Saving Money on Software Negotiations -- Tips From Forrester's Duncan Jones (Part 1)
I recently had the chance to sit down with Forrester's Duncan Jones, an industry colleague who happens to be an old pro on software negotiation. Based in the UK, Duncan is currently a Principal Analyst at Forrester Research. Yet his recommendations when it comes to saving money with the SAPs and Oracles of the business applications world are clearly universal. If you're a Forrester client and you're looking to save on software negotiations, I'd get to know Duncan, because many of the inner-circle spend tricks of enterprise software license and maintenance savings can't be explained in a quick interview. I'll feature this interview with Duncan in three parts.
Jason: What are the biggest levers in negotiating with enterprise software vendors?
Duncan: The largest levers in negotiation are centered on new money. Large software companies are focused on new orders (which presents immediately recognizable revenue).
Jason: What about maintenance revenue? This is high margin revenue, too, no?
Duncan: Vendor sales reps are not necessarily compensated on maintenance renewals. Moreover, they have no interest in cutting maintenance and have no authority to do this. If you are discussing maintenance with your account executive, from his point of view, you are wasting his time. If you are not interested in buying stuff, he will move on to other accounts where he can sell them something. However, there are some tactics to consider employing.
Jason: How do you broach the cost reduction discussion around maintenance and other areas?
Duncan: The first question to ask is what discretionary projects you might have to spend money on to get the rep interested. The concept is fairly straightforward: "Give us a break on maintenance and we'll give you an option on this project...Get a $50K year cut for $50K in license revenue." This is entirely a question about what he can get through his approval process. You need to recognize that his incentives are different from corporate.
Stay tuned for further discussions and Q/A with Forrester's Duncan Jones.
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At that point, you then can consider things like shelfware reduction, third party maintenance, SaaS options, BPO, or even additional spend. The danger of working with someone who doesn't take the business requirements and consider them against an apps strategy, means you have a very procurement point of view and you will miss long term strategy that then aligns with business outcomes.
While new money is a good lever, don't start with that as your opening offer. If you do that, the sales rep will be constantly fixed on that aspect and you wont' be able to move other parts of the deal without spending some money. A combination of carrot and stick usually brings the best outcomes. Just don't bring out the carrots till you understand your internal strategy. Hint: Make sure your contract negotiator understand BOTH the business requirements and the vendor roadmap. If they can't, make sure you work with experts in the field who can translate to both parties.
Here are some resources that may help you with some best practices from the experience of over 1000 contract negotiations:
http://www.forrester.com/rb/Research/enterprise_so...
http://blog.softwareinsider.org/2009/10/12/researc...
and here are some links to fellow colleagues I respect in the field of software and technology negotiations who can marry both:
Vinnie Mirchandani - http://www.dealarchitect.typepad.com/
Jane Disbrow - http://www.gartner.com/AnalystBiography?authorId=1...
Amy Konary http://www.idc.com/getdoc.jsp?containerId=PRF00026...
PF
As Ray, Vinnie and Phil have pointed out, start talking about third-party maintenance. Who cares if your sales guy is not compensated on maintenance revenue? Trust me, someone within the vendor's organization is responsible for ensuring your renewal. If the renewal is threatened, someone will get interested in your account very quickly.
I find some vendors have a real sense of entitlement when it comes to their installed base customers. It's not a healthy for the buyer when it gets to that point. Restore some balance of power in the relationship.
Frank raises a good point about 3rd party support, which Ive written about here:
"Don't Let Oracle's Lawsuit Dissuade You From Considering 3SPs, But Recognize The Risks "
http://www.forrester.com/rb/Research/dont_let_orac...
but that option isnt available for all software products.
Software suppliers have too long treated their "customers" as a cash cow - a recurring revenue stream without end and without abatement. So long as this remains true, the supplier has no incentive to listen to a customer's business needs or requirements. To change this, as Ray rightfully explains, the customer has to start with a business analysis: what are we doing? what do we need? what does the supplier offer us to help us get where we're going?
In countless interactions with customers, this almost ALWAYS starts with a reduction in product use, as customers discover that they've bought more than they need, more that they implemented or more than they now want. Then it's a matter of decreasing your spend (which the supplier's have made it hard - but not impossible - to do).
And if your rep isn't interested in what you have to say unless you have new money on the table, I guaranty that there's someone in the organization (at a pretty high level, no less) who cares if you tell them that you're not planning to renew maintenance this year.
A recent IDC survey of 5,000 IT execs on utilization rates—the net is, most IT believe that software is at < 50% utilization. This has been the case for many years, but although there is a sense of being overlicensed/overdeployed, many enterprises don’t do a great job of identifying exactly where the problems exist, and end up wasting big money on maintenance for a variety of reasons… they overbuy licenses just to make sure they are in compliance, have users with more expensive license types than they really need based on actual usage, etc. To be clear, I’m not trying to lay blame on enterprises here—tracking licenses and usage is not easy, and software vendors do not help with the complexity… a cynic could say that the complexity helps the vendors in this regard—but understanding this is one important way enterprises can shift the balance of power in negotiations.
I believe that the maintenance cash cow situation is unsustainable—it’s based largely on software that isn’t being used, and is dependent on enterprises continuing to renew maintenance without question. I made this point when talking with the head of services/support at a large software vendor recently and the arrogance that greeted my concern was unbelievable. They don’t think their maintenance cash cows are going away anytime soon. His point—“don’t you think enterprises are at fault here, too? Don’t you think they are being irresponsible?” …Speechless…
Yes, software maintenance is a huge drain on the economy, siphoning off IT budget that could otherwise have been invested in innovation and new projects. OTOH, far more $
are wasted on needless internal development, which creates its own support burden. So I'm still a believer in packaged software & the license + maintenance model - but it must adapt to the times and provide more flexibility.
But in the short term, I give clients pragmatic, actionable advice. The IT sourcing or vendor management can't threaten to cancel maintenance on his firm's strategic database licenses - thats just not a credible threat. Nor is 3rd party support an option in that category. He can moan about unfair policies and under-utilized software, but that wont get him anywhere with a sales rep who has a number to make to keep his job.