How to negotiate better enterprise software deals

Tough economic times, and the availability of more software licensing models than ever before, have combined to shift more negotiating power into customers' hands.

But there's a downside: The software-shopping process has grown more complicated. With a slew of complex options to choose from, IT decision-makers have to do more homework than they once did.

Smart IT managers are getting more for their money these days, though. Instead of passively accepting the old perpetual-license model and vendors' pricing terms, customers are haggling for better deals, says IDC analyst Amy Konary. Some customers are threatening to choose other options -- including virtualization, software as a service (SaaS) and open source -- if a traditional vendor doesn't meet their demands, she explains.

The has also given customers more leverage, says Ray Wang, an analyst at Altimeter Group. Some have gotten maintenance and support fees cut by up to 60 per cent, he says, adding, "This is a great time to buy enterprise software."

Baker Hughes Inc. recently got better terms from several vendors by agreeing to longer-term contracts and by bargaining as an enterprise rather than having each of its divisions negotiate on its own, says Graham Crisp, IT assets manager at the Houston-based global oil-services firm. "We have much more leverage and can get volume discounts by bargaining as a single company with 36,000-plus users instead of eight divisions," says Crisp.

Enterprises have always been able to cut deals in exchange for larger and longer-term commitments. The big change now is that the customer "has more transparency, flexibility and choice" during negotiations, Konary says.

In addition to providing more pricing options, vendors are becoming more open about what choices they offer, Konary says. Indeed, some are actually using them as marketing tools.

Cloud vendor RightNow Technologies Inc., for example, has been trumpeting a provision in its new cloud services agreement that allows users who sign multiyear deals to cancel at the end of a year for any reason. In addition, customers can buy a pool of "seat months" that they can use on an as-needed basis.

Maintenance is another area where customers are starting to push for fairer deals.

For example, Gartner Inc. recently formed a user group, called the Global IT Council for IT Maintenance, that has issued a "code of conduct" for the way vendors approach maintenance deals. It calls for "reasonable, predictable" percentage ranges for annual maintenance fee increases or reductions, long-term caps on increases, and the ability for customers to stop or alter support at any time for unused products.

Recession or no recession, vendors still play hardball at the negotiating table, of course. They might cut you a deal upfront but also include clauses that hamstring your ability to renegotiate later -- such as eliminating volume discounts when you give back licenses, says Wang.

First Steps: Analyze, Streamline

Assessing your software assets and monitoring utilization are crucial first steps for negotiations (and, later, contract compliance audits).

Before sending out requests for proposals, businesses need to analyze their software needs and streamline those needs as much as possible, says Gartner analyst Bill Snyder. He recommends that users answer these two questions: "Is there a cheaper alternative? And do we need all of these features and functions?"

The ability to predict software needs is critical when it comes to long-term negotiations, Snyder says, because once you deploy a vendor's ERP or database system companywide, you're effectively in a monopoly relationship. If you purchase too few licenses, you'll have to buy more later, losing out on volume discounts. If you buy too many, you're paying maintenance and support costs for shelfware -- software that sits unused.

Anticipating software needs more than a year or two ahead can be tricky, however. For example, 20/20 Companies, a sales-personnel outsourcer, originally purchased 300 end-user licenses for Force.com, Salesforce.com Inc.'s hosted application development software. From there, 20/20 went up to 500 licenses, which it quickly exceeded and expanded to 900. "Edging up means no volume discount," warns Mark Warren, 20/20's acting CIO.

"You absolutely need to figure out your business software goals upfront," says Thomas Jefferson, former vice president of business technology at TMP Directional Marketing LLC. While at TMP, he had monthly planning meetings with the CEO, the CEO's direct reports and several business managers. "We would go over what we're doing, where we're going, and make sure this strategy is reflected in the overall IT road map," says Jefferson.

TMP has been discussing the potential business benefits and cost trade-offs of implementing a document management system, according to Jefferson. (A current TMP IT executive confirms that.) This would cut document access time and improve customer service, but it would also require an expansion of storage and storage-area network capacity and the purchase of additional licenses for storage software, databases and client data access applications, Jefferson notes.

Once TMP assesses what resources the new system will require, it can go to vendors and say, "We're going to need this number of licenses over the next three years. How can you help me do that while taking advantage of today's prices?" Jefferson says.

IT decision-makers also need to get a handle on their own software installations -- not just what's out there, but who uses it when, and how often. This is particularly critical if you're thinking about going with a pay-per-usage pricing model.

Negotiating tactics and gotchas

Are you preparing to sit down at the negotiating table with an enterprise software vendor? Here are some best practices to employ and some gotchas to avoid.

* Beware of "buy now and save" bargains that vendors offer at the end of the quarter or year. They encourage customers to buy software before it's needed, so you can end up paying maintenance and support fees for shelfware.

* Ask your vendor for rebundling protections that ensure that you keep your functionality and add-ons when a suite or platform gets repackaged, bundled or unbundled.

* When negotiating, make sure you involve both an IT person who understands the software and a business person who understands contracts. And make sure they talk to each other.

* Don't immediately reduce the number of licenses you hold to reflect a decrease in users. During a recent workforce reduction, Baker Hughes opted to continue paying maintenance and support costs on expensive software, since it will probably add end users down the road, says Graham Crisp, the company's IT assets director. The other option was to wait and potentially pay higher prices when the new users come online.

* Negotiate as an enterprise, not as separate divisions. You have more leverage that way.

* Talk to analysts, colleagues at other companies and fellow user group members to learn which vendors tend to be more generous and flexible. If Vendor A is being hard-nosed, mention that Vendor B is offering deals.

* Don't make decisions based on pricing alone. An alternative software offering may not have the features and capabilities your users need. Altimeter Group analyst Ray Wang says SaaS offerings typically have about 60 per cent of the features provided by on-premises products -- but that figure should go up to 80 per cent within the next two years, he notes.

* Remember: Linux has some features that Windows and Unix lack, and vice versa. Don't make a decision based on your personal preferences; figure out which features are critical to your organization, and make your choice on that basis.

Over the past few years, industry bodies such as the international standards group ISO have collaborated on a set of software asset management best practices for reducing software costs. Those practices include eliminating or reallocating underused software licenses, eliminating overhead associated with management and support, and ensuring compliance during vendor license audits.

Effective software asset management involves regularly inventorying software assets, determining usage and comparing what's installed with what the license agreement entitles you to, says Snyder. Companies that do this "are in a powerful position to drive down software costs," he adds.

Unfortunately, many IT staffs lack documentation for the company's software assets, according to Snyder. Software purchases are often made by individuals or business groups, with limited or no IT oversight. This limits IT's ability to negotiate volume discounts, and vendors exploit that weakness, Snyder says.

Using Asset Management Tools

Organizations are increasingly using IT asset management and software compliance tools to get a handle on their software assets and purchases.

For the past few years, Baker Hughes has been using CA Inc.'s Desktop and Server Management (DSM) tool to monitor software assets on some 30,000 machines worldwide so IT can determine whether the numbers are in compliance with vendor agreements. "We initially found that we were overlicensed," says Crisp. "This is what we expected, because people were buying software as needed, rather than going to the trouble of figuring out if we had additional licenses to spare." The company recently deployed CA's Software Compliance Manager, which automatically checks software usage against vendor licensing agreements.

CA's DSM also includes a metering tool that reports not only on used and unused licenses, but also on licenses that haven't been executed within a predefined time frame. "This will enable IT to harvest licenses that are just sitting on someone's desktop and redeploy them," says Crisp.

Asset management tools need to be backed up by organizational practices such as systematic enforcement of software retirements, says Snyder. Otherwise, data center administrators may keep an old system running while a new system is being tested and deployed but then forget to delete it, he adds. Be aware, too, that some software packages don't remove everything from the registry when you delete a program, or they may allow two versions of the same program to coexist.

Baker Hughes recently instituted a practice of assigning software to computers rather than to individuals, Crisp says. "When we decommission a computer, we harvest all software associated with it and reuse it more effectively," he notes. The payback: Microsoft enterprise license usage has stayed flat, even though the company has purchased additional machines and equipment, Crisp reports.

Centralizing software administration has enabled Crisp's group to accurately charge business units for software costs. Further, "it definitely helps us get volume discounts," he says.

However, asset management tools have yet to catch up with per-usage pricing models offered by SaaS and virtualization vendors, cautions IDC's Konary.

Time to Bargain

Providing usage statistics to a vendor can give you leverage at the negotiating table -- as long as you know how to bargain. For example, if your vendor insists on invoking a contract clause that penalizes you for giving back unused licenses, ask if you can reallocate the cost of those licenses to other products that you do need, Altimeter's Wang advises.

One way you can get your enterprise software vendor to listen is to mention that you're considering going with an alternative product, such as an open-source or SaaS offering.

Mosaic, an Omaha-based organization serving people with intellectual disabilities, wound up going with open source even though it hadn't originally planned to do so. As part of a desktop virtualization project, the nonprofit compared existing Microsoft products to Linux alternatives and found that the latter offered major savings in license fees, in-house IT infrastructure needs and staff costs, says Thomas Keown, data storage and security administrator at Mosaic.

Keown conservatively estimates that moving to open-source software has saved Mosaic $465,000 annually, or about 19 per cent of its IT budget. The organization has about 1,500 users nationwide.

But IT decision-makers should thoroughly evaluate the cost-benefit trade-offs of an alternative type of software. While moving to open source was the right choice for Mosaic, "every company has to do its own evaluation" of license, deployment, maintenance and support costs, Keown says. Particularly in larger companies, integrating open-source software with existing IT systems can be a problem.

Support can also be an issue, says Wang. If you're installing Linux software and you don't want to pay for outside help, he says, "you need a team that's trained in Linux software development." And make sure any open-source product you're considering has an active online support community. "Look at forums and bulletin boards and see how fast someone responds when you post an issue," he says.

SaaS, too, can provide significant cost savings over traditional software offerings, but it isn't a slam-dunk for all companies.

For small and midsize organizations, a hosted solution provides access to high-end systems and expertise they might not be able to afford otherwise, says Wang. For example, when 20/20's Warren evaluated tools for building a customized CRM system, he found that Force.com would cost about 75 per cent less than a comparable packaged offering. Factors that drove up the cost of an on-premises product included licenses and the need for in-house IT infrastructure to support the software.

However, a large enterprise often already has most of the IT resources needed to support a new application. Further, it can depreciate the underlying hardware -- which it can't do with monthly SaaS fees.

Of course, SaaS providers are just as profit-oriented as traditional software vendors and can be hard bargainers themselves, says Warren. For instance, Salesforce.com offered a discount in return for 20/20 agreeing to purchase both developer and end-user licenses as soon as the contract was signed. But development stretched out for two more months, during which time 20/20 paid maintenance and support for end-user software it wasn't using. "We probably should have held out for buying the end-user licenses once the development was completed," says Warren.

Moreover, customers that expect SaaS to be strictly pay-per-usage are often disappointed, says Gartner's Snyder. In exchange for a good deal, "many providers want a three-year agreement with a guaranteed minimum usage," he says.

Even if you're not ready to go with an alternative like SaaS or open source, it doesn't hurt to let your vendor know that you're exploring those options, says Snyder. Vendors will be more willing to negotiate seriously "when true competition is a factor," he adds.

Not Too Rough

But don't treat your vendor like an enemy. Hard-nosed negotiating is fine up to a point, but "price and licensing discussions are very much part of a long-term relationship," Konary says.

"You may get the best price in the world," says TMP's Jefferson, "but if you alienate your vendor, you may not get the support and service you need."

For example, TMP went through a workforce reduction recently, but the company's contract with Microsoft didn't allow it to reduce the number of licenses it paid for to reflect the decrease in the number of end users. Nonetheless, Microsoft agreed to renegotiate the three-year agreement so TMP wouldn't have to pay for the licenses it wouldn't be using, Jefferson notes. He gives the economic downturn partial credit for the software giant's willingness to cut TMP some slack. More important, however, was TMP's partnership with Microsoft. As part of that relationship, Jefferson says, "we put all our cards on the table" and keep the vendor fully informed of business plans and software needs.

TMP does that with all of its vendors, Jefferson says: "We'd bring them in and say, 'Here's what we're doing; we need to maximize our spend.' Often, they come up with innovative solutions."

Horwitt is a freelance reporter and a former Computerworld senior editor. Contact her at ehorwitt@verizon.net.

This version of this story was originally published in Computerworld's print edition. It was adapted from an article that appeared earlier on Computerworld.com.

Know your software pricing options

Before negotiating with a vendor, figure out what pricing model works best for your organization. Then, if the vendor rep says, "We don't offer that," you can threaten to go to someone who does.

"Pay per seat" is the traditional pricing model. In such arrangements, vendors offer better deals for volume and commitment but generally include penalties for reducing the number of seats before the agreed-upon renewal time. At the very least, customers lose their volume discounts if they give back a significant number of seats, and they have to pay list price for additional seats if they underestimated user demand. However, vendors are starting to be more flexible on this point.

Here's a look at some newer pricing models:

•Pay per number of concurrent online users. This is particularly useful for global companies that have multiple groups of employees who work at different times in different locations.

•Pay for unlimited clients. The advantage of this type of arrangement is that the customer no longer needs to guess how many licenses it will need in the next year or two, nor does it need to keep track of license usage in case of a vendor audit. Such licenses are pricey, however, and work best when the software will get lots of use, says IDC analyst Amy Konary.

•Pay per usage. In this model, vendors typically charge an upfront fee plus a rate that scales up and down according to utilization of a given software package. This option is catching on among companies that are sick of paying one price for a monolithic software suite, such as Office, even if their workers are using only a tiny percentage of the features, Konary says. Pay per usage will potentially enable customers to pay on a highly granular level, not just by application usage but according to who is using which features or software modules and for how long.

Usage-based pricing models have a catch, however: They require IT administrators to spend a lot of time monitoring and recording utilization levels. The more granular the model, the more time-consuming and complex that task will be.