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.
“Now’s the time to buy more licenses 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,” Forrester Research analyst Ray Wang wrote in a recent blog post.
Frank Scavo, of the Irvine, California, consulting firm Strativa, said 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 said via e-mail: “Economic conditions are causing organizations 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 licenses are just a door opener to the maintenance revenue, where vendors really make their money.”
While predictions of a recession could mean a cut down in new projects, the financial meltdown appears to be encouraging proprietary customers to switch to open source software.
Mark Slaga, CTO and CIO for the Americas division of Dimension Data, an IT infrastructure services provider with US$3.8 billion in revenues during 2007, said he expects to score a sweeter deal than usual next year on the maintenance renewal for his Oracle ERP (enterprise resource planning) system.
Slaga is also anticipating a nearly 20 percent cost reduction on the renewal of a SaaS (software as a service) collaboration product, which he asked not be identified because the agreement isn’t finalized.
Overall, however, Slaga’s advantage in this market climate depends on the type of deal, he said. “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.”
The Chelmsford, Massachusetts, vendor, which makes products for contact centers and had $600 million in revenue last year, recently invested “well north” of $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,” he said.
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.”
One midsize company, Serena Software, believes it can save money by switching over its systems to SaaS (software as a service)-based offerings, such as Gmail, said 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 said. The Redwood City, California, company 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, like NetSuite, according to Bonvanie.
SAP recently announced that all customers would be transitioned to a richer-featured but more expensive Enterprise Support offering. Bonvanie said 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.
“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,” said SAP spokesman Saswato Das.
However, SAP executive board member Bill McDermott said adamantly during an interview this week that SAP is not cutting deals on maintenance. “There’s been a lot of rumors 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, said 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 said. “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.'”
