How to cut software costs in the economic downturn

IDG News Service — Tue, 02 Dec 2008 14:35:26 -0500

It's official: IT budgets, once so resilient in the face of three years of worsening economic news, aren't immune to the downturn after all.

IT spending is expected to grow just 2.6% worldwide and less than 1% in the U.S. next year, according to market research firm IDC. Gartner Inc. is even more pessimistic: its latest spending forecast calls for 2.3% growth globally in 2009. When you factor in expected inflation, many CIOs likely will be overseeing budgets next year that are smaller in real dollars.

"This is the worst global downturn since the Jimmy Carter era," IDC analyst Mike Fauscette said. Although Fauscette said that he doesn't expect large users to engage in "wholesale stoppages" of critical IT projects, he thinks that "at best, companies will hold spending flat."

The economic conditions have driven some IT vendors to announce massive layoffs. Others are showing a willingness to deal. For instance, 39 of the 66 software vendors that responded to a recent survey said they were flexible on licensing and pricing, according to results released in October by 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.

As the Chinese expression goes, a crisis also equals an opportunity. So how do you take advantage of what may be a once-in-a-career IT buyer's market? Here are some suggestions:

1) Keep an eye out for looming price wars

When Oracle Corp. was bidding to buy ERP rival PeopleSoft Inc. in 2003 and 2004, both companies offered discounts of as much as 80% to 95% on their software licenses, said Jim Geisman, a longtime software pricing consultant who is president of MarketShare Inc. in Wayland, Mass. A price war of that sort may again be on the horizon in the ERP market; for instance, hosted applications vendor NetSuite Inc. recently promised 50% cost savings to users of SAP AG and Salesforce.com Inc. that switch to its software.

Vendors like SAP and Salesforce.com are unlikely to sit back and watch their customers go elsewhere. So users should be in a good position to play vendors off against each other "and then take advantage" of the heightened competition, Geisman said.

The Schumacher Group, which provides staffing and management services for hospital emergency rooms, uses Salesforce.com and Microsoft Corp. as its two primary software suppliers. About half of the Lafayette, La.-based company's systems are powered by software-as-a-service technologies, although Schumacher runs Oracle's PeopleSoft financial applications on-premises.

Douglas Menefee, Schumacher's CIO, said that most of his software contracts are up for renewal early next year. Menefee plans to negotiate hard, since he expects vendors to be much more amenable to bargaining than they were in the recent past.

"For the last three years, while tech was hot, I've experienced a bit of 'the price is what the price is' attitude from sales guys," Menefee said. "I completely think the power has shifted to the buyer."

As an example, Menefee said he is seeing "very aggressive pricing" from three vendors that are competing for a contract to supply Schumacher with a new human resources administration system.

Fauscette said that IT buyers should also watch areas such as workforce management software, where smaller, SaaS-savvy vendors such as SuccessFactors Inc. or Taleo Corp. could "go aggressively after Oracle or SAP." He even suggested that inexpensive or free desktop applications, such as OpenOffice.org and Google Apps, have matured to the point where organizations might consider dumping Microsoft Office, along with its accompanying Software Assurance maintenance tithe.

2) Consider cutting software maintenance -- carefully

Discontinuing maintenance or support contracts with software vendors is a popular way of saving coin among corporate users. "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."

In the case of Microsoft's products, maintenance is "something many customers could dispense with," agreed Paul DeGroot, a licensing analyst at Directions on Microsoft, an independent research and consulting firm in Kirkland, Wash.

But cutting your maintenance contracts 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 focuses on software contracts and licensing strategies for Oracle and Microsoft users.

Colon recounts the case of a US$1 billion-a-year semiconductor maker that dropped support for its Oracle apps two years ago, then found itself needing access to a mission-critical software patch. Despite offering a "six-figure flat fee" for the patch, the company was rebuffed by Oracle, Colon said. He added that after three months of negotiations, the chip maker agreed to pay several million dollars -- the same amount it would have paid if it had kept an active maintenance contract the whole time.

In between the two extremes are vendors that may be willing to strip out elements of their tech support programs you don't use in order to help you save money, Geisman said.

3) Bring hard business data to the negotiating table

Sharing internal financial data may seem like a surefire way to lose the upper hand in vendor negotiations. But some analysts said that when done in good faith, it often is more effective than simply claiming corporate poverty or making empty threats to migrate to other vendors. Good vendors, they noted, will respond to calls for pricing that's more in line with the economic value you get from products.

For instance, if your company pays $100,000 a year for an application that you estimate saves a million dollars annually, Geisman advised that you take the data to the software vendor and tell it that the current cost "is a little too rich for our blood." By doing so, he added, "it becomes a negotiation, rather than you squeezing them."

Colon agreed, citing the experience of a large retailing client. "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 apart from the 10-week holiday shopping season, Oracle responded by drawing up a less expensive custom contract, Colon said.

4) Look for other concessions besides price discounts

In lieu of discounts, a popular incentive during the dot-com crash was for vendors to help arrange financing at low interest rates. In a similar vein, Microsoft last month announced a zero-percent financing promotion for new buyers of its Dynamics ERP and CRM applications. But, in general, deals of that sort have either "dried up or the terms aren't going to be all that attractive," Fauscette said.

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

So what are some realistic concessions that may be available to IT buyers? One is asking vendors to provide free installation and training, something that Oracle has been agreeing to do, Colon said.

Menefee said he has found that, in general, vendors try to avoid giving buyers discounts on their core applications whenever possible. But they're often willing to discount add-on modules or even throw them in for free, he said. They've 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, Menefee said.

For their part, users should consider things that they would be willing to trade away as part of the bargaining process, or agree to do for vendors -- for instance, appearing on trade show panels or talking about a product to the media. "You've got to be more clever in how you negotiate what you give and what you get," Geisman said.

5) Consider new types of licensing agreements

Another possibility is pushing your vendor to tweak or overhaul their 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. Meanwhile, 70% of the vendors that were surveyed said they expected concurrent-user licensing to be one of their main pricing models by 2010.

Usage-based pricing models also may be on the rise. 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 Russelsheim, Germany-based 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 third-party products that are integrated with it.

The token system "gives us a lot of flexibility," Veith said. "It lets us use the best software for each particular job." He also likened Altair's licensing approach to shareware policies, saying it allows Tecosim's workers to try out new products for very little cost. And the use of the tokens is saving the company money, Veith said, although he didn't disclose any hard numbers.

6) Find less expensive, nearly equivalent alternatives

Manhattan Home Finance LLC, a mortgage lender in Manhattan Beach, Calif., 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 provides connectivity between SharePoint and Notes for $125 per user, enabling Manhattan Home Finance to avoid a lengthy and expensive migration to an all-Microsoft stack while giving its employees all of the features they needed.

If the problem is high maintenance costs, look to a third-party support vendor, Fauscette said. Or, he added, if operational costs and systems management hassles are getting you down, consider dumping your on-premises software for Web-hosted offerings.

7) Smaller vendors may be the most flexible -- and risky

During downturns, IT buyers often pare their vendor lists, starting with the smaller ones. But that is where the best bargains often can be had, said Fauscette, who noted that start-ups and emerging vendors may face a half-dozen similar competitors or have a need for cash to fuel their operations.

On the other hand, overeagerness on the part of a small vendor may be a warning sign. Fauscette said he'd be leery of doing business with a supplier that "is willing to cut his price to almost nothing," for fear that the vendor might not be around for the long haul.

Geisman also warned about driving such a hard bargain with a vendor that you contribute to its demise or sour a business relationship to your long-term detriment.

"If you take your vendors to the cleaners, they will get even someday, and with a vengeance," Geisman said. That could take the form of salespeople "not going to bat for you" on technical support issues, or vendors using tricky contractual language to raise maintenance and support prices, he added.

A wiser strategy, Geisman said, is to strike a deal that is "a fair thing for both sides ... and make it clear to your vendor that you are choosing not to hammer them because you realize that we are all in this together."