Part 7 – Rising IT Buyer Smarts & the New Economics Every Buyer Needs
Taken together, there are some powerful changes underway in IT and ERP. But, has anyone really looked at the new economics that could adversely impact your firm (and your most recent IT purchases)?
For example, let’s say you bought one of those newfangled monster servers with a bucket load of flash or DRAM memory and some of Intel’s latest and greatest processor chips. Maybe there are several chips in there. So, what will this do to your software contracts? Possibly a lot!
Standard software contracts permit the application software vendor to raise their license fee should you move their software to a machine with faster and/or multiple processors. They believe you are getting more usage of their software. You may have only retired an old server. Nonetheless, you’ll pay and pay for that upgrade unless you proactively re-negotiate that contract (preferably before you buy the new iron).
Likewise, your database management software vendor (and other systems management vendors) will want to hit you up for more money, too. They’ll point out clauses in your contract that allow them to charge incremental license fees (ILFs) for system upgrades like these. But wait you say. What if the server we’ve been using isn’t made anymore. How can they charge me for just replacing a server? They can because you signed a contract permitting them to do so.
But the fun doesn’t stop here.
Each ILF also provides another gift that keeps giving: you get to pay increased maintenance fees for these new license extensions. Worse, you probably signed a contract that stipulates that the ILF and the maintenance fee calculation will be based on “Current market rates”. So, even though your firm negotiated a 90% off of the ‘then current prices’ for the software license, the ILF will be priced at 10X the original price (plus COLA or other interim price increases). This is gonna hurt.
But Brian, we’re not buying a bigger or more powerful server. We’re going to virtualize our ERP application. Virtualization efforts could also trigger new fees, too.
A number of licenses, especially older ones, are often silent on the matter. You might think that’s a good thing but it may not be. If your application or database gets spread out over several servers, gets moved around a lot, or, gets placed on a bigger server that can handle the ERP and other applications, expect to pay for the privilege.
In all of these scenarios, some of the pain can be avoided upfront if you negotiate these scenarios into a contract. The next best scenario is to add these situations into a contract extension deal (e.g., where you license an additional module). The least optimal scenario is to contact the affected vendors just before you move on a new project. You might actually have some success with this. But, as in all negotiations, if there is no “alternative to a negotiated solution” (i.e., a credible Plan B often with a competing product), you have no leverage. No leverage equals no luck.
Moving to a hosting or cloud center can sound like a cost saver, too, but as the above scenarios point out, the vendors need to be on-board or your firm will pay, pay, pay.
Before you even think about going cloud, virtual or hosted, you should instead pour a lot of time into reviewing your existing application, report writer, database, middleware, systems management and other contracts. Assume the worst from a billing, audit and incremental license fee perspective. Then, develop a re-negotiating strategy to preemptively deal with this BEFORE it becomes a problem. Power through all of the scenarios, price changes, etc. and develop at least a 10-year financial plan to really understand the dollars and cents of the new technology environment. Only then should you start your re-negotiations with the affected vendors. And, during all this, talk to a lot of hosting firms to see what kind of bulk discounts they have with your software vendors.
We need a new set of economics and best practices to deal with the new IT reality. We need a way to measure every cloud, quasi-cloud, SaaS-querade, hosting, etc. option. We need new ways to understand the true costs of operating any of these choices. We need a level of transparency not currently available. And, we need to be able to compare, apples to apples, the return on investment (ROI) or total cost of ownership (TCO) of every option and every vendors’ solution to another. And the people looking to do several interim changes (e.g., from on-premise, to virtual, to private cloud and finally to public cloud) may need these tools sooner rather than later. I suspect that group of software buyers may be in for the most expensive cutover of all but we need the analysis to answer that once and for all.
We don’t have these analysis tools yet. Maybe Ray Wang (@ Constellation Research) will soon have a new buyers’ bill of rights for cloud users regarding this.
(End of 7 part series)