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Get more for your enterprise software budget: Negotiating strategies

There are more choices to navigate these days, but some fundamentals still apply, too

By Elisabeth Horwitt
August 16, 2010 06:00 AM ET

Computerworld - Today's tough economic times, along with the availability of more software licensing models than ever before, have combined to shift more negotiating power into customers' hands, some experts say.

But that power, and the expanded array of choices, come with a downside: a more complicated software-shopping process. With more complex options to choose from (see sidebar below), IT decision-makers have even more homework to do than usual.

Even with the economic downturn, however, the overall amount IT spends on packaged software hasn't gone down. In fact, packaged software has increased slightly as a percentage of the IT budget, rising from 1.92% to 2.02% of total worldwide IT spending from 2006 to 2010, according to IDC.

Know your pricing options

Before negotiating with a vendor, figure out what pricing model works best for your organization. Then, if the vendor rep says, "We don't offer that," you can threaten to go to someone who does.

Pay-per-seat is the traditional pricing model. Vendors traditionally offer better deals for volume and commitment but generally include penalties for right-sizing -- trying to reduce the number of seats -- before the agreed-on re-up time. At the very least, customers lose the volume discount if they give back a significant number of seats, and have to pay list price for additional seats if they underestimated user demand. However, vendors are starting to be more flexible on this point.

The following are among the more recent pricing models to come on the market:

  • Pay per number of concurrent online users. This is particularly useful for global companies that have different sets of users working at different time periods.
  • Pay for unlimited clients. IBM's Data Center license is one example. The advantage is that the customer no longer needs to guess how many licenses will be needed in the next year or two. Nor does it need to keep track of license usage in case of a vendor audit. Such licenses are pricey, however, and work best when the software will get lots of usage, IDC's Amy Konary warns.
  • Pay per usage. In this model, vendors typically charge an upfront fee plus a rate that scales up and down according to utilization of a given software package. This option is catching on among companies that are sick of paying for a monolithic software suite, such as Office, even if their workers are only using a tiny percentage of features, Konary says. Pay per usage will potentially enable customers to pay on a highly granular level, not just by application usage but according to who is using which features or software modules and for how long.

Usage-based pricing models have a catch, however: They require IT administrators to spend a lot of time monitoring and recording utilization levels. The more granular the model, the more time-consuming and complex this task will be.

Smart IT managers are getting more for their money these days, though. Instead of passively accepting the old perpetual license model and vendors' pricing terms, customers are haggling for better deals, says Amy Konary, research director of software licensing and provisioning at IDC. Some customers are threatening to go with an alternative software product -- including virtualization, software as a service (SaaS), open source and freeware -- if their traditional vendor doesn't pony up, she explains.

[Read related story, Virtualization and software prices: Very tricky.]

The economic downturn has also given customers more leverage, says Ray Wang, a group partner at consulting firm Altimeter. He knows some clients that have gotten their maintenance and support fees cut by as much as 50% or 60%, he adds. "This is a great time to buy enterprise software."

Baker Hughes has recently negotiated better terms with several vendors by agreeing to longer-term contracts and by bargaining as an enterprise and not as separate divisions, says Graham Crisp, IT assets manager for the global oil-services firm. "We have much more leverage and can get volume discounts by bargaining as a single company with 36,000-plus users instead of eight divisions," says Crisp.

Of course, enterprises have always been able to cut deals in exchange for larger and longer-term commitments. The big change now is that the customer "has more transparency, flexibility and choice" during negotiations, Konary says.



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