Wanted: Flexible IT pricing

IT execs want revamped licensing, maintenance fees and usage-based pricing.

BOSTON – Ray Barnard is putting his foot down: Vendors need to come up with new, more flexible pricing models if they want a piece of his $350 million IT budget.

“I’m not allowed to stay stagnant, you’re not allowed to stay stagnant,” is the message the CIO of Fluor Corp. wants vendors to hear.

Fluor is a $10 billion engineering and construction services company. Nearly a year ago, the Aliso Viejo, Calif., firm signed a $350 million, seven-year IT services agreement with IBM that covers network infrastructure, LAN and desktop support, server management and help desk administration. As part of the deal, Fluor transferred 350 employees to IBM and kept about 500, Barnard told an audience of IT executives at last week’s AMR Research executive conference.

Looking ahead, Barnard said he sees a day when he will run Fluor’s IT department with 100 to 120 people, having outsourced 80% to 90% of its activities.

A key element of the deal with IBM is usage-based pricing for computing resources. These on-demand IBM services are part of a larger Fluor initiative, begun about two years ago, to implement a standard, enterprisewide IT framework. The initiative, which includes consolidating applications and servers, has allowed Fluor to slash its IT budget by about $60 million. About half of that savings can be attributed to on-demand services, Barnard said.

“The technologies are real. The capabilities to use a utility-based model are real. They are not working perfectly yet, but they work,” he said.

Knowing that the model can work, Barnard is insisting on using it whenever possible. If a software vendor wants to do business with Fluor, the vendor must understand the concept of on-demand, at a minimum, Barnard said. A vendor also will have a better shot at Flour’s business if it’s an IBM partner. Barnard estimates that about 60% of Fluor’s software providers have some kind of relationship with IBM’s on-demand model.

Fluor’s plans for migrating applications to an on-demand model are ambitious. Even core engineering and construction management applications one day will move to a utility-based structure, he said.

These days Barnard works with Fluor’s two key ERP vendors, SAP and J.D. Edwards (now owned by PeopleSoft), to devise an on-demand strategy and deployment schedule.

Price wars

Cost is the chief reason for Fluor’s transition to on-demand services.

Barnard isn’t shy about questioning vendors’ pricing strategies. He doesn’t want traditional licensing and maintenance models anymore; he wants a different model – one that lets Fluor do more while taking on less risk.

A quantifiable ROI is imperative.

“With license fees and other fees under the old model, the ROI does not hold true,” Barnard said. “Nothing is allowed to go forward without showing the ROI.”

Upgrades need to be justified, and a few new bells and whistles won’t cut it, Barnard said. “When an upgrade comes in, we take a look at it. If it doesn’t give me enough value, it doesn’t go in.”

Bernard is not alone. While there are signs the economy is improving, CIOs still are under pressure to trim costs and squeeze greater efficiencies out of existing technology. They’re looking to vendors for answers.

Eastman Chemical has worked to centralize its IT staff, and revamp its systems and services, including moving to a single instance of its ERP software, eliminating a mainframe, and consolidating servers and storage. In the past two years the Kingsport, Tenn., company has cut 25% of its IT costs, Jerry Hale told attendees at the AMR Research event. The CIO expects to trim Eastman’s IT budget an additional 10% next year.

Hale is aggressive when dealing with Eastman’s technology vendors and said insistence is required to get concessions from the company. “We’ve had reasonable success getting costs out without losing functionality, but it’s a battle every step of the way,” he said.

Randy Stone, Teradyne’s CIO, described a typical love-hate relationship with Oracle: She praises the company for its help during an 802.11i rollout at the maker of test equipment for the electronics and telecommunications industries in Boston. At the same time, she resents Oracle’s upgrade policies and maintenance costs. “There are pluses and minuses as with any marriage,” Stone said.

Forced upgrades are a thorn in the side of Robert Dutton, vice president of IT and systems at General Dynamics C4 Systems. The Taunton, Mass., defense contractor recently made plans to upgrade to a new version of Microsoft Exchange when it found out its existing version would no longer be supported. The scope of the upgrade project quickly spiraled: The new version of Exchange required Active Directory, which General Dynamics didn’t have. In addition, putting in Active Directory required changes to its Windows NT platform.

“We have to do it because our messaging and scheduling environment can’t go out of service,” Dutton told the audience. It’s a source of ongoing frustration, he said.

Compelling technologies

It’s not just vendors that are forcing technology upgrades, according to the IT executives speaking at the AMR Research event.

Regulatory issues are driving Fluor to spend considerable IT money. So far the company has spent $4 million to come into compliance with the Sarbanes-Oxley act, legislation passed in 2002 that governs public companies’ financial reporting processes, Barnard said.

Customers are pushing two of the speakers to consider wireless inventory technology based on radio frequency identification (RFID).

Wal-Mart’s requirement that all of its suppliers start outfitting pallets or cases with RFID tags by 2006 will affect Dial, said Evon Jones, senior vice president and CIO at the consumer products manufacturer. The Scottsdale, Ariz., company is looking into RFID and will do its best to fulfill Wal-Mart’s requests – if it finds RFID is for the good of Dial and the good of the industry, Jones said.

If Dial chooses to invest in RFID, the company will have to do it with a small team or turn to outsourcers. Dial has been shrinking its IT staff from 130 people to 10 people while shifting its load to outsourcers, including Electronic Data Systems (EDS). Dial signed a seven-year, $110 million deal with EDS in July.

The Department of Defense has a similar RFID mandate that will affect General Dynamics. Dutton calls the initiative “more stick than carrot.” He knows his company has to comply or it will lose the agency’s business.

Some battles just can’t be won.