Why Your LMS Costs Too Much

If you have a learning management system (LMS) from SumTotal Systems, Saba, or one of their smaller rivals, you likely have two problems. One, your LMS costs too much. Two, your vendor's longevity is at risk.

Their are two culprits here: your vendor and your company. Today, let's look at what your vendor does wrong: your vendor is really a professional services company pretending (perhaps even yearning and trying) to be a software company.

Unlike a real software company (see my post on the software company business model on January 2), Saba, SumTotal and a lot of other so-called enterprise software companies are really in the professional services business. They use software as a loss-leader for professional services. They do this primarily because they are obsessed with top-line revenue growth in order to appease investors. The problem is that professional services are inherently low-margin. And they lose money on the software. So the net result is that they produce little, if any, profit. In fact, Saba and SumTotal have lost a monumental amount of money over the years. The result of this is that these companies get a low market valuation (see my December post on the zero billion dollar LMS market).

These companies do not think they lose money on software. They will, instead, patiently explain away their losses, year after year. They will tell you how each part of their business is profitable, yet, mysteriously, the total is not. 

But their software is way too expensive to maintain and support. It is not designed to minimize maintenance and support costs. It is not designed to be easily configurable to meet user needs. It is not designed to minimize the cost of installation and upgrading. Instead, it is designed to provoke the need for customization by adding code to the product (that is, by requiring professional services). It is full of complexity to support different versions for different customers. Everything from installation to upgrading to adding a feature is seen as an opportunity to add professional services revenue, not to make the core product better. This lack of focus on the core product as the profit and revenue generator, which is at the heart of the software company business model, is the root cause of the overall profitability problem.

The rule of thumb is that a software company should derive the majority of its revenue from software, not services. But a more careful analysis is needed, because many so-called software companies have costs buried in R&D and technical support that are really costs associated with software designed to generate the need for professional services. It can cost ten to twenty times (yes, really, no typo) as much to support software that is thus  poorly designed and architected. These costs usually get absorbed in R&D and tech support, but they are properly part of the overhead of professional services. In other words, you have to dig deeper to understand exactly how much professional services cost the company.

These companies must then try to recoup their costs from customers, driving up prices. Even so, they lose money. The hidden costs of being a professional services company instead of a software company mean they really lose money on every sale. And those losses escalate into the future because the true cost of support cannot be covered by maintenance revenue; the annuity stream is a money-loser. You cannot make that up  on volume. Question is, how long can you survive?

(Full disclosure: I was a founder of Silton-Bookman Systems, whose Registrar product, originally released in 1984, was instrumental in launching the LMS market. Silton-Bookman Systems merged with another LMS company, Pathlore Software, in 1999. I was COO of Pathlore when it was acquired by SumTotal Systems in 2005.)