Are We Heading Toward a Buyers’ Market?

Earlier this year, we declared our belief that the software and IT services environment had clearly become a seller’s market:

… reams of data from the last 12 months support the view that the pendulum of leverage has shifted decisively from buyers to sellers. Corporate earnings, earnings call transcripts, and the emboldened approach of IT suppliers we’ve seen firsthand in our own sourcing engagements have confirmed the onset of a seller’s market.

We stand by that declaration, which we made as Oracle and Accenture announced very impressive results in March. And their results, like those of nearly all the major enterprise software vendors and leading service providers, have been outstanding for a few quarters running. To put it in sportscaster terms, they have been flat killing it. There are many positive indicators that vendor pipelines remain strong and real demand persists in the market.

But as much as it’s a seller’s market, sales cycles are lengthening and the overall economy is soft. That means corporate wallets are tightening. We see in our engagements and hear from other market stakeholders that it takes significantly more time to close deals. It’s an interesting wrinkle – a seller’s market with slow-moving buyers and an overall economy that is not exactly roaring. It is worth keeping a close eye on things, because the pendulum may swing back to a buyer’s market before long.

There are a couple of reasons why this has come about. For one thing, the high degree of pent-up demand left over from the crash of 2008-09 has been released at a controlled pace. It’s been closer to a trickle than a tidal wave. Practically speaking, projects simply can’t get reviewed, approved and funded fast enough to sign the contracts. Partly this is due to leaned-out IT teams, but increased deliberation and more robust due diligence on the part of buyers is another factor. The lingering economic uncertainty means firms think twice – or three or four times – before investing in new software or expanding relationships with service providers. Every dollar counts, so businesses are treading carefully, even when they need to buy.

However, our experience tells us it’s also a bit of a backlash against the sales practices of vendors. Highly complicated pricing schemes and constantly shifting discount structures are testing the patience of CIOs and other buyers. They want simpler, more transparent structures, with greater flexibility to scale or contract as business needs dictate. And they want IT contracts to reflect the new economic realities. Such transparency has never been the strong suit of major IT vendors. Some CIOs, with painful memories of bad deals in the past, even adopt defiant “Won’t Get Fooled Again” stances.

Due diligence is critical, but it’s important to note the potential downsides of an excessively laborious or careful process. Longer sales cycles don’t automatically equate to superior deals or stronger partnerships. We have seen buyers use purposefully long evaluation and selection processes – with an endless series of milestones, gates and checkpoints and a hugely complex decision processes – in the hope of wearing down vendors. Maybe these stalling tactics work occasionally, but they shouldn’t be considered best practices.

On the other hand, we have some sympathy for those companies that see robust due diligence see as their only defense against what they perceive as a tilted playing field. If you lack access to current, comprehensive and objective supplier intelligence, it makes sense to keep asking for more data and more details before making decisions. Otherwise, how do you know if you’re getting the best price and package?

In our view, the longer sales cycles represent an argument for greater transparency, which would deliver tangible benefits to both buyers and sellers. If suppliers offered simpler, more easily understood pricing lists and clearer discount structures, buyers would be willing to commit sooner. If buyers had the reliable market data they need and a clear sense of their own goals, they could streamline their processes and move more quickly. That would free IT leaders and key business stakeholders to focus on more strategic and value-adding activities. At the same time, they would gain confidence that they’ve made the right deal with the right vendors.

In many cases, we believe current sales cycles are unnecessarily long and could be shortened significantly with more transparency and streamlined processes based on clear market intelligence. But at the same time, it’s clear that IT wallets are tightening, and with the backdrop of a soft economy, a buyer’s market may return relatively soon. The sellers of software and IT services may soon find themselves competing over a much smaller base of opportunities. This is one dynamic we’ll be watching closely.