Previously Microsoft tried to discourage customers from using virtual desktop infrastructure (VDI) on top of rival operating systems by applying complex licensing rules involving various TLAs such as RUR, VDA and CSL (which I’m not going to explain here, because they are, thankfully, no longer needed). The USL is far simpler - clear Windows licensing replacing translucent frosted glass, so to speak.
I've just published a Quick Take report that explains why the Nevada District Court’s recent decision on some of the issues in the four-year-old Oracle versus Rimini Street case has significant implications for sourcing professionals — and, indeed, the entire technology services industry — beyond its impact on the growing third-party support (3SP) market.
Transformation Should Focus On Improving Outcomes, Not Merely On Increasing Competition
I’ve spoken with many IT Procurement leaders in public sector organizations ranging from US county schools districts to national governments. Most are prevented from applying best practices such as Strategic Software Sourcing by their politicians’ ill-conceived edicts and directives, such as those included in this announcement by the UK’s Cabinet Office that optimistically claims “Government draws the line on bloated and wasteful IT contracts”. In related press interviews the relevant minister Francis Maude complained that “a tiny oligopoly dominates the marketplace” and talked about his intention to encourage use of open source alternatives to products such as Microsoft Office, to increase competition and to divert more spend to small and medium-sized IT companies. The new edicts include bans of contracts over £100 million or 2 years’ duration and of automatic renewals. Mr. Maude claims these rules “will ensure the government gets the best technology at the best price”.
Mr. Maude and his team have a laudable and important goal but their approach is misguided, in my opinion. Short term contracts, indiscriminate competition and avoiding sole source category strategies will deliver neither the best technology nor the best price, because:
Many of you will be in the midst of a negotiation with SAP at the moment, because SAP does about 40% of its license deals in the October to December quarter. It’s a sourcing cliché that software companies give their best discounts at their fiscal year end, but just because you are making a purchase in month 12 doesn’t mean that you are getting a good deal. I see a lot of SAP proposals and contracts, and I’m often surprised by the gulf between the actual deal on the table and what I would consider to be an acceptable proposal – one that sets the relationship up for mutual success, balancing price, flexibility and risk.
Buying software from powerful providers such as SAP is very different from buying hardware, services and non-IT categories. Unfortunately, many sourcing professionals seem to think that they’ll look weak if they engage expert help to coach them during a negotiation, but it isn’t a question of haggling skills, it’s a question of deep, current market knowledge. Unless you have that, you risk:
I’m part of a team called “sourcing and vendor management” (SVM). Forrester organizes its research teams by individual client roles, so my teammates and I all focus on helping clients who are sourcing and vendor management professionals. Wait a moment. Should that read “helping clients who are sourcing or vendor management professionals”? Aren’t they separate functions within a client’s organization? This is a frequent question from our clients, and one that causes a lot of internal debate within our team.
My view, formed from witnessing the experience of hundreds of enterprises, is that, at least in the software category, sourcing and supplier management should be very closely linked, but not via org structure and reporting lines. This is because:
· It is impossible to manage software suppliers effectively unless you can influence sourcing. The major players are so big and powerful that they usually have the upper hand in discussions about maintenance renewals and service levels. Even small software providers can build immovable, entrenched positions in their chosen niches. To have sufficient negotiation leverage to do a good job, the supplier manager must be able to credibly threaten to negatively impact the supplier’s ability to win future business.
· Sourcing is infrequent but intensive, whereas supplier management is continual. The former consumes huge amounts of time and effort for a relatively small period, which risks dropping the ball on monitoring while you’re immersed in a big negotiation, or missing opportunities on the sourcing side due to distractions from the ‘day job’. You therefore need different people handling each side, but collaborating closely with each other.
Sourcing professionals already understand the importance of monitoring financial performance to assess risk in their key suppliers’ ability to deliver commitments. Sometimes sourcing professionals can also find valuable negotiation leverage in the financial results of their key suppliers, as is the case with Oracle’s Q4 2013 numbers . In my opinion, the revealing aspects that you can use to increase your bargaining power over the next couple of quarters, include:
Many clients ask me for help in dealing with very large software companies who, in their opinion, always seem to have the upper hand in negotiations. "How can I make myself less dependent on X?" they ask, or "how can I cut the amount I have to pay Y each year?" They're CIOs or sourcing professionals who are used to being able to push suppliers around, threatening to kick them out if they misbehave, and they struggle to accept the reality that their normal tactics won't work with the likes of IBM, Microsoft, Oracle, SAP. My advice is, get used to it. These companies have grown so big and profitable that they will dominate the business technology market for years to come. Yes, they will face competition from younger companies, but they generate so much cash and have such strong embedded positions in so many enterprises that they can always acquire the upstart, or develop a product that beats it in most deals.
However, the software giants' huge power isn't necessarily a bad thing. Their scale enables them to spend far more money on development than their smaller rivals, and this usally results in excellent innovative products. Yes, they can also be inflexible, siloed, frustrating, bureaucratic - but when it comes to software development, size matters. So there really isn't much point in questioning whether the world would be a better place if these companies were much smaller than they currently are. Instead, we should accept reality and learn how to survive and thrive under their rule.
I help hundreds of technology buyers each year to understand the impact of technology changes on their software contracts, but I also get questions from software providers about how best to price their products. Some are bringing new products to market and want to know how to maximize revenue, while others are struggling with obsolete metrics such as per processor and want to update their pricing for the modern mobile, cloudy world. The answer is usually to find licensing metrics that make their pricing value-based while balancing simplicity and fairness. The more value a customer gets from your product, the more they should be willing to pay for it. If you make your pricing too simple then you won't match value sufficiently closely, which will cause you to price yourself out of some deals and leave money on the table in others. If, OTOH, you try to match value too precisely you risk making your pricing so complicated that buyers will reject it, and you, completely.
For example, suppose you have a product that will help people do their jobs better, so you decide that charging for each user will be a good approximation for value. The potential problem is that not everyone will use your product the same, in terms of depth of functionality and/ or frequency of access. Your single per user price will be unfair to companies with long tails of light, infrequent users, for whom you'll therefore be too expensive. Conversely your pricing will be unfair to you when the customer is mostly power users. To make your pricing fairer you could have different prices for different categories of user, but then you risk being criticized for being too complex.
On Monday, SAP communicated that it will increase the price of standard support on new contracts by 5% from July 15, 2013, from 18% to 19%. SAP’s announcement claims that the increase is necessary: “In order to ensure the same high level of quality support in the future.” That justification is disingenuous, in my opinion. SAP already makes a very healthy profit on maintenance. (SAP does not report its margin on maintenance revenue. For 2012, it reported 81% gross profit on software licenses and maintenance combined.) Moreover, third-party support providers (3SP’s) like RiminiStreet can provide better support at half the price or less.
SAP’s other justification is equally unconvincing. It states that within the standard support package “there is ongoing expansion of value, for example a continuous flow of innovation through Enhancement Packs.” SAP reinvests 14% of its revenue in R&D, but I estimate that 90% of that goes on developing new products such as Hana that you have to pay again for if you want them. (SAP disputes this estimate but did not provide an alternative figure.) That would mean that Enhancement Pack development represents around 1% of revenue, insufficient to justify charging double what 3SP’s charge, let alone a 5% price increase.
Avoid the 2013 holiday rush – start your year-end software negotiations now! Have you just about recovered from several adversarial, transactional software procurement negotiations last month? Have you resolved to avoid a similar situation next year? Then Forrester’s Strategic Software Sourcing Playbook can help you.
Apparently 38% of Americans made weight-related resolutions in 2012, and 67% of people with gym memberships never use them. So my advice is to shun anything you’ve seen in a TV infomercial (“we called it Lunacy because you’d have to be mad to buy it”) and instead make your New Year's resolution to be more strategic and proactive in your software buying in 2013. Our Playbook, launched today, explains how to do that.
Reactive, adversarial software buying is ineffective in the new business technology (BT) world of self-provisioning, cloud deployment, and mobile access. IT sourcing professionals' colleagues bypass them in the sourcing process, while powerful technology vendors expect more revenue from them than they can afford to provide. Software sourcing professionals rarely have alternative suppliers that they can use as negotiation leverage, so you need something more than your natural charm and belligerence if you are to be effective. Forrester's solution is a strategic approach that aligns the commercial model for each supplier with its place in the enterprise's software sourcing strategy.