How to Negotiate Better Business Software Deals

Tough economic times, and the availability of more software licensing models than ever before, have combined to shift more negotiating power into customers' hands.

But there's a downside: The software-shopping process has grown more complicated. With a slew of complex options to choose from, IT decision-makers have to do more homework than they once did.

Smart IT managers are getting more for their money these days, though. Instead of passively accepting the old perpetual-license model and vendors' pricing terms, customers are haggling for better deals, says IDC analyst Amy Konary. Some customers are threatening to choose other options -- including virtualization, software as a service (SaaS) and open source -- if a traditional vendor doesn't meet their demands, she explains.

The economic downturn has also given customers more leverage, says Ray Wang, an analyst at Altimeter Group. Some have gotten maintenance and support fees cut by up to 60%, he says, adding, "This is a great time to buy enterprise software."

Baker Hughes Inc. recently got better terms from several vendors by agreeing to longer-term contracts and by bargaining as an enterprise rather than having each of its divisions negotiate on its own, says Graham Crisp, IT assets manager at the Houston-based global oil-services firm. "We have much more leverage and can get volume discounts by bargaining as a single company with 36,000-plus users instead of eight divisions," says Crisp.

Enterprises have always been able to cut deals in exchange for larger and longer-term commitments. The big change now is that the customer "has more transparency, flexibility and choice" during negotiations, Konary says.

In addition to providing more pricing options, vendors are becoming more open about what choices they offer, Konary says. Indeed, some are actually using them as marketing tools.

Cloud vendor RightNow Technologies Inc., for example, has been trumpeting a provision in its new cloud services agreement that allows users who sign multiyear deals to cancel at the end of a year for any reason. In addition, customers can buy a pool of "seat months" that they can use on an as-needed basis.

Maintenance is another area where customers are starting to push for fairer deals.

For example, Gartner Inc. recently formed a user group, called the Global IT Council for IT Maintenance, that has issued a "code of conduct" for the way vendors approach maintenance deals. It calls for "reasonable, predictable" percentage ranges for annual maintenance fee increases or reductions, long-term caps on increases, and the ability for customers to stop or alter support at any time for unused products.

Recession or no recession, vendors still play hardball at the negotiating table, of course. They might cut you a deal upfront but also include clauses that hamstring your ability to renegotiate later -- such as eliminating volume discounts when you give back licenses, says Wang.

First Steps: Analyze, Streamline

Assessing your software assets and monitoring utilization are crucial first steps for negotiations (and, later, contract compliance audits).

Before sending out requests for proposals, businesses need to analyze their software needs and streamline those needs as much as possible, says Gartner analyst Bill Snyder. He recommends that users answer these two questions: "Is there a cheaper alternative? And do we need all of these features and functions?"

The ability to predict software needs is critical when it comes to long-term negotiations, Snyder says, because once you deploy a vendor's ERP or database system companywide, you're effectively in a monopoly relationship. If you purchase too few licenses, you'll have to buy more later, losing out on volume discounts. If you buy too many, you're paying maintenance and support costs for shelfware -- software that sits unused.

Anticipating software needs more than a year or two ahead can be tricky, however. For example, 20/20 Companies, a sales-personnel outsourcer, originally purchased 300 end-user licenses for Force.com, Salesforce.com Inc.'s hosted application development software. From there, 20/20 went up to 500 licenses, which it quickly exceeded and expanded to 900. "Edging up means no volume discount," warns Mark Warren, 20/20's acting CIO.

"You absolutely need to figure out your business software goals upfront," says Thomas Jefferson, former vice president of business technology at TMP Directional Marketing LLC. While at TMP, he had monthly planning meetings with the CEO, the CEO's direct reports and several business managers. "We would go over what we're doing, where we're going, and make sure this strategy is reflected in the overall IT road map," says Jefferson.

TMP has been discussing the potential business benefits and cost trade-offs of implementing a document management system, according to Jefferson. (A current TMP IT executive confirms that.) This would cut document access time and improve customer service, but it would also require an expansion of storage and storage-area network capacity and the purchase of additional licenses for storage software, databases and client data access applications, Jefferson notes.

Once TMP assesses what resources the new system will require, it can go to vendors and say, "We're going to need this number of licenses over the next three years. How can you help me do that while taking advantage of today's prices?" Jefferson says.

IT decision-makers also need to get a handle on their own software installations -- not just what's out there, but who uses it when, and how often. This is particularly critical if you're thinking about going with a pay-per-usage pricing model.

Next page: How to negotiate wisely

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