How enterprises can (gently) squeeze their vendors during the recession

It may be time to rethink software licenses, subscriptions

Enterprises can use the recession to transform their relationships with vendors without trashing them, while saving some or a lot of money to boot.

For CIOs, the temptation to put the big squeeze on vendors must be high. Many have endured years of licensing and maintenance increases from vendors, increases that have only abated temporarily due to the recession's toll on IT budgets.

Also, the rise of SaaS's pay-as-you-go subscription model is making the conventional on-premises licensing model -- pay millions of dollars upfront for software that takes months or years to get to work properly -- feel increasingly anachronistic.

"It's like if you went and bought a car from GM, and they told you that they wanted all of the money now and that not only would you have to wait months before you could drive it, but that you would actually help them build it," said Peter Whatnell, CIO of gas retailer, Sunoco Inc.

But just because they feel like they've been exploited in the past isn't a good reason for IT users, especially big ones, to exact payback today, Whatnell said.

"It's easy to become a bully," he said. "Like the expression goes, 'If you owe the bank $100, you worry. If you owe them $100 million, then they worry.'"

Jim Knight, global CIO at insurer Chubb Corp., said treating vendors as adversaries sets a bad tone for a long-term relationship.

"It's like a marriage. It's got to be a win-win where everyone's happy," he said.

Meanwhile, picking the lowest-cost vendor can hurt in the long run.

"What tends to happen is that the vendor underestimated how much work it was going to be. They also were counting on upselling you services and products once they got their foot in the door," Knight said. Once they realize how little of that is happening -- and consequently, how much money they are losing -- they start to pull back on resources.

"That's when quality suffers," Knight said. "It's the winner's curse."

Also, aggrieved vendors will start to unleash the remaining weapons in their arsenal, including the dreaded software audit. Most software licensing contracts give vendors the right to order an audit if they suspect customers are misusing their wares.

It's already happening. According to Gartner Inc., between 54% and 63% of respondents in a survey said they had been audited by a vendor in the last 12 months, up from 30% to 35% in prior years' surveys.

Adobe Systems Inc., IBM, Microsoft Corp. and Oracle Corp. are jacking up audits the most, respondents told Gartner, but so are many other vendors.

While some audits are legitimate, "we are also seeing evidence of increased audits as vendors attempt to make up for revenue shortfalls that they may be experiencing due to a decline in the transaction volumes and deal sizes as a result of the economic downturn," wrote Gartner. "In other cases, we have seen anecdotal evidence of audits after vendors failed to close large enterprise deals with customers."

Would you be ready for an audit? According to Flexera Software Inc.'s 2009 licensing survey, half of enterprises admit they would not be.

Enterprises can still use the recession to transform their relationships with vendors without trashing them, while saving some or a lot of money to boot. Companies in the past year, for example, have shown a remarkable willingness to tweak their licensing approaches to appease customers.

According to the Flexera survey, 44% of vendors have adapted their licensing approach in the last year to appease customers, such as mixing license types in a single installation or adding subscription models.

According to a presentation earlier this month by IDC analyst Amy Konary using the Flexera data, 40% of the 100 largest software vendors by revenue said they offer subscription licensing. And 13% of those vendors said they already depend on subscriptions for more than half of revenue.

Pay-as-you-go is far from restricted to SaaS. Two-thirds of subscription revenue came outside of SaaS, according to IDC.

IDC expects subscription revenues to grow 20% year-over-year and to make up more than a fifth of software revenues by 2013.

In terms of pricing, concurrent licensing is tied neck-and-neck with per-seat licensing today in popularity with vendors, according to the Flexera data. Concurrent licensing is expected to leap ahead within the next 24 months to be used by 60% of vendors.

Usage-based licensing, currently used by 15% of vendors, will be offered by 35% of vendors within two years, according to the Flexera data.

This story, "How enterprises can (gently) squeeze their vendors during the recession" was originally published by Computerworld.

Copyright © 2009 IDG Communications, Inc.

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