Tough Talk for Hard Times

A few years ago, while sleuthing out underused, undermaintained or misaligned software assets at Sony Pictures Home Entertainment, David Cortese found that he was paying for 266 ERP licenses at a cost of $7,000 per seat when in fact he was using just 177.

By reworking those agreements and some others, he cut several million dollars in IT overhead. "Everything is negotiable," says Cortese, the company's vice president of IT.

As the economy slides, that's becoming the mantra for more and more IT leaders, says Joe Auer, president of International Computer Negotiations Inc., a Winter Park, Fla.-based consultancy. "When [economic] times are great, it's tough to get people to do better deals ," says Auer, who has 34 years of technology contract negotiation experience. "But when times are tough, they want to."

Do they ever. Forrester Research Inc. analyst Ray Wang says that over the past few months, more than 200 clients have contacted him and other Forrester analysts looking for help in renegotiating existing licensing and maintenance pacts. "They're looking for Plan B's" to cut costs, says Wang.

Now is the time to design your own Plan B. Here are nine ideas to help you negotiate harder with vendors, cut waste, sharpen licenses and get more out of your IT assets this year:

1. Do Your Homework.

To be adequately armed for effective contract negotiations or renegotiations, it's imperative that you know your existing contracts inside and out, says Roy Schleiden, senior manager of IT procurement at YRC Worldwide Inc. , a transportation services company in Overland Park, Kan. "It's amazing to me how many people don't read their contracts and don't know what's in them," he says.

2. Give Back Shelfware, and Don't Buy More.

Wang says that many clients overestimate the number of user seats needed for a particular software system and end up licensing a lot of shelfware. "There's a lot of room to cut licenses," he says.

But many licenses are designed to make that difficult to do. If a customer wants to reduce the number of seats, some vendors, including SAP AG and Oracle Corp. , typically respond by raising the price per seat, says Wang. The net result: You pay the same and get less.

Although both SAP and Oracle tend to be fairly rigid about lowering the number of user seats in software agreements, there are techniques you can use to get around this problem with other vendors.

For instance, since July, Schleiden and his team have worked with approximately 300 of YRC's software vendors to see if it would be possible to "park" unused seat licenses until the economy improves. Parked seats are set aside and licensed at a price that's significantly lower than the per-user price in the contract. Once the economy improves, the parties unpark the seats and revert to the original cost structure.

So far, YRC has been successful with about 80% of the vendors it has contacted, including providers of application software, technical tools and database systems, says Schleiden.

3. Use Your Leverage.

But renegotiation after the fact is never easy. Given the difficulty of adjusting a license in midstream, the best cost-saving opportunities are at the front end of a contract, when the vendor knows that you can still walk. For example, vendor pricing models are often poorly documented, says Wang, so before you sign, make sure you completely understand the terms of pricing and use them to your advantage. "It's more cost-effective to flex up," he says.

That means, for example, that a customer with 1,000 users should negotiate hard for the first 500 seats at the onset of contract negotiations and then add sets of 100 more licenses as needed, Wang says.

4. Ask, and You Shall Receive.

In light of the economic crunch, some vendors are coming up with creative financing to entice would-be customers to sign deals, says Schleiden. If they don't, you should. "We have a list of side perks we typically ask the vendor for," says Schleiden. These include cost caps on future maintenance and licensing increases, and free first-year maintenance. "We've never been successful in getting them all, but we typically get several," he says.

Never hesitate to ask vendors for concessions, says Gartner Inc. analyst Jane Disbrow . During the course of contract negotiations, software vendors will typically go through a discounting process "that leads the customer to believe that [the salespeople] won't be able to feed their own children tomorrow because they gave them such a great deal," she says.

But don't worry about the vendors. They "always tend to hold back money," Disbrow says. Your goal should be to not leave any of that money on the table.

5. Eliminate Phantom Systems.

During the cost-cutting drive at Sony Pictures Home Entertainment, Cortese met with various business unit leaders to determine what software contracts were in place and how effectively software was being used. "I was pretty blown away by what I discovered," he says.

For instance, during Cortese's evaluation, the company received a $125,000 maintenance bill from a provider of workflow management software. With a little digging, he found that the system was no longer in use. "If we hadn't asked about it, the maintenance bill just would have gone through," he says.

6. Put Maintenance Under a Microscope.

Vendors hate to discount maintenance, largely because it's so profitable. For instance, 85% of the revenue Oracle derived from software maintenance in fiscal 2008 was pure profit and represented 76% of the company's total profit, according to the company's 2008 10-K report.

If a customer signs an enterprise software deal worth tens of millions of dollars, it might have the leverage to demand discounted maintenance rates, says Wang, but generally, it's an area that vendors don't want to haggle over. "Maintenance is the last thing [vendors] want to discount," he says.

But there are always exceptions. For example, under most vendor-generated software contracts, customers begin paying for maintenance before the ink has dried on the contract -- even if it takes a year or more to implement the system. But some IT leaders push hard not to pay maintenance for any software until the system has gone live. Cortese says he's had mixed results in attempting to defer maintenance, but he was successful recently on a seven-figure CRM license.

YRC Worldwide's Schleiden tries to get the first year of maintenance free of charge. Though he, too, is not always successful, he says that "lately, the percentage [of vendors that concede] is higher than it's been in the past."

Schleiden's IT procurement group also tracks the number of software maintenance calls it puts out to each of its suppliers annually to make sure YRC is getting its money's worth. Last year, Schleiden renegotiated maintenance fees with some vendors and shifted to use-based maintenance agreements with others. With one ERP vendor, he recently negotiated a three-year maintenance agreement at a 2% annual increase cap per year.

Schleiden says it's easier to renegotiate maintenance agreements for middleware software than it is for mainframe systems because there's more competition in the middleware market.

Other users take a hard line across the board on any maintenance fee increases. "We make it clear to all of our suppliers that while software [is] important to our company, the focus of our company is selling things like helicopters and golf carts," says Sherri Zapinski, director of Textron Inc.'s indirect strategic sourcing center of excellence. "So if an engine supplier doesn't get to raise its prices, it's not fair if someone like a software supplier that's used for overhead gets to raise its prices."

Still, Zapinski says she "might make an exception" if a vendor has been reliable and consistently responsive in delivering patches, upgrades and other fixes over time.

7. BYOC.

Auer strongly recommends that clients bring their own contracts whenever possible and that they let the vendor know they will be doing so in the request-for-proposals stage of the deal.

"Here's a legitimate problem for vendors: If you pull out your own contract at the end of a deal, there's rarely a way for vendors to agree to it quickly," says Auer. That's because the lawyers representing vendors are familiar with their clients' formulaic contracts but would require additional time to go line by line through a customer's contract. In fact, says Wang, if you do insist on using your own "paper," expect to add three to six months to the negotiation process, even if you state your intention upfront.

In Disbrow's experience, customers outside the public sector almost always have to use form contracts offered by SAP and Oracle. But some customers say they're comfortable using vendor-generated contracts; they merely insist on amending them.

"We've never signed any kind of an agreement without making changes," says Tyrone Magby, IT sourcing manager at Fiserv Inc. in Brookfield, Wis. Key examples include the addition of indemnification clauses and guarantees that the maintenance terms are tied to the net price and not the list price of the system, he says.

8. Don't Be Rushed.

Don't allow a vendor to hurry you or corner you into making a deal to meet its timetable. "We don't like to be forced into [meeting] a date," says Magby. "We don't play that game."

"If a vendor gives you less than a month to do a deal, you'll almost certainly lose financial benefits to your company," says Schleiden. That's because 30 days or less isn't enough time for customer companies to work their own provisions, like audit requirements, into a contract or to negotiate and "make the vendor sweat the competition," says Schleiden.

9. Run the Clock.

The best time to negotiate a software deal is toward the end of a vendor's financial quarter or fiscal year, when its salespeople are trying to hit their numbers. Disbrow says contracts landed during these periods can include overall discounts of 5% to 10%. To gain maximum leverage, Auer recommends starting the process 60 to 90 days before the end of a fiscal year, or 30 days before the end of a financial quarter.

"Vendors are real serious about salespeople making their quotas," says Auer. "They can make magic things happen during those times."

Hoffman is a former Computerworld national correspondent. Contact him .

This version of the story originally appeared in Computerworld 's print edition.

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