For much of my career, I was involved with selecting and assessing software vendors and was often involved with the procurement of software. Later, I went over to the dark side and set up a software vendor, so I have been on both sides of the procurement fence.
This has given me perspective on some of the things to do, and not do, during the process of buying enterprise software.
I will assume, for the moment, that you have selected your software – in itself a non-trivial procedure – and now want to purchase it from your chosen vendor. If you are in this position, you have already made a serious mistake.
Deal maker, deal breaker
Enterprise software is not like buying a car. With cars, I can look in Parker’s Car Guide and find the going rate for a particular vehicle. Software, however, does not have a transparent market; therefore, the going rate is -uncertain.
Buying software is more like haggling with a vendor in a Marrakech bazaar than popping down to Tesco. You might see a list price from a vendor, but that is not what people actually pay. On this basis, procurement departments typically aim for a target discount to list price – let’s say 50 per cent – and will fight tooth and nail to gain it. However, it is hard to know what the list price really is.
Getting a 50 per cent discount on a list price of $4m sounds great, but it is less impressive if the vendor anticipated this and greatly inflated the list price to begin with. Therefore, as a buyer it is important to gauge what the going rate is for the software you are interested in. You will find that most contracts actually have non-disclosure clauses, which is a good indication of how guarded vendors are about what typical prices are.
Competition is the key to getting good value in a software deal. If you carry out your technical assessment, pick a winner and then ask the price, you will not receive the best possible deal, and I have observed this as both a buyer and vendor.
In my experience, it is vital during the selection process to keep the short-listed vendors fully engaged and uncertain about the outcome. There needs to be an -environment where they are competing with each other on price, not competing with you. This may sound obvious, but it often does not happen.
So what about when there is no competition? On one occasion I recall well, a vendor was renewing a large enterprise contract, and because of the customer’s blunder when the original deal was done, the vendor could do pretty much whatever it wanted at the expiry of the 10-year contract period. When approached about this, the vendor dug its heels in and came up with an outrageous price. Various hard-nosed negotiators were wheeled in, but to no avail. After four months of negotiations, the renewal price had not moved one dollar.
On that occasion, I managed to convince the software salesman that there was a serious prospect the company would switch to another vendor (a complete bluff) and the price halved that afternoon – saving literally millions of dollars.
Another valuable lesson is to read existing contracts carefully. I am aware now of a situation where a contract I had -personally negotiated came up for renewal years later, when I was no longer employed at the firm. The procurement department had not read the contract properly and had not realised there was a clause in the contract allowing the -renewal to take place at a nominal cost when the contract term expired.
The vendor was aware that procurement staff had moved around since the original deal and tried asking for a couple of million dollars as a renewal fee. The salesman who related the story to me was acutely aware of the renewal clause and was dreading a call right up to the day of the contract. But the call never came, and the vendor was two million -dollars richer for doing nothing at all.
It should be said that not everything is about price. If you are in a very strong position and squeeze the vendor mercilessly, then you may win the battle but you’ll lose the war. You are the one that is going to implement the software. And if the vendor feels aggrieved, it will likely be a lot less helpful when it comes to sorting out problems on your project than if it feels it was treated fairly. This is particularly the case with smaller vendors, for whom your deal may be very significant. With the larger players, though, it can be seen from the net margins of these companies that there is usually some scope for negotiation.
Buying software is a dark art, so arming yourself with as much information as possible will put you in a better bargaining position. Then, ensure genuine open competition to get a fair deal.
Andy Hayler this week launched, Information Difference, a boutique market research and analyst firm specialising in the master data management. He was the founder of Kalido