Ready for Hardball?

Vendors get tough on licensing deals; how to fight back

Desperately needing a major software upgrade but unwilling to pay through the nose for a new enterprise software license on which his vendor insisted, Dave Waterman recently found himself between a rock and a hard place. After weeks of negotiations in which he attempted—unsuccessfully—to wring price concessions out of the vendor, CompuWare Corp., Waterman, the principal information analyst at utility company National Grid USA, finally swallowed hard and did what he had to do: He walked away and found a new vendor.

For Waterman, the experience represents a change in his relationship with his enterprise software vendors, which historically had been willing to bend the rules and negotiate licensing terms.

"The rules have changed," said Waterman, in Westboro, Mass. "As licensing models have evolved, its become increasingly difficult for us to get a break."

Waterman isnt the only IT manager searching in vain for a break on enterprise software licenses these days. As times have gotten tough, vendors have increasingly been playing hardball, negotiating more toughly and coming up with software pricing strategies intended to generate cash flow by, for example, stimulating upgrades and pressing customers to forgo perpetual licenses in favor of software rentals, enterprise customers and analysts say. While some of these vendor-introduced licensing schemes can save some customers money—enterprises willing to upgrade frequently, for example—for most, they have brought only uncertainty and new management headaches—not to mention higher software bills.

As a result, savvy enterprises are adjusting their software buying strategies. Some are looking more favorably on open-source software, which can often be licensed for far less than traditional commercial software. Others are arming themselves with the most current and complete information about pricing strategies they can find and demanding further discounts or added services and support. They are also resorting to tried-and-true negotiating tactics, asking software companies to match competitors prices and even switching vendors when demands are unmet. Lastly, experts say, IT managers can combat software vendor hardball tactics by being willing to delay purchases to get the most cost savings out of a deployment.

"Just because the vendor licensing strategies have changed doesnt mean IT managers shouldnt continue to use traditional tactics such as lengthening the contract term, asking for software bundles or opening the bidding to competing software suppliers," said Chad Robinson, an analyst at Robert Frances Group Inc., in Westport, Conn. "Software vendors are under extreme pressure to improve their financials, and IT managers who dont use that to their advantage will find it difficult to keep acquisition and management costs from rising."

Digging into the details

Perhaps the most notable licensing tweaks have come from Microsoft Corp., of Redmond, Wash., which in May revamped its worldwide licensing program for enterprise applications by offering software by subscription and replacing its Upgrade Advantage program with its new Software Assurance offering. Software Assurance contracts commit customers to purchasing upgrades at a discounted rate on a periodic basis, rather than purchasing the upgrade when the customer needs it—a move that could raise fees from 33 percent to 107 percent for most customers upgrading every three years, according to Gartner Inc., in Stamford, Conn.

In 1997, the company had eliminated concurrent-use licenses on Office products. That option had allowed customers to buy fewer licenses than they had actual users, as long as the products werent used by all of them at the same time. Many companies had saved millions by using the software-sharing option. In fact, Gartner estimates that a company with 5,000 desktops will have paid 224 percent more over the course of five years as a result of the change.

Microsofts not the only one playing this game. Last month, Oracle Corp. announced plans to give companies several options designed to encourage enterprise customers to rent Oracle software as a service. And last year, enterprise software vendors including IBM, Sybase Inc. and Computer Associates International Inc. announced changes to their pricing structures.

According to Robert Frances Groups Robinson, many of these new strategies take actual workload into account, rather than using server capacity or size as the metric for software pricing (see chart, Page 54). And, say experts, such new licensing schemes could increase software costs as e-commerce and the Internet boost service workloads.

"With all of these machinations, IT managers really need to understand a vendors pricing model before working with a sales representative on a deal," Robinson said. "The pressure on software vendors to show profit is obvious, and this is certainly good timing for enterprises to really put pressure on vendors to strike a deal."

Indeed, IT managers arent taking the licensing changes quietly. According to Microsoft representatives, the software company has given enterprise customers five more months to upgrade to the Office XP suite in response to customer requests. Customers will now have until Feb. 28, rather than Oct. 1, to make the change as part of the companys controversial new licensing program, Software Assurance.

Software Assurance contracts commit customers to buying operating system and application upgrades at a discounted rate on a periodic basis, rather than purchasing the upgrade when the customer decides the time is right. The program lowers costs for businesses that upgrade software frequently but will force those that upgrade less frequently to pay more, experts say.

Microsofts changes to its Worldwide Licensing Program have put many IT managers into a predicament. At Octave Communications Inc., in Nashua, N.H., Kyle Lippert, director of IT, has a choice between buying Office XP—and buying into the Worldwide Licensing Program—now at a discount or in the future at full price. Octave, which provides audioconferencing technology to telecommunications carriers, has Office 97 installed on all its desktops. Because the company seems to be operating fine with its current suite of desktop applications, Lippert is uncertain as to whether or not he wants to commit to Office XP right now.

"As for right now, my short-term plan is that I have no short-term plan," Lippert said. "I will upgrade if the software meets our business strategy. Companies are really tightening the reins on their licensing agreements, and we have to be on top of them before we sign any deal."

Experts say IT managers need to do the math when vendors offer discounts on software upgrades purchased now and refuse to offer savings to IT managers who choose to wait until a later date. While its true that enterprises may see immediate cost savings on software purchased at discount, IT managers who push their deployments back two or three years can see the same savings, whether through purchasing hardware already preinstalled with the software or by dealing with third-party distributors later on (see chart, next page).

"Software vendors will have every incentive to make money whether its now or later," Robinson said. "IT managers will still have every bit of leverage they have now when it comes time to negotiate a new arrangement. The difference is, because youve saved 12 or 18 months waiting, it could very well end up being cheaper to wait."

As Lippert contemplates his decision on Office XP, he is pressuring his software vendors to throw in services such as consulting and access to higher-level support channels. Lippert, who up until last month was director of IT at First Virtual Communications Inc., negotiated with Microsoft for a software audit earlier this year. Microsoft employees went on-site at First Virtual Communications and helped Lippert define an asset management program.

"It was a nice process for us to go through free of charge," Lippert said. "From an IT management perspective, licenses have been difficult to manage, and this audit allowed us to see what we had and what we needed."

While Lippert did not do so, experts also recommend negotiating with vendors for so-called liability clauses. For example, if an enterprise signs an agreement to purchase 25,000 seat licenses over a three-year period but plans to purchase only 500 seats the first year, it should ask its vendor to bill according to how many seats were actually purchased. Traditionally, a software vendor will average the price over the length of the purchase agreement.

Experts also recommend that IT managers consider multinational software licensing agreements, since purchasing software for multiple lines of business worldwide in one fell swoop rather than by specific department often means volume discounts.

There are tricks to negotiating multinational software licensing agreements, however. Robinson warns that agreements need to stipulate which customer service center an IT manager located in a remote office should call in order to receive support for products. He also recommends hammering out exchange rate issues beforehand.

"We tell IT managers to handle the purchase in such a way that they can take advantage of exchange rates to save a few hundred dollars here and there," Robinson said. "If the ruble is down against the dollar, it makes sense to take advantage of that."

When it comes to purchasing software for overseas locations, however, IT managers need to be careful. Experts say many software vendors, particularly those in the mainframe and database arenas, dramatically raise prices to make up the margin on software sold in countries where its common practice to give discounts of anywhere from 10 percent to 30 percent. As a result, IT managers need to look for consistent pricing across all countries and carefully evaluate whether that 30 percent discount will really save their enterprises money.

In the event that a software vendor refuses to back down, experts say the tried-and-true method—pitting the vendor against its competitors—is still the best bet.

Looking at merger and acquisition activity in the power industry, IT managers at National Grid USA, a subsidiary of National Grid Group plc., knew earlier this year they needed to prepare for possible growth in mainframe processor power in a hurry. The company was planning to move from an IBM 8672 R55 265-mips (million instructions per second) system to the IBM 9672-X37 480-mips system and wanted the best possible price on any new licensing agreements.

Waterman contacted the companys business intelligence applications vendor, CompuWare, in hopes of negotiating better pricing agreements and longer contract periods. When CompuWare refused to budge, he immediately began asking competitors such as Serena Systems Inc., Macro4 Inc. and IBM for price quotes.

Macro4 agreed to a long-term contract that included free upgrades. CompuWare, on the other hand, stayed firm on its licensing terms. The result? Waterman is in the midst of phasing out all CompuWare products from his mainframe environment and swapping in Macro4 business intelligence products for application availability, interactive testing, fault diagnosis and data manipulation, all because CompuWare simply wouldnt cut the company a deal.

"The CompuWare pricing model as it was would have killed us because we were involved in a pretty hefty upgrade," Waterman said. "It was a conscious-based decision to switch to Macro4 because of CompuWares pricing policies."

Of course, Waterman isnt the only one contemplating a break with an enterprise software vendor. Robert Frances Groups Robinson said that many of his companys enterprise clients have been looking at alternative products in response to more stringent licensing policies. Financial services companies, for example, are now testing the Linux operating system as an alternative to more expensive software packages from Sun Microsystems Inc. and Microsoft.

And some organizations are looking at open-source applications as a way to bypass licensing hardball. Sun landed the U.S. Defense Information Systems Agency as a customer for its free StarOffice desktop suite after the government agency decided it could not afford Office products and was unable to negotiate better rates from its vendor, Applix Inc. Last month, DISA began to install StarOffice 5.2 on 10,000 seats in 6,000 locations.

"We evaluated StarOffice as best satisfying our requirement," said Lt. Col. William Hoppe, chief engineer, Global Command and Control System for DISA, in Washington, in a statement.

As software vendors change their licensing models, IT managers will find other ways to reduce costs, experts say. Nonetheless, as vendors begin selling software by subscription and over the Internet, new models will continue to evolve.

"Just because the licensing models change doesnt mean traditional tactics such as lengthening the contract term, switching vendors or looking at other alternatives are no longer applicable," Robinson said. "Continue to put pressure on software vendors in order to ensure the most bang for your buck."