Weak economy creating IT buyer's market

Now is a good time to re-negotiate licences and maintenance, many say

The dismal economy may be hurting some software vendors' earnings reports and putting a crimp in IT budgets, but it has also created a buyer's market, according to users, consultants and industry observers.

In a recent blog post, Forrester analyst Ray Wang wrote: "Now's the time to buy more licences should you need them and if you have the cash to spare. Vendors remain anxious for new deals and new deals are far and few between".

Frank Scavo, of consulting firm Strativa, says he is telling clients to negotiate a ceiling on how much software maintenance fees can go up on an annual basis.

That's the real key to holding down costs, Scavo says. "Economic conditions are causing organisations to delay buying decisions, so the major vendors are aggressively discounting to prospects that are willing to make a decision quickly. [But] the business model of the major vendors is increasingly focused on maintenance fees, which are a recurring revenue source year after year. Software licences are just a door opener to the maintenance revenue, where vendors really make their money", he says.

Mark Slaga, CTO and CIO for the Americas division of Dimension Data, says he expects to score a sweeter deal than usual next year on the maintenance renewal for his Oracle ERP system.

Slaga is also anticipating a nearly 20% cost reduction on the renewal of a SaaS collaboration product, which he asked not be identified because the agreement isn't finalised.

Overall, however, Slaga's advantage in this market climate depends on the type of deal, he says. "If there was a new project, I would definitely believe I'm in the driver's seat. Renewal, not so much. I'll have more leverage, but it won't be drastic."

Jamie Ryan, CIO of Aspect Software, said the company is "keeping more vendors in the mix much longer to create more competition".

Aspect, which makes products for contact centres and had US$600 million (NZ$1 billion) in revenue last year, recently invested "well north" of US$800,000 in its networking infrastructure and came out a winner in the agreement, which was mostly for hardware. "We clearly got to a price point we would not have reached a year ago. I would think there was little if any [profit] margin in that deal," Ryan says.

Aspect also got "very good concessions on consulting", he added. "A lot of [vendors] have professional services people on the bench right now, and they'd rather have them doing something, even at a break-even point," he says.

One mid-size company, Serena Software, believes it can save money by switching over its systems to SaaS-based offerings, such as Gmail, says René Bonvanie, a senior vice president. The move also reflects the company's decision to begin selling its products, which include project portfolio management tools, on a SaaS basis.

The maintenance renewal on Serena's SAP ERP platform is coming up in March, Bonvanie says. Serena would like to move to Business ByDesign, SAP's nascent on-demand ERP product, but may also seek out less-expensive third-party maintenance or another ERP option, such as NetSuite, according to Bonvanie.

SAP recently announced that all customers would be transitioned to a richer-featured but more expensive Enterprise Support offering. Bonvanie says he has heard that some SAP customers are even considering going off maintenance for a year.

"It is a somewhat dangerous strategy because so much of my business process depends on SAP, but if I look back over the last four years, have I ever really needed [maintenance]?" he said. "It is a very expensive tax to pay".

Meanwhile, vendors are keeping mostly mum about their bargaining strategies.

SAP spokesman Saswato Das says: "These are indeed extraordinary times, but as a matter of corporate policy we don't publicly discuss our pricing models, as we consider this proprietary information between SAP and its customers".

However, SAP executive board member Bill McDermott said adamantly during an interview last week that SAP isn't cutting deals on maintenance. "There's been a lot of rumours that really aren't true about pricing," he said. "We don't negotiate about maintenance, ever."

Oracle spokeswoman Karen Tillman declined comment on whether the company is offering steeper discounts.

While it has been a buyer's market overall for some time, vendors probably won't be equally amenable to every client, says John Hanson, a senior executive with Accenture who advises vendors on their pricing strategies.

"Tactically, the high-performance ISVs are going to be really thinking really hard about who their best customers are," he says. "I don't just mean high-revenue volume, but those who have helped them collaborate well and made their products better. They'll go to those guys and say, 'You're a valued partner, and here's how we want to help you get through this.'," he says.

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Tags managementlicencesbuyersmaintenancecontractseconomy

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