I just took the whole Consigliere family on a nice vacation, and during my travels I was struck by all the little add-on costs and the many times I felt like there were hands in my pocket. The cost of the trip wasn’t astronomical, but the extra fees piled up fast.
Because the Consigliere is a seasoned traveler, I knew what to expect – and padded my pocket with a few extra small bills to cover these additional services, many of which were very useful. But if you didn’t know these add-on fees were coming, you would be in for an unpleasant surprise when calculating final costs. Kind of reminds me of contracting for software and IT services, now that I think about it. Let me tell you about my trip and I think you’ll see what I mean.
We took a car service to the airport. Nice ride, a little pricey, and then of course the customary tip. Because my wife packs like she is going away for three months, we need a porter to help us with the bags. That’s another couple of bucks. Then we check our bags at the counter and get dinged with some hefty baggage fees. On the plane, my kids want some food. So, yep, you guessed it, more fees. Since I already had my wallet out, I treated myself to a scotch to take the edge off the sound of screaming kids. (That felt more like a strategic investment!)
At the hotel, the bellhop brings the bags to our room – that’s another palm to grease. Finally, at dinner at an upscale restaurant, I pay a visit to the men’s room and there’s an attendant handing me a towel. More money down the drain! I felt like everywhere I turned that day, someone else was trying to stick his hands in my pocket. It wasn’t the amounts that bothered me, but the fact that it seemed like every time I did something – anything! – I had to pay tribute to someone for the privilege of doing it. But the saving grace for me was that I knew what to expect and was prepared for the costs of these additional services. And I had a sense of their value, too.
All this got me to thinking about software vendors. Some of them seem to have a sense of entitlement when it comes to charging additional fees. But the biggest pet peeve for many IT pros – Consigliere definitely included – is that these charges are often unexpected, so they catch you off-guard and unprepared. Every time your business grows or evolves – whether it is an expansion into new markets, an acquisition, or just a good revenue quarter – here come your IT “partners” knocking on the CIO’s door with their hands out. Another beak to wet just for running your business!
Now, don’t get me wrong. I’m not saying the vendors are dishonest. In some cases, additional fees may be justified or at least stipulated in contracts. I’m just saying many vendors are not fully transparent about their pricing models. Companies simply don’t know these additional fees are coming or how they are calculated. In some cases, the players have changed, as have market dynamics and the understanding of expectations and obligations spelled out in the contract. That’s why many CIOs feel like vendors’ hands are in their pockets.
Here are three common examples of what I’m talking about:
Hardware Refresh or Upgrade: Many companies have a substantial amount of middleware and software applications that are priced based on the processing capacity of the hardware/servers where they are installed. As technology advances, new hardware/servers with far greater processing capacity replace older models. Even if a company is not benefitting from the increased capacity, they are upgrading as part of regular refresh programs.
Well, guess what? Most enterprise software contracts specify that once you make that upgrade and load up all the software and middleware on new hardware with higher processing capabilities, additional license fees will be due. They did nothing, provided no additional value, enhanced no product, etc. Nor is your organization deriving any additional value from their software. But they are hitting you up for more fees as a result of an arcane license model. It’s like paying them tribute for the work you did in upgrading your hardware. And in the case of mega-vendors, one business unit may be taking its hand out of one pocket just as a different business unit sticks its hand in another pocket.
Mergers & Acquisitions: Every time you acquire or merge with another company, you can expect a little visit from your software providers, asking for additional license and maintenance fees to reflect the increase in your company’s size. Again, the devil is in the fine print of the contract. Whether it is an enterprise license model based on total employee headcount, total revenue, or even just a few applications in your stack priced according to business metrics, the software providers think they are entitled to additional fees even though they didn’t do anything – as in nothing, zero, zilch, nada. Reminds me of my kids expecting money from the tooth fairy every time they lose a tooth – which is fun and all – but in software we are not talking nickels and dimes.
And it doesn’t even matter whether or not you expand the software to the newly acquired or merged entity. The fees are due before the ink has even had a chance to dry on the merger, or the CEO has held a press conference to talk about “synergies.” And the worst part is, if your organization shrinks due to divestitures or falling on hard times, the license and support fees do not adjust downward. If you don’t believe me, call your account rep some day just for fun and ask for a fee adjustment due to organizational downsizing.
Inflation: I am not talking about inflation adjustments for services resource rates, but rather how inflation impacts business metrics, like total revenue. Let’s say you are an oil or gas company, or a chemicals company, or any company whose cost of goods is significantly impacted by the price of oil. Naturally, you raise and lower prices to reflect cost of goods sold, competitive profit margins, etc. Well, let’s say the price of oil rises, you would naturally pass through those cost increases to your customers in the form of higher-priced products, and your revenues will typically increase, even allowing for lower demand due to the higher prices.
Guess what, the software providers do not care. They expect their cut, because their contracts say they are entitled to it. Even though they have provided nothing extra to you and your so-called business growth is not real growth, they think they have a right to wet their beaks. In fact, your margins and profit may have actually decreased, yet you still owe more license and support fees. And you wonder how Larry Ellison can spend $250M on a custom yacht that was too big to dock, so he decided to sell it.
All of this reminds me of a saying – no good deed goes unpunished. Or in the case of software providers, no change in a customer’s business goes without additional fees.
It’s a good game for the software providers. They created the rules and they know how to take advantage of them. So, how can you protect your company and minimize all these add-on fees?
There are a number of steps you can take to mitigate these risks. Many of them have to do with structuring contracts and commercial agreements very carefully, though they are not easy fixes. The most important thing is to recognize that you can’t go it alone and simply browbeat your vendors into submission. I can assure you this will not work. I’ll cover some of the best ways to keep vendors out of your pockets in a future post. But if you need help now, contact the Consigliere and I’ll be happy to get on the phone to discuss some options with you.
Until next time… Arrivederci!