Cutting Time: Economy Gives IT a Sword for Slashing Software Costs

The global recession isn't helping IT budgets. But it provides users with an opportunity to gain a pricing edge on their software vendors.

Tech budgets aren't immune to the economic downturn. Market research firm IDC expects IT spending to grow just 2.6% worldwide and less than 1% in the U.S. next year. Gartner Inc. is even more pessimistic: Its latest forecast calls for 2.3% growth globally in 2009.

And last week, Forrester Research Inc. sharply cut its projected increase in U.S. IT spending for next year, turning the number around from 6.1% to 1.6%.

IDC analyst Mike Fauscette said he doesn't expect large users to engage in "wholesale stoppages" of critical IT projects. But he thinks that at best, many companies will hold spending flat in the months ahead.

The silver lining is that the current crisis may also represent an opportunity. For instance, 39 of 66 software vendors polled recently said they were flexible on licensing and pricing, according to Acresso Software Inc. Acresso, which sells software licensing and compliance monitoring tools, conducts an annual survey of users and vendors along with the Software & Information Industry Association (SIIA) and other groups.

So, how can you take advantage of what may be a once-in-a-career IT buyer's market, even with budget restraints in place?

1. Encourage price wars.

Users should be in a good position to play vendors of ERP and CRM applications against one another and benefit from the competition, said Jim Geisman, president of MarketShare Inc., a software pricing consulting firm in Wayland, Mass.

A case in point is The Schumacher Group, which provides staffing and management services for hospital emergency rooms. CIO Douglas Menefee said most of his software contracts are up for renewal early next year. He plans to negotiate hard, since he expects vendors to be much more amenable to bargaining than they have been in the recent past.

"For the last three years, I've experienced a bit of 'the price is what the price is' attitude from sales guys," said Menefee. "I completely think the power has shifted to the buyer." For example, he said he's seeing "very aggressive pricing" from three vendors that are competing for a contract to supply Schumacher with a new human resources administration system.

2. Consider cutting software maintenance -- but be careful.

Discontinuing support contracts with software vendors can save corporate users some coin. "A lot of enterprises will say, 'You're not giving me anything anyhow, so kiss that revenue goodbye,' " Geisman said. "Customers feel they've been cheated, and in many cases, they have been."

But cutting maintenance could prove costly if you're dealing with vendors that take a hard line in such situations, according to Eliot Colon, president of Miro Consulting Inc., a Fords, N.J.-based firm that helps Oracle and Microsoft users negotiate and analyze software contracts.

Colon recounts the case of a semiconductor maker that dropped support for its Oracle apps two years ago but then found itself needing access to a mission-critical software patch. Despite offering Oracle Corp. a "six-figure flat fee" for the patch, the company was rebuffed, he said.

He added that after three months of negotiations, the chip maker agreed to pay Oracle several million dollars -- the same amount it would have spent if it had left the maintenance contract in place.

3. Bring hard business data to the negotiating table.

Sharing financial info and other internal data may seem like a surefire way to lose the upper hand in vendor negotiations. But some analysts suggested that when done in good faith, it is often more effective than simply claiming corporate poverty or making empty threats to migrate to rival products. Vendors that are good business partners will respond to calls for pricing that is more in line with the economic value users get from software, the analysts said.

Colon cited the experience of a large client in the retail industry. "They told Oracle they were in financial disarray and had a bleak outlook for the next year or two," he said. "Oracle didn't budge at all." But when the retailer went back to Oracle with data showing how low its usage of the vendor's software was outside of the 10-week holiday shopping season, Oracle responded by drawing up a less expensive custom contract, Colon said.

4. Look for concessions other than discounts.

Microsoft Corp. last month announced a zero-percent financing promotion for new buyers of its Dynamics ERP and CRM applications. But for the most part, such deals have either "dried up, or the terms aren't going to be all that attractive," said IDC's Fauscette.

That's partly because of the tightening of credit markets. "Vendors used to be able to get you approved for several million dollars [of financing] if they just knew your name," Colon said. "Now banks are asking for audited financials and [checking business] references."

So, what are some realistic concessions? One is asking vendors to provide free installation and training -- something that Oracle, for one, has been agreeing to do, according to Colon.

Menefee said he has found that vendors are often willing to discount add-on modules or even throw them in for free. They have also become open to doing "a lot more legwork" on things such as evaluating Schumacher's business processes and how the use of software could save the company money, he said.

Users also might want to consider things that they would be willing to trade away as part of the bargaining process or would agree to do for vendors -- such as appearing on trade show panels or talking about a product to the media.

5. Consider new types of licensing agreements.

Another possibility is to push your vendor to tweak or overhaul its software licenses for you, as in the case of Colon's retailer client. That could involve adding a cloud-based subscription option to an existing perpetual-use license, or pushing a vendor to adopt concurrent-user licensing.

Sixty-nine percent of the 78 IT managers who responded to the Acresso-SIIA survey said they preferred the concurrent-user approach over per-seat or per-processor licenses. And 70% of the surveyed vendors said they expected concurrent-user licensing to be one of their primary pricing models by 2010.

Usage-based pricing may also be an option. Altair Engineering Inc., a maker of product life-cycle management (PLM) applications, is among the vendors that have adopted token-based, pay-per-use licensing schemes that let end users within a company share a pool of software licenses.

Tecosim GmbH, a German provider of computer-aided engineering services, has used Altair's token system for the past five years. Juergen Veith, Tecosim's managing director, said the tokens cover the use of Altair's own PLM software as well as integrated third-party products.

The token system "gives us a lot of flexibility," Veith said. "It lets us use the best software for each particular job." Using the tokens is also saving Tecosim money, he said, although he didn't disclose any hard numbers.

6. Switch to less expensive alternatives.

Inexpensive or free desktop applications, such as the cloud-based Google Apps or open-source suite, have matured to the point where organizations might want to consider swapping out Microsoft Office, Fauscette said.

Similarly, you could look at dumping on-premises software for Web-hosted software-as-a-service offerings, he suggested. And third-party support vendors might be able to help lower your maintenance costs.

Manhattan Home Finance LLC in Manhattan Beach, Calif., faced a different kind of choice. It was locked into Lotus Notes for e-mail but desperately wanted to adopt Microsoft's SharePoint Server software for document storage and collaboration, said Nader Chahine, branch manager at the JPMorgan Chase & Co. affiliate.

Chahine found a product from Mainsoft Corp. that links SharePoint and Notes for $125 per user, enabling Manhattan Home Finance to adopt the former while avoiding a lengthy and expensive migration to an all-Microsoft software stack.

7. Look to smaller vendors, which may be more flexible -- but also more risky.

Fauscette noted that start-ups may face a slew of competitors or need cash, often making them a good source of bargains. On the other hand, overeagerness may be a warning sign. Fauscette said he would be leery of doing business with a vendor that "is willing to cut his price to almost nothing."

MarketShare's Geisman, meanwhile, cautioned that driving such a hard bargain could contribute to a vendor's demise or sour a business relationship. A wiser course of action, he said, is to strike a deal that is fair to both sides and then "make it clear to your vendor that you are choosing not to hammer them because you realize that we are all in this together."

This version of the story originally appeared in Computerworld's print edition.

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Copyright © 2008 IDG Communications, Inc.

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