In-Depth

Renegotiating for Cost Savings

Identifying your software assets and scrutinizing your licensing contracts can result in surprising cost savings

• By Stephen Swoyer
• 01/30/2003

For example, says Pat Cicala, President of Cicala & Associates, an IT procurement and SAM consulting practice based in Hoboken, N.J., now would be a great time for IT organizations that have over-invested in ERP licenses to renegotiate their enterprise license agreements (ELA). “Most people are over-licensed like crazy” to ERP vendors such as PeopleSoft Inc. and SAP America Inc., she explains, and if they have an effective software asset management (SAM) program in place, “they probably know it. Why are they paying for licenses that they don’t need?”

Probably because they’re locked into multi-year licensing contracts from which most ISVs won’t allow them to escape, Cicala acknowledges.

The rub, Cicala and other analysts say, is that even as software vendors are willing to renegotiate licensing terms during good times, they’re correspondingly less eager to compromise on ELAs during tough times.

One of the best ways to convince an ISV to sit down and renegotiate is to commit to additional licensing that will generate new revenue. But in the current climate, suggests Cicala, if ISVs do commit to lower renegotiated price points, chances are that they’re not going to agree to long-term contracts. So it’s often a trade-off between winning in the short-term and finding yourself locking horns again in a year’s time with your ISV of choice.

At the same time, suggests Sherry Irwin, president and general manager of Technology Asset Management Inc. (TAM), located in Ontario, Canada, renegotiating with a vendor can provide a great opportunity to correct mistakes that you’ve made in the past even as you secure reasonable pricing going forward. “As a standard practice any time that you’re looking to do more business with a vendor, you look at your existing practice, and if there are any issues or inefficiencies, you make certain that you improve those as part of the opportunity. That’s your leverage with the vendor.”

Outside of purchasing additional hardware, software or services, you do have another option at your disposal: The ability to take your ball and go home, so to speak, to the extent that you can solicit RFPs from vendors that compete with your ISV. In most cases, this is obviously a last resort—the costs associated with migration to another application often rule out such a tactic—but in response to a vendor that believes that it has you over a barrel, it can be effective.

And if you find that you’ve no choice but to play this trump card, advises Rob Schafter, a director with research firm and consultancy Meta Group, you should be certain that your threat has some teeth. “At the end of the day, you do the homework. You talk with your staff and task them to come up with a step-by-step playbook of migration plans, and then you bring your ISV rep in and show them that this is not an empty threat. At that point, they’ll often be willing to listen.”

Analysts are almost unanimous in saying that IT organizations can save money by more closely inventorying their software assets or by examining the terms of their existing ELAs.

After all, points out Meta Group’s Schafer, most Global 2000 organizations have already invested in software asset management solutions of one kind or another. Chances are they “probably can find some interesting percentages if they go back and check [their software assets for] duplicates and examine where they are in their various contracts.”

Among other practices, Schafer suggests that you start negotiating the terms of your new ELAs well before your current licenses are due to expire. If you approach an ISV as your ELA is about to expire, he notes, you’re giving it way too much leverage. In addition, he counsels, beware of ELAs that include quick-sign bonuses, as the latter are often employed to disguise the underlying unattractiveness of the licensing terms. Finally, he recommends IT departments avoid ELAs in which an ISV has projected annual price increases of 10 percent or more. Meta Group’s research indicates that ISV product pricing rarely increases by more than three or five percent annually.

Cicala outlines a situation in which IT organizations negotiating ELAs are often hoodwinked by software vendors. Conventional wisdom has it that an IT organization should push for a cap on the annual maintenance costs associated with a product, she says, and as far as it goes, this is a good idea. But customers need to be aware that even if ISVs aren’t raising the list prices of their products, they’re sometimes raising their maintenance caps—and on an annual basis, at that. Not surprisingly, she points out, this shouldn’t be happening: “You’ve got to look at those caps, because if vendors are no longer raising their list prices, that means that the caps on maintenance shouldn’t be going up every year. We found a client who every year their price went up by 10 percent, and they ended up saving $2.5 million worth of over-charge, and that’s something that you can justify to management.”