At a recent Gartner event in Barcelona, analyst Alexa Bona gave a hard-hitting presentation about the difficulties surrounding software negotiations with some of the industry’s top vendors — namely IBM, Microsoft, SAP and Oracle.
Bona said that the reason she decided to focus on these four is, perhaps unsurprisingly, that these are the vendors that Gartner receives the most enquiries about (thousands for each vendor) when customers are faced with a contract negotiation. She said that it also made sense to focus on these four because they are very hard to negotiate with.
In fact, one customer told Gartner (after the vendor recommended the customer as a referral) that having to deal with vendor X “was like having to put your hand in a tank of piranhas” because you know you are going to get hurt at some point.
The challenge
Software purchasing creates a number of distinctive problems for the buyer — it is not your typical buying environment. For one, you are not actually buying and owning the product, you are simply buying a right to use the software for a certain number of employees. This means that, unlike purchasing a physical product, if you are not satisfied you cannot just sell it on to someone else to recoup costs.
However, this is not the biggest issue for buyers — switching is. Bona said that the first time you buy software from a vendor you are in a very strong position to negotiate because there is software available from a number of competitors, which is good leverage. However, once you have committed and have been using said software for a number of years the balance of power is very much with the vendor.
Gartner estimates that the costs associated with switching from an incumbent software provider to a new one are so high that the incumbent would actually have to increase their costs by 300 to 700% in order to make the business case work and justify a switch.
Bona also explained that IBM, Microsoft, Oracle and SAP are increasingly making it very difficult for customers to reduce their maintenance costs, regardless of whether they want to reduce the coverage of their assurance.
“Software vendors are becoming incredibly protective of these revenue streams — why? Because they are incredibly profitable. For many of these companies they are delivering between 85 and 95% profit margins. They’re also incredibly predictable because most companies renew them year after year,” said Bona.
“For some of these vendors they are nearly half of their revenue. So what we have started to see is that they are putting more T&Cs in their contracts, making it even more difficult, or impossible, to reduce.”
For example, vendors are now using clauses that say maintenance is all or nothing. So if you have bought a bundle of software that includes CRM and ERP, but you do not want maintenance for CRM anymore, the vendor will say you have to then cancel maintenance for the whole bundle.
Either this, or the vendor will agree for the customer to cancel maintenance for the CRM component, but then have the right to re-price all of the remaining licences at a discount that is ‘more suitable considering the lower investment’. So customers could end up paying the same amount of maintenance, but covering fewer licences.
“Therefore do not buy licences that you are not sure whether you need or not,” urged Bona, “because you will pay maintenance probably until you die. It may even be the inheritance gift that you send on to your grandchildren.”
Gartner also warns customers that many of their licence agreements are likely to be structured around payments based on the number of devices accessing the software. With the growth in the ‘internet of things’, Bona warned that this could become expensive for companies.
“If you are going into this internet of things more aggressively, look at your software contracts. Next time you are looking at a contract that is device based, try to change the licence metric to something else — pay by user, pay by employee,” she said.
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