Vendors: Tough Times Call for Tough Negotiations

The economic downturn brings lower prices but also some nasty surprises in software licenses.

In this corner, a salesman for any hard-pressed IT vendor desperately trying to make his quota for the month. In the other corner, an IT manager whose budget has been slashed and who wants to drive a bargain. It's a face-off of fierce negotiating, one in which the customer doesn't always emerge as victor.


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Less Time in the Air

You would think hardware, software and services vendors would be eager to offer bargains as demand slows in the wake of a sluggish economy and September's terrorist attacks. Framingham, Mass.-based market research firm IDC reported in October that worldwide PC shipments fell 14% in the third quarter of 2001 compared with the same quarter a year ago. In the wake of the attacks, IDC also cut its predictions for 2001 growth in the worldwide software market from 12% to 6%. And throughout the third and fourth quarters, a string of hardware, software, networking and services companies announced losses and layoffs.

But all that weak demand isn't necessarily translating into bargains, say several current and past leaders of the Premier 100. Sure, some consulting firms are practically giving away their time to keep their staffs occupied, some customers are getting great deals on PCs and storage hardware, and some software vendors are slashing license fees.

At the same time, some vendors are building in contract language that allows them to increase maintenance and other charges in the future. And despite falling demand, many vendors are resisting major changes in existing contracts and price structures.

Small vendors eager to land a major account may be more accommodating -- if they are in solid enough financial shape to cut prices. Agreeing to serve as a reference client can also get a discount from start-ups, says Susan Sumner, executive director of IT at Alza Corp., a pharmaceutical company in Mountain View, Calif.

"The software vendors are getting much, much, much more aggressive about putting language in the contract that has the most upside potential for them," says Brian Kilcourse, senior vice president and CIO at Longs Drug Stores Corp. in Walnut Creek, Calif. "For our part, we are getting much, much, much more aggressive about warranty and indemnification" if software doesn't work as advertised. But, he says, the negotiations have been "extremely difficult," and "our success has been very limited."

"We're seeing higher discounts now than we would have a year ago," rising as high as 80% off list price for initial software license fees, says analyst Jane Disbrow at Stamford, Conn.-based Gartner Inc. But "the vendors are becoming more sophisticated," she says, trying to "get their foot in the door and get their products installed so they can make more money down the road."

They can do that, she says, by licensing their software on a per-CPU or per-named-user basis without specifying those terms. They can then boost licensing fees when a customer moves from a two-processor to a four-processor server or when new suppliers or customers use the software over the Web. Kilcourse says he's getting a lot of pressure from vendors to agree to per-user pricing, which can boost his license fee if the user is anyone accessing the application from a handheld device rather than only the server running the application.

Some vendors are refusing to cap future increases in maintenance fees for as long as they once did or are basing the maintenance fee on the software's list price rather than what the customer actually paid.

Some IT managers say vendors that are eager to do deals are making it easier to negotiate their way out of such binds. James Stough, director of technology at Houston-based law firm Locke Liddell & Sapp LLP, says that's because both large and small vendors "are really trying to get your business." Gwen Boddie, director of e-commerce and data management at Springs Industries Inc., a Fort Mill, S.C.-based linens manufacturer, says vendors are more willing to compromise on issues such as an escrow account to give her access to the source code of the software if the vendor goes out of business.

But even in those cases, prices might not be diving. Smaller enterprise application integration vendors have "maybe ... been willing to cut a little bit deeper" on pricing since last year, but "they started out being aggressive," says Boddie. While Stough is seeing big price cuts on hardware such as PCs, he isn't seeing them in the specialized software, such as document management, used by his law firm. "Most of our relationships with our existing partners are pretty well structured, and the discount [prices], although perhaps a little more aggressive around year-end, are pretty well known to us and are holding firm," says Kilcourse.

Services is one area where falling demand has cut prices -- in some cases dramatically. One consulting company is giving Brooklyn Park, Minn.-based Wilsons The Leather Experts Inc. the use of two consultants for the price of one -- and that's after cutting the rate for the single consultant by more than 50%. Consulting firms don't want to lose skilled staff during the downturn, says Jeff Orton, Wilsons' CIO and vice president of logistics, and the best way to do that "is to keep their people occupied." Boddie says she is using India-based consultants who charge at least 50% less than their domestic competitors.

Because so many vendors are suffering themselves, "if it's anybody other than IBM and maybe Microsoft," her financial team examines the vendor's books to determine how long it could last if it is losing money, says Boddie. Kilcourse says such checks are easier these days because the survivors of the dot-com meltdown are usually "real vendors with real revenue streams. The people who were kind of flaky, they're gone."

Downturn or no, a crisis makes specialty talent more valuable. Sumner wants help beefing up Alza's business-continuity plan. With so many others doing the same thing, she says, "we will have to wait in line with other people who want the same type of services. So [the vendors] are in a better negotiating position than we are."

Be prepared to walk

You can't negotiate a good deal if you're not willing to walk away if the price isn't right.

That classic piece of bargaining advice is especially critical when buying software, says Gartner Inc. analyst Jane Disbrow. She advises IT managers not to settle on a specific software package until they've negotiated both short- and long-term licensing terms, and to make sure the vendor knows that the IT manager is considering competitors until the deal is signed.

"A lot of companies tend to default to the name brand" or most well-known vendor in any software category, she says or will buy a customer relationship management (CRM) system from their existing ERP vendor on the theory that two packages from the same vendor will work together better than software from different vendors. But sometimes a package from a less well-known vendor will work just as well, she says, and keeping the second vendor under consideration gives you valuable leverage in the negotiating process.

It's very rare, she says, "that there's one and only one product that will fit your requirements. You need to look at what they are willing to give to you, in terms of price protection down the road, before you make your final decision."

Of course, when a vendor has a lock on part of the software market -- such as Microsoft's dominance in desktop operating system and productivity applications -- the customer doesn't have much leverage to begin with. "There's not much negotiating going on with Microsoft," chuckles James Stough, director of technology at Houston-based law firm Locke, Liddell & Sapp.

— Robert L. Scheier

Stamford, Conn.-based Gartner Inc. offers the following advice on getting the best deal from vendors:

  • Form a cross-functional selection and negotiation team that includes project management skills.

  • Create a request for proposal to clarify what you need.

  • Define how you will measure how well competing products meet those needs.

  • Include professional negotiators on the cross-functional team.

  • Be sure each vendor knows you are considering competitive products right up to the end of the negotiation.

  • Begin negotiating the contract before, not after, you choose the winning product.

  • Buy (and pay for) only the portions of a vendor's software suite you'll have in production within a year.

  • Lay the groundwork for implementation before you buy the software licenses.

  • Negotiate price protection for future purchases, such as for additional users.

  • Negotiate future maintenance costs (and deliverables) as part of the initial contract.

Copyright © 2002 IDG Communications, Inc.

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