“Beware; for I am fearless and therefore powerful.” Mary Shelley, Frankenstein.
Over the last few years I have heard more clients express concerns on market consolidation and the continued growth of mega-vendors taking hold in the software application market (e.g. SAP, Oracle, and Microsoft). Primary concerns and market chatter revolve around consumer choice and inflexible commercial practices. Since clients have asked, I figure it is time to pass along some insights regarding the mega-vendor practices we are seeing in the market and the potential implications to the user community in a series of blog posts.
The first post in our series will focus on the distinction between vendor value and commercial practices and the birth of what I call Frankenvendor.
Mega-vendors love to spout off about the value their products provide customers. They literally have thousands of marketing and sales professionals analyzing data and devising new and creative ways to quantify, characterize, and present their value messaging. But the value professed by these mega-vendors is often far greater than the actual value received by customers. The delta between the two can be illustrated in the commercial and pricing practices.
Let’s look at maintenance and support as a prime example. Years ago these were two separate services that clients could elect to purchase either as a whole, separately, or not at all. Maintenance was intended to provide software updates to product functionality, bug fixes, security patches, and rights to future product version releases. Support was intended for service calls when clients had questions about how to use, configure, or integrate a product, conduct troubleshooting, report bugs and errors, and obtain workarounds until fixes were available through maintenance product updates. Customers acknowledge the value in maintenance and support, but they question the price/value equation and elimination of choice by combining both into an “all or nothing” offering.
Mega-vendors proclaim they care about customers, and will cite their world-class product support services and the millions of customers who utilize and benefit every day. But they conveniently ignore their customers’ complaints regarding the ever increasing costs, lack of options to choose only the maintenance and support levels that they need, lack of flexibility to terminate maintenance and support on a subset of licensed products, the increase in customer obligations (e.g. remote access to customer environments, implementation of the latest version release, etc.), and the exhaustion of all self-help tools required before receiving actual support. Customers are then perplexed when they receive an annual support fee increase and realize that over the past year they had to conduct all their own support activities through various vendor support portals. This leads them to ask, ‘what are we paying support for and why should we be expected to pay more?’
Mega-vendors understand the leverage they have gained over time and that customers feel they have little to no viable alternative but to pay the fees and accept the one size fits all support package. Mega-vendors act as if they are entitled to these support revenue streams in perpetuity and to increase these streams to keep pace with inflation, regardless of their customer’s perspective. In short, mega-vendors morphed into Frankenvendor once they no longer felt they needed to continually earn their customers’ business. The evolution of their support commercial practices and annual price increases epitomizes this.
Another Frankenvendor example is the pricing and discounting of license fees. Take a look at the discrepancies in the discounting on your prior license transactions. I have seen clients whose own transaction discounting varies by as much as 50% over the course of 5 years. Mega-vendors determine discounting based on leverage and the highest amount they feel they can force a customer to pay. Mega-vendors will cite deal size as the discount driver – the higher the list price the greater the discount. But the reality is this is a half-truth. There is no physical inventory to move or bulk savings realized by a larger volume purchase to pass along to the customer. That concept only applies to physical goods and services. Further, while I have seen some very aggressive discounting on high list price deals, I have also seen the same or even greater discounting on exponentially smaller deals. The one constant driving force that explains these differences is leverage. Once the mega-vendor knows a customer has no viable alternative – often resulting from the mega-vendor’s own policies from prior transactions – Frankenvendor comes alive to extract as high a fee as possible with no remorse or consideration for the actual value the customer may realize.
Mega-vendors also claim that the larger the organization, the greater the value they are deriving from their products and, therefore, the greater the fees they should be allowed to charge. I remember a client who once told a mega-vendor that the only other entity permitted to extract greater fees from his company as its revenue grew was the IRS. And we’re all familiar with how the IRS plays!
Just imagine if all products were priced like this. You go to the supermarket to pick up some milk and eggs and the clerk charges you $20 instead of the $5 you paid 4 days ago when you did your bulk grocery shopping. Or the clerk looks up your prior year’s tax returns to determine your annual income and then consults a price list to determine what he thinks you can afford and should pay. Or a Fortune 500 company had to pay something like $200 for a pack of post-it notes while a small business only paid $2? Yet, Frankenvendor is taken aback when customers complain about prices.
I have worked with many clients over the years who simply dread negotiating with a Frankenvendor and in some cases delay purchases and projects as a result. The funny thing about Frankenvendors is they do not realize how their practices negatively influence their customers’ behavior and approach toward them. The scary and frustrating thing for customers is Frankenvendor doesn’t really care.
If you would like to learn more about how UpperEdge has helped companies source, gain leverage, and negotiate highly competitive contracts with their critical suppliers, or if you have any questions or comments, please do not hesitate to contact [email protected].