Firms must exude knowledge in software negotiation

More delivery options mean more bargaining power and also more complications in sealing software agreements, say observers, who advise IT buyers to know their business' software needs and not buy into hype.
Written by Jamie Yap, Contributor

The rise of cloud, virtualization and open source software (OSS) has given IT buyers in Asia more software choices and greater bargaining power, along with greater risks of making bad business decisions, say observers. Their number one advice? Understand precisely what the company's software needs are, and do not be swayed by hype or price.

Having more software options not only gives IT buyers more bargaining power at the negotiating table, they also have the flexibility to tailor their software expenses to their organization's forecasted business needs, said Matt Healey, program director for software and services, IDC Asia-Pacific.

Ray Wang, principal analyst and CEO of U.S.-based Constellation Research, also noted there has been renewed focus from software companies to grow their business in the Asia-Pacific region, making the market and product price-points highly competitive.

But observers cautioned that the greater variety of choice also creates more confusion and room for decision errors.

Rohit Partha, Asia-Pacific industry analyst for ICT practice at Frost & Sullivan, noted the increase in options creates a more complicated process of buying software and putting together a sales agreement. SaaS or cloud services, for instance, appear to have lower upfront and switching costs than traditional offerings, but they may include other hidden costs and risks, Partha said.

At the same time, multiple options introduce more complexities in current IT systems, increasing the risk of bad decision making, he added. So companies will have to spend more time and money analyzing their needs to come to the right decision, he noted.

Still, Healey pointed out that the good news is that as software investment increases in Asia-Pacific, companies--especially those in emerging markets--can learn from the mistakes of companies in the United States and Europe. He added: "There are more buying options and so greater opportunities to future-proof."

The analysts offer five tips for companies negotiating software agreements:

1. Do your homework.
As a starting point, companies must conduct extensive research about their own software needs and goals.

Partha highlighted that enterprises will only be able to negotiate from a position of strength if they do their "due diligence" and know exactly what their software and organizational business needs are. These include which and how frequently applications are currently being used, the kind of users using them, how their business is growing, and what service level agreements (SLAs) will be required.

Healey said: "This comes down to doing your homework. If you think you can walk in to a negotiation without having prepared, you'll be in bad shape."

The IDC analyst also recommended that research not only be done internally but externally as well, such as talking to vendors, independent service providers or consultancies, and the wider IT community for peer recommendations.

2. Pick what's right for you.
This means not falling for hype or the cheapest price.

Wang said it is critical companies first align their business requirements with their software needs before deciding which vendors to select, and then determining price.

"Form follows function. Get the deal you deserve," he said. "Oftentimes, the rush to getting the lowest cost deal can muddle decision making, leading to a great price on licenses and a long-term cost structure burdened by customizations, expensive implementations and unsupportable code."

Healey similarly stressed the importance of choosing the right software vendor, considering companies do get caught up with marketing and media hype. They need to consider whether a software application offers a functionality, regardless of how exciting the news headlines make it appear, that is truly needed in the first place.

Furthermore, enterprises must ensure a software vendor's long-term product roadmaps are in line with their company's needs, he added. For instance, for companies that have a mobile workforce, a vendor investing a lot into making software for mobile devices may be of higher worth to the company.

3. Never underestimate maintenance cost.
Companies have to pay attention to how much maintenance will cost, said Healey, who noted that this can account for between 70 and 90 percent of the total cost of ownership (TCO) for software.

IT buyers should not get "sucked into" comparing the initial price of one vendor versus another, which is a very common mistake, he added.

"Software vendors know this. They're very willing to cut down the initial price, especially for software that's meant to be deployed for the next 10 years. They can make up the loss by the second or third year of maintenance," he said.

The IDC analyst also advised that employees looking after the company's capital expenditures and maintenance budget should both be present at the negotiation table.

4. Don't be shy.
IT buyers should never hesitate to ask vendors for concessions.

Partha pointed out: "Software vendors do have standard discounts that they offer without much prodding." Timing negotiations at the end of the quarter or of the vendor's fiscal year can also put the buyer in a better bargaining position, he added.

Companies should also speak up when discussions involve clauses in agreements, he said. For instance, enterprises should assess formal benchmark clauses, he added, noting that given today's age where new technologies and models emerge by the day, companies may realize--midway through their contract period--that terms they previously agreed to are not in line with market standards.

5. Aim for win-win deals.
Constellation Research's Wang pointed out that if companies want to secure the upper hand at the negotiation table, they should strive to create a win-win for both sides, rather than create a power-play with vendors.

"At the end of the day, this is like a marriage and long-term partnership," he said. "The software vendor can only succeed if the customer is successful. The customer is only successful if the software vendor provides their best capabilities."

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