Disciplining the irrational buying mind
When thinking about your ERP decision, an important thing to realize is that people are not perfect decision makers. In fact we all make goofy decisions, often against our self-interest, on a fairly regular basis. We might eat a 2nd piece of chocolate cake in the midst of a diet. A lot of us are bad at saving, but good at spending on credit. We tend to fear spectacular, but less common risks (plane crashes) over more mundane, but probable ones (car wrecks).
Cognitive science has lots of pet terms for these little glitches that impair our decision making: confirmation bias, gambler’s fallacy, present bias, the anchoring effect, and so on. This article isn’t a Pscyh 101 course, though. It’s just an opportunity to self-check to make sure that these impediments to rational decision making don’t effect your critical ERP software call.
Considering all, rather than just upfront, costs
The reality is that there are many, many software options on the market. They range from very inexpensive options in the hundreds of dollars to extremely sophisticated programs that can range into the millions of dollars to address the needs of the largest companies.
Whichever general range you fall into, who wouldn’t want to believe that the program with the lowest initial costs is the right one? It’s an extremely easy trap to fall into. The good news is though, the right software really is the one with the lowest costs. It’s just important to make sure all costs are considered when running the math. When you are considering costs, are you really looking at the full costs or just the upfront price-tag?
Taking software out of the abstract
As buyers we naturally want to believe that the low upfront cost option is going to work. It fits our confirmation bias that it would be lovely to accomplish all of our needs without needing to spend to achieve the return. With tangible, consumer product purchases, we can easily see the differences. Software can be more abstract.
Enterprise software purchasing is also a difficult area in which to gain expertise. A company may only make an ERP software purchase every 3 to 7 years for example. That doesn’t provide much of an opportunity to become an expert. When multiple products purport to handle billing, for instance, as buyers we have to work harder to understand the differences in those offerings. Because of unfamiliarity, we may overrate the fact that each product claims to handle the same task.
But differences do exist. In our billing example, more sophisticated software will streamline processes, allow for approvals reviews, offer greater invoicing flexibility, sponsor electronic means of delivering bills, and assist with a more reliable means for collecting on a higher percentage of receivables. There is a cost benefit to all of these advantages. But, it can be difficult to get past our confirmation biases to take the time to quantify it.
Identifying likely ongoing sources of cost savings
Really, the fact you’re considering software at all is because you’ve identified that your current tools, or maybe even manual processes, are not cost effective. So, it’s important to make sure you are identifying the ways that improved technology can create savings and even enable new profits.
Depending on your particular needs, you will have different cost savings drivers. But some key areas to make sure you are looking at to quantify cost savings include:
- Automation and efficiency
- Better financial decision making
- Tapping new markets
- Lowering supply costs
- More effectively upselling and customer relationship
- Better prospecting tools
- Lowering job costs
- And, improving production or project management processes.
“If we run into issues, we’ll switch systems later”
If you hear yourself uttering those words, it’s time to do some hard evaluation of what’s gotten you there. There are two big, potential problems with this kind of thinking in terms of maximizing the cost effectiveness of your software investment.
A tendency to hope for success, without properly planning for failure
The first problem with counting on a back-up plan in case of insufficient software is the natural inclination to underestimate the risk of project failure, not to overestimate it. There are a couple of reasons that this is the case. Confirmation bias again plays a role. We want to believe that the positive experience others have had is most relevant. So, we tend to cherry-pick examples of companies having success with lower cost software. Without even realizing it, we may actively seek out and assign more weight to the evidence that confirms our hope that a solution, which we rationally understand as limited, will work for us.
We’re also prisoners of the moment. We have what cognitive scientists refer to as a present bias. Essentially, if a product looks to meet our current needs, we’re more willing to overlook the evolution of our requirements. The net effect is that issues like scalability and ongoing support tend to get short shrift when we consider the different decision factors.
Remembering to consider the costs of the back-up plan
The second problem with relying on the notion of switching software is that it is easy to fail to account for the full costs associated with something that we are identifying only as a contingency. Switching software is a major undertaking.
There are lots of hidden costs when it comes to a software change that should be considered:
- Disruption of business continuity. Selecting a software program takes time. Because of the importance that is has to your company’s financial and operational success, that time is likely to belong to your most important employees.
- Training. Learning a new system represents another investment in terms of both time and money.
- Data conversion. Migrating data from one system to another is not an instantaneous process. In fact, most companies will rely on an experienced 3rd party to manage the data conversion, which represents another potential cost center.
Often times the most cost-effective solution, will be the one that involves purchasing software capable of scaling with the business. Being aware of confirmation and present biases can help in more carefully assessing the risks related to implementing a partial or temporary solution.
So, what’s the overall cure to these natural biases we bring into our software decision making? It’s really a one-word answer: information. By being aware of these biases we are in a position to overcome them. A careful software review involves consideration of various different approaches and quantification of their likely benefits. In many cases, you may find that a lower cost option will represent the most cost-effective long-term solution. In others, you will find that a more significant upfront investment generates tremendous returns. By gathering the data and shedding our natural biases, you position yourself to make the right decision for both the present and the long term.