Photo by Official GDC

A packaged application is not ready-to-use, in any sense of the word. The word “packaged” is kind of a misnomer. You won’t find a warehouse management system in a shrink-wrapped box on the shelf at Best Buy. A packaged application is simply one whose features and functions match in general terms what you want the software to do, but which still needs to be configured for your business. Configuration (also called setup) involves a lot of work.

Some important guidelines:

Stick with a software vendor’s competencies. If you have defined your scope as one or two specific functional areas, look for applications that best fit those purposes. It’s always interesting to look at a program’s other features and functions, but unless you see hard returns in expanding beyond the package’s main mission, stay within your scope.

The biggest risk in overspending with packaged applications is during the implementation phase. A single implementation of, say, a system to manage order processing, can cost $2 million to $3 million or more. Why? Two main reasons: a) you don’t know exactly what modifications are needed to make the program work the way you want; and b) you don’t know what delays you might encounter; each delay prolongs the project and adds billable hours to your cost from either the application vendor or other people you have hired to help with the project.

Plan the life-cycle costs of a packaged application. The life of a packaged application can span many years. The main costs will be annual support fees and any enhancement (custom development) work you might need as your business requirements change. Your vendor will also be releasing upgrades to the software, sometimes as frequently as every six or nine months, and you will need to stay current with those upgrades in order to get the best performing software and to continue your support contract.

Understand that software is an annuity business. In simple terms a software company survives in the long run because it is able to collect annual maintenance and support fees from its customers while providing custom development services and a stream of version upgrades. The support fees are 20% to 25% of the original cost of the software license, so to the software firm, it’s like selling a new system to the same customer every four or five years.

Packaged applications generally can’t be implemented by without people who know the app. So the software vendor is not just selling you the application but a team of people to implement it for you. One expert on a project for one year can cost you $300,000 – $500,000.