique strategic advantage.
Two potential long-term advantages
● High application quality (debugged and best practices)
○ Software packages often have superior quality compared to custom systems.
○ Vendors can invest more time and effort in development and offer best practices
for various scenarios.
○ Documentation is typically better, and new releases often incorporate user
feedback and thorough testing, including beta testing in client organizations.
● Infusion of external expertise (IS, business)
○ Software vendors often have the funds and motivation to develop systems using
newer technologies.
○ Packaged solutions for a particular industry, or large ERP systems, also
frequently have best-in-class processes and procedures embedded in the software.
○ By purchasing the software, companies can also adopt better business processes.

2. Purchasing Disadvantages
Two major project risk
● Risks due to lack of package knowledge
 ○ Package implementation requires substantial training for IS and business
personnel, increasing costs.
○ Organizations may not quickly utilize package capabilities due to unfamiliarity.
○ Organizations may make the mistake of initially modifying the package, realizing
later it could have provided the same functionality differently.
● Risks due to the extent of organizational changes required
○ Implementing a packaged system involves significant business process changes,
leading to higher project risks.
○ Involvement of knowledgeable business managers and skilled IS specialists is
crucial in the Definition phase.
○ User resistance is common due to the extensive changes needed for packaged
solution implementation.
Long-term disadvantage
● Initial and ongoing dependence on vendor
○ Dependency on an external IT provider for installation, modifications, and
ongoing maintenance.
○ Coordination costs in managing the vendor relationship may be underestimated.
○ Risk of the vendor going out of business or being unresponsive.
○ Pricing issues if the vendor restricts third-party competition for support services.

SPECIAL CASE: ENTERPRISE SYSTEM PACKAGES

Enterprise resource planning (ERP) systems

● By the end of the 1990s, the majority of U.S.-based Fortune, 500 companies and more than
one-fourth of European-based midsized organizations had invested in a first wave of enterprise
system packages: the enterprise resource planning (ERP) systems.
● Reasons for adoption include cost reduction, efficiency, and compliance.
● ERP systems are both IT platform and business process investments.

Benefits of ERP Systems:

- Enable access to integrated data for better decision-making.
- Support cross-functional business processes.
- Reduce the need for maintaining multiple system interfaces.
- Offer configuration options for various industries.

Potential Risks and Costs:

- ERP systems are very expensive to purchase
- Restriction to package capabilities.
- Dependency on a single vendor for core applications.
- Complex deployment process.
- Training and skill development are required.

5 Success Factors for ERP Projects:

1. Top management is engaged in the project, not just involved.
 2. Project leaders are veterans, and team members are decision-makers.
3. Third parties fill gaps in expertise and transfer their knowledge.
4. Change management goes hand in hand with project planning.
5. A satisficing mindset prevails.

Long-Term Considerations:
● ERP projects should anticipate a shakedown period post-implementation.
● Continuous improvement can lead to long-term business benefits.
● Learning from early adopters' experiences is valuable.

OPEN SOURCE SOFTWARE

● Open source software extends beyond freeware.
● It provides access to the source code for modification.
● Users may be obligated to share changes with the community.
● Open source applications are free but may have fee-based extensions.
○ The real advantage of open source software is not the lower cost but rather the
independence from a single software provider that may not have the same priorities as
you do for enhancements and that may lock adopters into their services and add-on
components by not allowing third parties to be involved.

Advantages of Open Source:

a. Large pool of volunteer testers and developers ensures reliability and low-cost software
development.
b. Ability to modify source code according to specific needs.
c. Independence from one vendor or proprietary code.
d. Cost-effective for large-scale deployment.
e. Versatility in software usage.
f. Easier integration of different open-source packages.

Risks of Open Source:

a. May lack complete documentation without additional costs.
b. Limited viability for highly specialized applications.
c. Potential for duplication of efforts among adopters.
d. Variability in open source licensing agreements.

NEW PURCHASING OPTION: APPLICATION SERVICE PROVIDERS (ASPS)

● ASPs emerged in the IT industry during the first decade of the new millennium (2000s).
● Under an ASP purchasing option, the purchaser elects to use a “hosted” application rather than to
purchase the software application and host it on its equipment. The ASP is therefore an ongoing
service provider.
● Instead of having a software licensing agreement with a firm that developed the software, a
company pays a third party (ASP) for delivering the software functionality over the Internet to
company employees and sometimes the company’s business partners.
● The ASP host owns the licenses for the software.
 ○ Almost any software can be delivered via an ASP, from basic office automation (e.g.,
Microsoft Office) to specialized application software (e.g., Salesforce.com) and large
ERP systems (e.g., the Oracle ERP suite).
○ Common ASP services include web hosting, email, financial/accounting apps, and
e-commerce.
○ The ASP Provider:
● specialize in particular software or industry verticals.
● Major technology vendors like Microsoft and Oracle offer ASP-hosting options.
● ASPs may support small to medium-sized businesses and provide additional
services like networking and hardware.

Two Major Advantages of Choosing ASPs:

● Cost savings
● Faster implementation and reduced infrastructure investments.
Other advantages
● Reduced network access and service delivery costs for remote employees.
● Access to software with more functionality.

Potential Downsides:
● Dependence on an external vendor for software and ongoing operations.
● Importance of assessing ASP capability and reliability in the selection process.
● Security and data protection concerns.
● Potential requirement to convert to new software versions.

Contractual Considerations:
● Metrics for vendor performance and penalties for noncompliance.
● Service level agreement specifying performance expectations.
○ such as system uptime, recovery time, wait time on calls to the help desk,
notifications about software upgrades, and other factors important to the
customer.
● Careful selection of ASP is crucial to avoid future issues.