Microsoft deals as fiscal year closes

Some users find the vendor is more willing to grant concessions as its license deadline nears.

Corporate users who have dragged their feet on signing up for Microsoft Corp.'s controversial new volume-licensing program might want to get into negotiation mode this week.

Microsoft's fiscal year ends June 30, and some analysts and enterprise customers said the software maker has become increasingly flexible.

"They're quite a bit more amenable to giving concessions than they were even two months ago," said Julie Giera, an analyst at Giga Information Group Inc. in Cambridge, Mass. In the past six weeks, some of her firm's clients have reported bigger discounts on licenses and the bundling of free or discounted consulting and training, she said.

Giera couldn't say whether that's because the fiscal year is ending or because Microsoft sees many users still undecided about its new licensing program as the July 31 deadline for important software upgrade options looms.

But Microsoft CEO Steve Ballmer acknowledged that his company has been "making deals" (see story). He declined to specify which items are negotiable, but he said support has been an element. Support isn't typically included in Microsoft's software maintenance program.

"If there are customers that have issues, of course we're going to try to earn that customer's trust by creating a win-win situation," Ballmer said. "And we've done that many, many, many dozens of times with customers as they have evaluated our new license."

Pacifying Customers

Ballmer himself has gotten involved. He told Computerworld that several months ago, a large manufacturing company in Germany complained that the new licensing plan would cause its costs to increase by a percentage it had no intention of paying.

"I said, 'That sounds very reasonable. We're not trying to do that to you, so let's try to find a path,' " Ballmer recounted. "It took us three weeks after I visited. The team had an appropriate arrangement."

Microsoft has worked to pacify many customers since introducing its Version 6 licensing program just over a year ago. At that time, officials claimed that the new plan would simplify the software maker's complicated licensing scheme, ease software administration and license tracking, and even provide a potentially appealing subscription option (see story).

But customers lashed back, often complaining about the lack of advanced warning about the new plan and potential cost increases they might incur, largely due to the elimination of a popular version upgrade program on Oct. 1.

In response, the software maker twice extended key deadlines and this year is devoting $20 million to a worldwide education project that aims to reach every volume licensing customer (see story).

"We've learned a lot. We'll see," Ballmer said. "There may still be issues that arise that we need to address, either with individual customers or in general."

Jonathan Murray, vice president of global accounts at Microsoft, said the initial introduction of the licensing program had been a "monumental screw-up on a number of levels" and served as "a real wake-up call" to senior management in an area where it lacked an effective feedback loop.

"We didn't actually go out and validate with the right number of customers or the right types of customers ahead of time," Murray said. Since then, Microsoft has undertaken extensive customer surveys. "This is an organization that listens to feedback, acts on it, and it is not afraid to change," he said.

Sour Taste

Customer noise may have died down to some degree, but some users have been left with a sour taste in their mouths. Wolly Morin, CIO at clothing retailer Ann Taylor Inc. in New York, said last week that he still feels Microsoft is "giving us an ultimatum approach" and "kind of putting a gun to our heads."

Several members of his IT staff met with Microsoft, and Morin himself has a meeting scheduled for July. But he said he has no intention of buying into Microsoft's optional Software Assurance program.

Software Assurance, the key new provision in Microsoft's licensing program, entitles customers to receive the latest product versions at potentially lower costs than in the future. But they must pay an annual fee of 25% of the license cost for server software and 29% for desktop software during the contract term.

For most customers, the Software Assurance plan won't make economic sense unless they upgrade their desktop software at least every three and a half years and their server software at least every four years, Microsoft product manager Rebecca LaBrunerie said. She advised customers to do a business analysis to see if the maintenance program is right for them.

Morin said it's not right for Ann Taylor. "I think they're crazy. We're going to do upgrades every four to five years. What's the business reason behind upgrading more often? There doesn't seem to be a driver here," he said, noting that the retailer's users don't need most of the features that are now in the products.

Jim Prevo, CIO at Green Mountain Coffee Roasters Inc. in Waterbury, Vt., also plans to buy new licenses several years from now, and the process he had to undertake to make that decision was no picnic, he said. Prevo said Microsoft provided its licensing scheme, but he had to pull together his own set of workbooks to analyze the various new upgrade scenarios.

"I'm sure they could have written a simple program that prompted users for key information and gave the best answer with very little effort on their part," he said.

Most of Microsoft's top customers hold Enterprise Agreements and are largely unaffected by the changes. Randy Richardson, CIO at clothing retailer The Talbots Inc. in Hingham, Mass., said he witnessed all the commotion. But, he said, "we're really pretty happy with our relationship with Microsoft."

Navigant International Inc. in Englewood, Colo., waited until two weeks ago to sign its Enterprise Agreement, a step up from the Select Agreement it formerly had.

Navigant CIO Neville Teagarden said that with Microsoft pushing Enterprise Agreements, "you can get certain consideration above and beyond signing a Select Agreement."

Teagarden said Microsoft agreed to be more active in helping his company adopt, implement and support products. But he cautioned his peers to do a careful cost analysis to make sure those incentives aren't the drivers for switching to an Enterprise Agreement.

Navigant not only needed to upgrade old software, but also has plans to upgrade more often in the future. Teagarden also noted that the new agreement will help his staff manage licenses at client sites that use Navigant's outsourced corporate travel services.

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Price comparison for Microsoft Office Professional purchase using select Level B volume license agreement:

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2002 2003 2004 2005 2006 TOTAL
Company using version upgrade program (VUP) every four years* $269
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$269 $538
Company purchasing Upgrade Advantage in 2002 and Software Assurance from 2004-2006 $282
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$122 $122 $122 $648
Company now using Office 2000 or XP that purchases Software Assurance $122 $122 $122 $122 $122 $610

Price comparison for Windows purchase using select Level B volume license agreement:

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2002 2003 2004 2005 2006 TOTAL
Company using VUP every four years* $120
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$120 $240
Company purchasing Upgrade Advantage in 2002 and Software Assurance from 2004-2006 $157
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$50 $50 $50 $307
Company now using Windows 2000 or XP that purchases Software Assurance $50 $50 $50 $50 $50 $250

* NOTE: VUP option is no longer available from Microsoft.

Source: Meta Group Inc., Stamford, Conn.

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Sticking Fast To Plan

Ravaged by shrinking profit margins, slow sales and heavy layoffs, companies are reluctant to stray from their initial 2002 IT budgets and strategic plans, which, above all else, call for cutting costs. Averting budget risks is the name of the game as we move into the second half of a year that will end with few financial surprises, if CIOs have their way.

If profits improve over the next three to six months, would you increase your technology spending above the current plan?

Sticking Fast To Plan

Source: Morgan Stanley Dean Witter & Co., New York; survey of 225 CIOs, April 2002

When profits improve and budgets loosen up, here's where IT will focus spending:

Security 80%
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Enterprise integration projects 75%
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Web-based applications 67%
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Enterprise portals 56%
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CRM 53%
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Note: 200 respondents; multiple responses accepted

Source: Giga Information Group Inc., Cambridge, Mass./SoundView Technology Group Inc., Old Greenwich, Conn., June 2001

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The Big Decision: Upgrade options

OPTION 1

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Open License (five-license minimum; two-year contract)

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Select Agreement (250-desktop minimum; three-year contract)

A. Old upgrade plan (ends July 31): Upgrade Advantage

PROS: Good choice for companies that plan to move from an old version of Microsoft software to the current version. At the end of the two-year contract term, companies have the option of moving to the new Software Assurance maintenance program.

CONS: Tracking licenses is more difficult; new product version may not be released during the contract period.

B. New upgrade plan: Software Assurance

PROS: It can potentially reduce costs for companies that plan to upgrade frequently; offers more predictable costs; reduces complexity of software management.

CONS: May push companies to upgrade more frequently than they would like; new product version may not be released during contract period.

OPTION 2

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Enterprise Agreement (250-desktop minimum; three-year contract; standard product set on all PCs)

PROS: Gives customers deep discount and predictable, locked-in costs; affords access to latest product versions; simplifies license management and software administration.

CONS: Costs more money upfront; requires standard desktop purchase for entire company, reducing flexibility.

OPTION 3

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Enterprise Agreement Subscription: Allows customers to rent software for a three-year period, in the same way they lease computer hardware. Since they don't own a perpetual license for the software, customers must remove it if they terminate the subscription, or they can buy out the licenses.

PROS: Cost is about 15% less than new Enterprise Agreement; can be a tax advantage in some regions; can be written off as an operating expense.

CONS: May push customers to upgrade more frequently than they would like.

OPTION 4

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Do nothing and buy new software licenses under volume program at later date.

PROS: Lets companies choose when they want to spend money.

CONS: May be more costly than the Software Assurance option in long term; carries the risk that prices will increase.

OPTION 5

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Acquire Windows, other software as part of PC hardware purchase or through retail channel.

PROS: Lets companies choose when they want to spend money.

CONS: Companies don't get volume licensing benefits, such as potentially lower costs, ease of administration, version downgrade rights and reimaging rights for all products. Companies may have to activate products.

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