Each budget cycle, CIOs are expected to reduce operating expense even when faced with increased expenses on key business projects or requirements to increase service levels. They are often challenged to achieve these expense reductions without regard for increased business volumes. CIOs respond with budget presentations positioning the above mentioned cost drivers and offsetting expense management initiatives designed to improve asset utilization and productivity, including strategies to reduce the growth of hardware and software maintenance.
Longer-term strategies include application rationalization and infrastructure consolidation accompanied by material capital investments. These longer-term strategies require significant investment of time and resources and should be an integral part of your overall expense management plan; however, IT leaders and sourcing teams should also consider the following short-term actions to produce some meaningful in-year reductions to help you achieve your annual budgetary objectives.
1. Validate & Reclaim Inventory – Entrust your IT asset management team and license subject matter experts to conduct proactive reviews of license utilization vs. entitlements. If excess entitlements exist, negotiate exchange rights for new product/user demand to reduce incremental investments. Alternatively, negotiate terms to “park” licenses and suspend maintenance. Lastly, if future utilization is highly unlikely, terminate unused licenses but be mindful of accelerated depreciation.
2. Leverage New Capital Spend – As part of your category and demand management strategy, leverage the aggregate demand across your enterprise to obtain reductions in subsequent maintenance renewals. Expect vendors to refer to revenue recognition constraints, however, concessions can be obtained via vendor internal redirects between sales and support organizations and one time credits that will reduce operating expense.
3. Evaluate Multi-Year Maintenance Agreements – Utilization of multi-year maintenance agreements can be used to reduce software costs, however, they tend to be more effective in reducing hardware support because the displacement threat placed upon the incumbent hardware support provider by a competitive OEM or third party reseller is more credible.
4. Eliminate Extended Support – A thorn in the side of many CIO’s is being compelled to pay extended support due to an ineffective software or hardware upgrade strategy. Ensure the capital plan produced by IT specifically targets upgrades that will eliminate extended support. In addition, a byproduct will be elimination of vulnerabilities that continue to exist due to discontinuation of patches.
5. Negotiate Software ELAs – Software vendors will exhibit a much higher degree of flexibility to reduce operating expense when the prospect of a multi-year ELA is on the table. These are legitimate options to customers provided an accurate multi-year demand profile can be obtained. In some cases, software vendors will restate the entire baseline of a client’s entire inventory and materially reduce operating expense.
6. Evaluate Vendor Acquisitions – Hundreds of acquisitions a year occur within the technology industry. Evaluate the acquisitions made by the larger vendors in your portfolio and identify consolidated negotiation opportunities. Conversely, be aware of the acquiring entity trying to change pricing and packaging of software that will negatively impact your operating expense.
7. Leverage Acquired Entities – With every acquisition, synergy targets are identified. Take the time to review acquired entity IT vendors, budgets, contracts and spend to determine if maintenance cost reduction opportunities can be uncovered.
8. Specific Approach with IBM – For those companies leveraging IBM within their IT portfolio, they require a special callout of this subject altogether. Depending on your footprint with IBM, UpperEdge recommends a careful evaluation of IBM’s ESSO, CPLA, RAS and OIO agreements as a means of leveraging total IBM spend and achieving significant operating expense reductions.
As with any initiative, a well-defined strategy and coordinated approach between IT application and infrastructure leaders, IT asset management, IT finance and IT sourcing, coupled with third party sourcing expertise and market intelligence, will be critical to implementing an effective hardware and software maintenance cost reduction initiative. Cost reduction initiatives do not have to be brokered with your vendor partners under an adversarial approach. In fact, our experience shows that the most successful cost reduction efforts are secured through mutually collaborative and transparent engagement.
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