Government taps SAP and Microsoft for £70m licence and maintenance savings

The Cabinet Office has revealed that it has secured £70 million worth of savings from renegotiating licencing and maintenance contracts with SAP and Microsoft.

New frameworks will run up to 2015 with the two software vendors, which see some £65 million shaved off the government’s Microsoft software licence bill, with up to an additional £5 million worth of SAP savings.

Negotiations with Microsoft lasted for nine months, whilst SAP’s lasted six months, and it is hoped that across the whole of the public sector, not just central government, savings ‘north of £150 million’ could be achieved.

Bill Crothers, executive director for commercial relationships at the Cabinet Office, explained that the basis for negotiations involved convincing suppliers that the government operates as one customer, and should receive benefits for being a large SAP and Microsoft buyer.

“We have changed how we view ourselves and have asked our suppliers to view us as a single customer. In the private sector you would add together all of the business that each subsidiary does with the supplier and take a single view. Surprisingly, the government hasn’t done this before, but that’s a fundamental change that has been introduced,” said Crothers.

He added: “On that basis we tend to be one of the largest, if not the largest customer of these vendors. Also, we pay on time, in fact we pay super-fast, and there is no credit risk with us. We always pay our bills. So we should enjoy the benefits that go with such a position.”

“So we have been working through our suppliers’ list methodically over the past two years to improve our commercial position, in recognition of our true relationship with each supplier.”

To further pursue this change in perception with suppliers, the Cabinet Office will be holding a roundtable discussion with some of the largest software vendors this Thursday with the purpose of persuading them to embrace the single client notion and address inefficient commercial practices.

However, Crothers did admit that this change isn’t an easy one and some of the suppliers are, unsurprisingly, reluctant.

“The response is mixed. I won’t name names, but some suppliers essentially pay lip service and continue to resist,” he said.

Stephen Kelly, former CEO of Micro Focus and Government Crown Representative, has played a key role in the renegotiations with Microsoft and SAP and has also secured savings on SAP’s maintenance charges to government.

“In the proprietary world, these software companies vigorously defend their maintenance revenue streams. For many of these companies, half of their revenues typically come from maintenance streams,” said Kelly.

“So I’m really pleased to announce that with SAP we have managed to secure a discount in excess of 20 percent of running costs of support and maintenance charges through their professional, premium support for large enterprises.”

Kelly explained that vendors have gross margins of approximately 90 percent when charging for maintenance and support, but customers are rarely seeing the benefits of its high cost.

“From a customer point of view you have got massive levels of committed IT expenditure before you have even started. However, if you ask the questions around whether or not you are on the latest version of software, or how many calls you have put into Microsoft’s support desk, or how many updates you have made, you will be surprised that you are most likely paying millions of pounds a year in maintenance, almost as insurance,” said Kelly.

“That’s why we have had to recalibrate and I’m pleased that SAP responded well.”

Kelly also revealed that the UK public sector probably accounts for over one percent of Microsoft’s total revenues, whereas it only spends approximately £50 million a year with SAP.

This news follows a similar announcement was made earlier this year, where the government renegotiated a contract with Oracle to save £75 million. Bill Crothers admitted to Computerworld UK that the Cabinet Office may revisit these negotiations to include maintenance costs reductions, following the success with SAP, and said that the “deal is never over”.

Jos Creese, Hampshire County Council chief information officer (CIO) and chair of the Local Public Services CIO Council, believes that the frameworks will enable easier pooling of resources amongst local government.

“Working with the one framework and contract potentially allows some of the bigger companies to stand a chance of competing for some of the smaller organisations in the public sector, with whom they would find it very difficult to do business with, purely because of scale at the moment,” said Creese.

He added: “We are planning to secure a back office join-up between Hampshire Constabulary, Hampshire Fire and Rescue and Hampshire County Council, and the intention is that this will be based on an SAP platform. Some of the smaller organisations that might want to share services can’t afford the level of support that is necessary to drive innovation around products, so sharing that common platform and common contract potentially opens up opportunities for them to get much better value.”

Copyright © 2012 IDG Communications, Inc.

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