Each budget cycle, CIOs are expected to reduce operating expenses even when faced with increased expenditures on key business projects or the need to increase service levels. They are often challenged with expense reductions without regard to increased business volumes.
Annual software maintenance bills can make even the toughest IT leaders question their negotiating power. These short-term actions can produce some meaningful in-year cost reductions to help achieve annual budgetary objectives, build leverage, and ensure you gain the upper hand in maintenance fee negotiations. This is essential because software vendors like SAP and Oracle have a massive toolbox of strategies they use to protect their cash cow (their maintenance revenue stream).
Validate Software Usage
Take inventory of real usage and compare license utilization to entitlements. A complete audit of your organization’s ERP software almost always finds that 10-15% of licenses are allocated to users who no longer require the application to perform their duties. While many companies use this technique to avoid buying new licenses, it can also be used as a negotiation tactic to lower maintenance fees.
- If excess entitlements exist, negotiate exchange rights for new product/user demand to reduce incremental investments.
- Or negotiate terms to “park” licenses and suspend maintenance.
- If future usage is highly unlikely, terminate unused licenses but be mindful of accelerated depreciation.
Evaluate Multi-year Maintenance Agreements
Using multi-year maintenance agreements can reduce software costs. However, they tend to be more effective in reducing hardware support. This is because the displacement threat on the incumbent hardware support provider by a competitive OEM or third-party reseller is more credible.
Software vendors will be much more flexible to reduce operating expense when the prospect of a multi-year ELA (Enterprise License Agreement) is on the table. These are legitimate options to customers provided when you have an accurate multi-year demand profile. In some cases, software vendors will restate the entire baseline of a client’s entire inventory and materially reduce operating expense.
Consider Third Party Maintenance
Also consider using third party maintenance providers like Rimini Street or Spinnaker Support. This works particularly well near the end of the software lifecycle. As you consider a move, address the challenges associated with third-party support by conducting a thorough evaluation.
- Determine if third party support providers have the capabilities to deliver the level of support to meet your organization’s requirements.
- Evaluate the cultural fit within your organization: “Will the third party support provider be able to work well with my company to deliver the service?”
- Request a detailed pricing and commercial term proposal.
Eliminate Extended Support
A thorn in the side of many CIOs is being compelled to pay extended support due to an ineffective software upgrade strategy. Ensure the capital plan produced by IT specifically targets upgrades that will eliminate extended support. A byproduct will be the elimination of vulnerabilities that continue to exist due to the discontinuation of patches.
Build a schedule of the project maintenance payments of your ERP software and all of the supporting infrastructure software. Include databases, add-ons, and the operating system within this schedule. Also identify fundamental terms of the maintenance and the primary drivers of costs, (i.e., server size, number of user licenses and transaction volumes). Building this schedule will help you establish the appropriate timeframe for executing your plan and define the appropriate drivers for negotiating leverage.
Evaluate Vendor Acquisitions
Hundreds of acquisitions a year occur in 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 that tries to change pricing and packaging of software that will negatively impact your operating expense.
Leverage Your Acquired Entities
Synergies exist with every acquisition. Take the time to review the acquired entity’s IT vendors, budgets, contracts, and spend to determine if you can uncover maintenance cost reduction opportunities.
As part of your demand management strategy, leverage the aggregate demand across your enterprise to get reductions in subsequent maintenance renewals. Expect vendors to refer to revenue recognition constraints. However, know that concessions can be obtained via vendor internal redirects between sales and support organizations and one-time credits that will reduce operating expense.
Get a Pricing Benchmark
Understanding where you stand in comparison to the market is a critical component to any IT negotiation. Work with an independent firm like UpperEdge to acquire a pricing benchmark and determine how much opportunity there is for cost reduction. These findings will guide you in establishing how much effort you should put towards lowering costs. If you are already in the first quartile for maintenance productivity, then you may want to reconsider your objectives and focus on maximizing the value of the software you have in place.
Establish a Product Replacement Strategy
Negotiating leverage on a product that you have no exit strategy for is more than just difficult, it is nearly impossible. For those maintenance contracts that chew up the largest portion of your budget, develop a detailed replacement strategy.
Don’t cop out on this by simply building a list of alternative software providers. Build an honest plan that documents how you would go about replacing the incumbent provider with an alternate. You very likely will be able to get help from the incumbent’s primary competition in accomplishing this. The secret to making this tactic a success is making the honest effort.
Just telling your software provider that you are being charged too much is not going to get you anywhere in cutting your maintenance costs. These vendors know the score and can typically wait you out through the payment terms. To build leverage you need to develop and execute a plan that will allow you to look your software salesperson in the eye and demonstrate your case.
Ultimately, in negotiations with your software provider, always remember two important truths:
- You will always get your best deal when you are willing and able to walk away.
- Your software provider will find it easier to keep you happy than to find a new customer.
As with any initiative, a well-defined strategy and coordinated approach is critical to implementing an effective software maintenance cost reduction initiative. Cost reduction efforts do not have to be brokered with your vendor under an adversarial approach. In fact, our experience shows that the most successful cost reduction efforts are secured through a mutually collaborative and transparent engagement.
This blog was co-authored by John Belden. Comment below, follow Len on Twitter @lpriley6 or John on Twitter @jmbelden98. Find Len’s UpperEdge blogs and John’s UpperEdge blogs and follow UpperEdge on Twitter and LinkedIn.