Is Software Pricing A Science Or An Art?

I’ve been with Forrester for just over a month now. It’s great to be involved with our clients and communities and to be helping businesses across the world evaluate the quality of software suppliers' proposals from a commercial perspective (e.g., is this a great deal or can the supplier do better?). One of the best parts of being at Forrester now is seeing the continuation of the work I did prior to joining Forrester — advising businesses on software contract and pricing negotiations. One thing I noticed then, and continue to hear about now, is the reluctance of software suppliers like IBM, BMC, CA, and Compuware to publish meaningful list prices or to explain how their price book worked or how discounts had been determined. Time and again I had to ask suppliers to un-bundle prices and confirm the basis for the net prices they were proposing. Does anyone else agree with me that pricing should be clear and transparent and not a black art?  

Here’s an example of an “art” that should be science: list pricing. While it’s logical to think list pricing is the same foundation upon which all bids are built, that’s actually not the case. Often, I found that my clients were being quoted “list pricing” that was different. Isn’t list pricing supposed to be the same by definition? Which is why you may with good reason doubt the validity of a list price or the competitiveness of a discount that you’re being offered by a software supplier. It’s why I love my work, and why you should make sure you get third-party validation of your deals.

How you do validate your software vendors’ list pricing and proposed discounts?

Herculean Buyers, Lions, And Hydra — Do You Want One Throat To Choke, Or Reps That Understand The Products They’re Selling?

The proposed acquisitions of SuccessFactors by SAP, and of Emptoris by IBM got me thinking about the impact on buyers of market consolidation, in respect of the difference between dealing with independent specialists versus technology giants selling a large portfolio of products and services. Sourcing professionals talk about wanting “one throat to choke,” but personally I’ve never met one with hands big enough to get round the neck of a huge vendor such as IBM or Oracle. Moreover, many of the giants organize their sales teams by product line, to ensure they fully understand the product they are selling, rather than giving customers one account manager for the whole portfolio who may not understand any of it in sufficient depth. Our clients complain about having to deal with just as many reps as before the acquisitions. They all now have the same logo on their business card, but can’t fix problems outside their area, nor negotiate based on the complete relationship. It seems that buyers end up like Hercules, wrestling either with a Nemean lion   or with a Lernaean hydra.

The acquirers' press releases tend to take it for granted that customers will be better off with the one-stop shop. Bill McDermott, co-CEO of SAP, said, “Together, SAP and SuccessFactors will create tremendous business value for customers.” While Lars Dalgaard, founder and CEO of SuccessFactors, talks about “expanding relationships with SAP’s 176,000 customers.” Craig Hayman, general manager of industry solutions at IBM, said, “Adding Emptoris strengthens the comprehensive capabilities we deliver and enables IBM to meet the specific needs of chief procurement officers."

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Stormy Weather's Ahead For The IT Services Industry?

Infosys recently published strong fiscal Q3 results as revenue growth and operating margins were boosted by a falling rupee (down a sharp 11% sequentially). For the full year, however, the company revised its forecasts in dollars from 19% to 16% for FY2012 (April 2011 to March 2012) on account of a slowing business in Europe.

Forrester expects marginally slowing growth in the global IT services market, dropping from about 7% growth in 2011 to 6% growth in 2012 (read Andy Bartels’ tech market outlook for 2012 here). Most of the slowdown effect will come from the debt crisis in Europe. Growth in emerging markets like AP should remain strong in 2012 (read my report with Andy Bartels here), although this growth will not be large enough to offset a slowdown in mature markets.

I look forward to having updates from Wipro, TCS, and HCL this week to see if we can “generalize” Infosys’ guidance to the overall IT services industry. Until now, Indian IT companies’ growth and margins have been protected thanks to a weakening rupee. I believe that this situation combined with slower growth in the US and Europe will lead to a price war between vendors as they try to build volume.

What does this mean? As economic uncertainty looms in 2012, I believe IT services companies will have to accelerate their transformation toward software capital intensive models. In my upcoming report (“Solutions Accelerators — A Reality Check” to be published in April 2012), I will look at how far they have gone in this transformation and what the key success factors are going forward. Stay tuned.

Mo' Data, Mo' Problems

Big data is a big topic these days, with companies aggregating consumer data and contracting with third-party marketers to mine it.  However, an unforeseen problem arises around unclear data ownership. This is a problem because companies are packaging your data and selling it.

Take the following case — a client was looking to have a marketing company take its point-of-sale (POS) data to prepare email campaigns. Upon closer review of the contracts, data ownership was ambiguously defined and nested in three separate areas: the Master Services Agreement (MSA), SOW, and an addendum. When you trace the definition through the various documents, the only thing made clear on data ownership was that the campaigns resulting from the ETL (extract, transform, load) process were owned by the client. What about the POS data that was sent over to the marketing services company? 

In a conversation with a data expert at a retail-focused marketing services company, they package your POS information and sell it to other buyers, thus creating an additional revenue stream. Disturbingly, clients are unaware this is happening and don't share in any of the profits.

Here's what to do to mitigate the issue:

  1. Ask the company if it is packaging up your data and selling it. If it is, is there an opportunity for your company to collaborate? What's your company's internal position on this? Identifying intent and understanding your options will help you define the data protection or partnership language you want to think about before contract negotiations begin.
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MNCs Are Trying To Uncover The Value And Vendor Options For 'Global' Mobility Management

I've had several conversations with Forrester IT clients in sourcing and vendor management and infrastructure and operations roles during the past few months about how-when-why-who to outsource mobility management. The top drivers identified are: 1) concerns over perceived and detected escalating international mobile roaming costs and how to avoid/stop/reduce them; 2) corporate-level sourcing strategies to consolidate vendors in order to reduce the burden on stretched IT and administrative resources responsible for telecom services contract negotiations, and invoice processing and chargeback; and 3) a need to understand whether a move to more individual-liable user (ILU) mobile services to respond to consumerization and user demand for more choice in smart connected devices (including personal) would erode corporate contract price benefits and also increase IT support burden. I generally recommend they start by conducting an audit of their mobile spend using a third-party service, and then poll heavy users and their managers about interest in, and support and subsidy expectations in bring-your-own-device (BYOD) programs. Next, firms should reach out to two or three of their main mobile service providers, like Vodafone, AT&T Mobility, Verizon, Orange, Sprint, and Telefonica about their telecom expense management (TEM) and mobile device management (MDM) capabilities, and about ILU programs that might even benefit rather than erode the company's price discounts for corporate-liable user (CLU) accounts, and even contribute to meeting overall telecom revenue commitments under a Master Service Agreement that includes fixed-line services (if they have any). There are several dozen (albeit mostly small and privately held) pure-play TEM providers that offer telecom audit consulting, either specifically focused on single-country or regional mobile services or more broadly on multicountry fixed-line and mobile telecoms. The large global systems integrators

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President Obama’s Call To Action: A Serious Boost For Domestic Outsourcing . . .

Forrester clients are looking for more options when it comes to IT service and outsourcing providers, and there’s a new option available to them: domestic outsourcing.

For many years, India has been the answer for large companies that need to save money and increase their IT bandwidth. Indian vendors, in fact, revolutionized the IT services industry by delivering higher quality, lower cost services with a never-let-the-client-down mentality. Now, however, the market has “overcorrected” in terms of outsourcing IT work. Companies, whether they work with a pureplay Indian vendor such as Infosys or a US-based vendor such as IBM, have to buy the bulk of their programming talent from India.

Unfortunately, today, India is not the best delivery location for all IT work or for all companies.

First of all, India is overworked — some might even say tapped out. The excess demand for Indian labor has meant that clients are less satisfied with their offshore IT services:

  • Costs are escalating and narrowing the gap relative to US costs.
  • Employee turnover is too high.
  • Time-to-market is impacted by rework and time zone issues.
  • C-Player and “fresher” syndrome reduce quality and productivity further.
  • It is increasingly difficult to land offshore resources onsite using H1B and other visas.
  • Communications challenges persist and are exacerbated by the increasing use of Agile methods.
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