Software-licensing costs predicted to fall

Analysts suggest that software vendors' profit margins will be reduced in coming years, as trends such as SaaS and SOA give buyers more bargaining power
Written by Andy McCue, Contributor

Software licensing costs are set to fall over the next decade as IT industry trends converge to give buyers more bargaining power.

Analyst Gartner predicts vendors will find themselves increasingly challenged as IT departments look to reduce software costs as they have done with hardware and services.

In a research note Gartner vice president William Snyder said: "Up until now the unique nature of the software market has meant that buyers had very little negotiating power after the initial purchase of a software licence. We expect those dynamics to change considerably over the next five to 10 years giving CIOs and software procurement officers more bargaining power while potentially reducing software vendor profit margins."

Gartner has identified seven major trends converging to change software delivery models, reduce dependence on the giant application vendors and force prices down.

These include business process outsourcing; software as a service (SaaS); low-cost development environments, such as China and India, combined with modular architectures and service-oriented architectures; the emergence of third-party software maintenance and support; growing interest in open source; the rise of Chinese software companies; and the expansion of the Brazilian, Chinese and Indian markets.

Although Gartner says open source won't topple the likes of IBM and Microsoft, the analyst believes it will put pressure on traditional software margin structures, particularly in areas such as servers, operating systems, development tools and database technologies.

Gartner also predicts a quarter of all new business software will be delivered by SaaS by 2011.

Synder said buyers need to realise that the pendulum is beginning to swing in their favour with an increasing number of alternatives in the software market.

He said: "We would advise IT organisations to use BPO and open-source alternatives to improve their negotiating power with software suppliers as well as employing the emergence of third-party vendors as a means to reduce higher maintenance fees on older versions of software. Costing out the possibility of using offshore skills to build application functionality as web services will also help negotiations with vendors."

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