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.
Software purchasing creates a number of distinctive problems for the buyer – it isn’t your typical buying environment. For one, you aren’t 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 if you were purchasing a physical product, if you aren’t satisfied you can’t just sell it on to someone else to recoup costs.
However, this isn’t 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 – 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 percent 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 or not 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 percent 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 don’t 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.
Bona urged: “Therefore do not buy licences that you are not sure whether you need or not, 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.
Common points of leverage across all vendors
With vendors getting more aggressive in their contract tricks, whilst remembering that these providers are also likely to have far more experienced negotiation and legal teams at their disposal, what can companies do to claw back somewhat of an advantage? Bona outlined a number of key areas of leverage that are common across all four vendors (advantages specific to each vendor will be provided in more detail below).
• Competition – Although we have already said that competition may not be that much of an advantage given the switching costs, it could still play a role. For example, some companies are actually starting to calculate the switching costs, according to Gartner, and are writing them off over a longer of time. Also, organisations are beginning to look at competitors that offer the same capabilities, but with alternative delivery models – such as service providers, cloud providers, third-party support providers, and open source providers. These companies tend to have lower margin expectations (around 15 percent), and as a result can offer a lower price. These factors could be used as bargaining tools when approaching a negotiation.
• Buy newer strategic products – Look at products that the vendor is talking up to its investors and to analysts, products that it hopes will keep it innovative within the market. Bona says: “If you are buying these, the sales force tends to be more heavily compensated to sell them, so companies often get additional discounts or concessions.” Examples of these include SAP’s HANA and Microsoft’s Office365.
• Understand pricing tactics – Gartner details that not all vendors have the same pricing model – for example, they don’t all have global pricing. SAP, for instance, has lower list prices in Europe, Microsoft in the US. If you own more than 50 percent of a subsidiary company in one these regions you could go and buy for a lower list price in that region (or at least threaten to do so for a discount).
Although these common points of leverage could be useful, each vendor has its own unique approach to negotiations and has its own problems that it is trying to ease with new deals. As a result, Bona also outlined a number of useful tips Gartner has formed, which are specific to each vendor.
• Play a long game – Bona argues that if you have an enterprise agreement with Microsoft you are likely to have significant leverage if you can assess your current situation and make an argument that you do not need to upgrade to any new versions beyond those you already have entitlement to. For example, if you are running Office 2007 but already have the rights to a newer version, you could say to Microsoft that you will spend the next five years slowly upgrading all the versions you don’t have and then once that is done move to the cloud. The prospect of no new deals and then moving to a subscription model in five years’ time might motivate Microsoft to provide better discounts now.
• Don’t renew the whole platform – Microsoft’s software assurance programme allows companies to renew maintenance for components of their licensing agreements. For example, a company may decide to renew maintenance for just the operating system, but not client access. Bona said: “Microsoft clearly doesn’t want that so that’s when you will begin to see reductions and additional discounts.”
• Profile your usage – Most companies with an enterprise agreement are likely paying for every qualified device, but some may find that their users are not making the most of this and just using certain applications, such as SharePoint. Point out to Microsoft that it knows that this is a problem, as it has four different tiers of user with its cloud offering, Office365. Bona claims this argument has allowed companies to negotiate their own user profile categories on premise.
• Year end – Microsoft’s year end is in June and is more likely to be more generous during this period, take advantage of that.
• Transaction size – With Oracle it is all about volume and the size of the deal being done at that moment in time, according to Gartner. Bona said: “Oracle tends to have selective amnesia about all of your prior spend, so the fact that you have spent £10 million over the last ten years is forgotten about.” She claims that Oracle are only really going to give you a discount based on what you spend now.
• Discounting isn’t disciplined – Bona has seen discounts for deals of the same size that differ significantly. According to Gartner, Oracle is likely to discount more when it approaches a customer and tries to sell a product that has a lot packaged in that is unlikely to be used, but will likely result in maintenance revenue streams for years to come. Bona said: “That’s why it is discounted higher because they will expect an annuity stream whether the product is used or not. So be careful to dissect what you are getting, if you are getting high discounts make sure it is software that you are going to deploy.”
• Third-party support – There has been a rise in companies offering third-party support on maintenance, with some claiming discounts of over 50 percent on what companies are paying. The most popular ones include Rimini Street and Spinnaker. Companies that have seriously looked at these as options, according to Bona, have got more flexibility from Oracle.
• Year end – Oracles year end is in May.
• Consider competitors – Bona said that IBM is particularly sensitive about its customers looking elsewhere for alternative products and will likely be more flexible if there is a threat of change. She said: “If you are thinking of a competitive switch, keep saying that. BCA, Compuware, BMC, Oracle, whoever – if you are thinking about it, mention it repeatedly.” However, Gartner does warn that if you are looking at competitors to assess the benefits over a long period, as these companies tend to be very competitive in years one to four, but not so good after this.
• Growth – If you have a growth plan and are going to grow using IBM products, this will likely get you additional discounts and concessions. However, Gartner warns that these deals have to be unbundled. “These deals are obviously predicated on growth assumptions, for multiple product lines, so you have to be able to take them out, dissect them, build in the business as usual scenarios for each of those products, then get them re-bundled back up,” said Bona.
• Year end – IBM’s year end is in December.
• Profile the users – There are a number of special ‘users’ with lower list prices that SAP doesn’t necessarily promote that much to its customers, according to Bona. Make sure you profile all of your users and ask SAP to incorporate lower-priced users into your deal.
• Standard support vs Enterprise support – Enterprise support is what SAP goes to market with (rate of 22 percent), but they do have a standard support offering (18 to 19 percent). Many organisations have expressed interest in standard support, according to Bona, but are put off when they notice that it doesn’t come with any firm SLAs. However, Gartner notes that under enterprise support a ‘fix’ may be guaranteed in under four hours, but this ‘fix’ may just come in the form of a response from SAP stating what steps it is going to take next, or a workaround while it considers a longer term solution. When you take this into consideration standard support may seem less of a risk. However, if you do want to move to standard support you have to tell SAP 90 days before your current maintenance agreement ends.
A final word of advice
Bona’s left attendees at the Gartner conference with a tip that they should also be wary of re-bundling from all of the four vendors mentioned. She said that she speaks to clients all the time that have bought software, deployed it and then the vendor comes up with a new capability that the client thinks should be part of current maintenance fees, but isn’t. The vendor claims it is a new product.
“It’s very difficult for you to defend this because most licence agreements do not include a description of what is in the software. If you do nothing else, next time you buy software include a paragraph of description about what it does,” she said.
“Also include a clause that said that if the functionality is re-bundled, or re-packaged, or re-named, but is the same or substantially similar, you will not pay extra maintenance. That clause right there can save you a lot of money.”