I received this question the other day from a reader and thought I'd open it up to the wider blogosphere for comment. I've included some general guidance on the topic as a starting point but it would be especially interesting if a vendor would like to give their perspective. What does it means to be 'strategic' versus a 'utility' to a client? What types of value added services do you provide and what do you look for in return?
Last week I had the opportunity to present the first half of a teleconference on contract lifecycle management (CLM) hosted by the Institute of Supply Management (ISM) and Zycus. You should be able to view the recording in its entirety within a week or so here. It was a good session covering the basics of CLM as well as some specific best practices so I recommend taking a look. As part of the presentation we polled the listeners on a few key questions and I'd like to share the results as well as some insights.
I just took a briefing from Jive Software about their new innovation management tool, Jive Ideation. The fact that Jive is now formally dedicated to the innovation space is significant – a move that has ramifications for the broader innovation management market, and for sourcing professionals.
Forrester has been covering the innovation management market for several years, and written about it as a “unique” market. We have always, however, recognized that the distinctions between this market and other markets -- particularly the social collaboration market -- were thin.
The arrival of Jive into the ideation space shows just how thin those boundaries are. Jive has made a name for itself over the past few years as a social collaboration tool. The company differentiates on its ability to connect a wide variety of enterprise users (both internal and external), and integrate easily with a host of technologies – making it appealing to a range of business and IT buyers. Since collaboration is a critical component of innovation, its not a stretch to see how Jive’s collaboration tools can be applied to their client's innovation objectives.
I'm currently researching the ROI of the Vendor Management Office (VMO) -- looking to help answer key questions like:
Of the services the VMO provides to the company, which have the most value?
What are best practices for establishing VMO credibility across the org?
How is VMO performance being measured?
With about 25 VMO interviews completed so far I've seen a surprising trend -- when asked what VMO services provide the most value to the organization, contract lifecycle management is consistently front and center.
Now, it makes sense that many VMOs are involved in some stage of the contract as an IT domain expert but these folks are actually taking ownership of the entire process -- building contract templates, authoring, owning the approval and review cycles, as well as ongoing monitoring. Some VMOs are also even leading the charge to bring in new software tools to automate this process and get better control of overall contract lifecycle management (CLM). Why?
Given the unique, complex and risky nature of many IT contracts, the CPO's organization is staying hands off and relying on the IT specialists to create a favorable deal that’s enforceable.
OK, makes sense. Buy why should the VMO really own the process end to end?
My initial reaction is no, it shouldn’t. And many of my VMO interviews agree -- but have still heroically stepped in to fill the void short of an alternative.
I get a lot of input into my research from speaking with software buyers and sellers, which I analyze and process to come up with firm conclusions and recommendations in my published research and forum speeches. I'm going to use this blog to air some work-in-process analysis, to solicit additional thoughts and information from you. Just recently, Ive been considering why people are talking about 'pay-per-use' a.k.a. 'utility pricing' for software, and to me, the disadvantages to buyers and sellers outweigh the benefits.
Software pricing should be simple but fair, value-based, future-proof and published (see The Five Qualities Of Good Software Pricing). Yes, a one-price-fits-all 'per user' fee isn't fair or value-based, but that doesnt justify the potentially horrendous complexity of tracking detailed usage. Role-based user pricing, such as SAP user categories, is a much better way to reflect diverse usage profiles.
Im not arguing against flexible, on-demand services, particularly for temporary needs, such as renting some CPU power for a few hours. I'm concerned about pay-per-use pricing models for regularly used applications. To me they would be:
Microsoft announced on Friday that it will stop selling new Select licenses from 1 July, 2011. Customers with existing agreements can renew them for another 36 months, as per their agreements, but the replacement Select Plus program is likely to be a better option. Microsoft launched Select Plus on 1 July 2008, and I wrote at the time that it was an improvement on the basic Select structure: Microsoft Simplifies Its Volume Licensing.
However, Microsoft's pricing team struggled to persuade its LARs to promote Select Plus over the more familiar Select agreement, and customer adoption was disappointing. So the decision to drop the older program makes sense for Microsoft, because it will force its channel partners to embrace the new model. And its no bad thing for buyers - you've one less choice to make, and there's little negative impact.
The biggest advantage of Select Plus for sourcing managers is that they no longer need to submit a three-year spending forecast - this is extremely difficult for central teams buying on behalf of autonomous business units that won't havent planned Microsoft technology adoption that far out. Instead, pricing works like an airline loyalty program, on the current and previous years' actual transactions, as the figure below from my report illustrates. My report explains some more advantages, such as the flexibility to opt tactically for software assurance on individual purchases.
Hopefully you’ve all read SAP’s co-CEO’s open letter to you (http://ceos.blogs-sap.com), and also some of the great responses such as this one: http://bit.ly/b5foPD . With all these open letters flying around, I thought I’d write a slightly different one. Unlike most of my fellow commentators, I’m not going to tell SAP how to run its business. Instead, I’m going to give you, its customers, a suggestion on how you can cut the cost of your SAP environment. You ready? The answer is “buy less stuff from them”.
Actually, it is not as facile as it sounds. Many companies that I speak with automatically favour their incumbent vendors for new projects, while their IT vendor managers complain to me about their negotiation impotence. You won’t be able to get the contractual protection you need, such as limits on CPI maintenance increases, unless you make them a condition of future purchases. Large software companies such as IBM, Oracle and SAP focus predominantly on license sales. It wasn’t customers’ unhappiness, resulting from the Enterprise Support blunder, that caused SAP to fire its CEO and rethink its approach. It was the fact that you showed that unhappiness by voting with your purchase orders, delaying projects, going to competing vendors, and causing SAP’s license revenue to plummet. When Jim and Bill promise to “accelerate the pace of the innovation we deliver to you”, the d word is a euphemism for ‘sell’.
The SAP services market is undergoing significant change: provider consolidation, changes in pricing models, new delivery options, and cloud-based deployment. At the same time, firms are entering 2010 with an eye to growth and business strategy enablement, after significant focus on cost-cutting during the recession. Firms struggle with finding the best services provider for their SAP project and the best delivery, pricing, and deployment models to ensure value, ROI, and success in achieving business goals,. Increasingly, firms are also considering Cloud and SaaS delivery models.
SAP users wondering about the latest trends in SAP services – from pricing models to multi-sourcing to cloud – are welcome to join us for an interactive session next Thursday March 25th. Moderated by Forrester’s George Lawrie, Bill Martorelli, Euan Davis, Stefan Ried and I will lead an interactive discussion around:
- SAP services provider landscape. The market has undergone significant consolidation, with major acquisitions by firms like PwC (BearingPoint), Xerox(ACS), and Dell(Perot) as well as numerous smaller acquisitions. Leading India-based firms have rapidly built their strategy consulting capabilities and now challenge the MNCs in higher value project work.
- Offshore delivery. Offshore ratios have grown extremely high. Implementation and project work is commonly 60% or more offshore; support and maintenance work surpasses 90%. Firms’ offshore strategy is broadening beyond India into geographies such as Latin America, China, and Philippines.
- Outsourcing and AMS work. Firms weigh the trade-offs between single-sourcing their project across implementation, AMS, and hosting versus using multiple providers. Firms also struggle with pricing models and SLAs, with many firms exploring outcome-based pricing models that shift risk to their provide. Outcome-based pricing also provides a potential foundation for innovation and savings beyond labor arbitrage.
In my recent interviews with IT services providers on the topic of innovation, one of the key findings was the many different ways in which innovation can be categorized. Some companies view innovation as simply an extension of their traditional R&D capabilities, others view their innovation as a way to prove their thought leadership, still others view innovation largely as a strategic marketing imperative. Sometimes, it’s a combination of these factors.
One interview that stood out was with Lem Lasher, the Chief Innovation Officer (and Global Business Services President) at CSC, who described to me a deep and holistic approach to transforming CSC’s innovation capabilities. Three things that stood out at me about Lem’s approach: