When Oracle released version 6 of its database, Jay Hemmady, then CIO of an information services provider in the trucking sector, decided it was time to take a calculated risk. Knowing Oracle was in a tough financial position, "we took the opportunity to negotiate incredible pricing," Hemmady says. But Hemmady and his team didn't stop there. They locked in provisions for future licensing as well. "Even five years after signing up with them, our licensing and support costs were unbelievably low," he adds.
Hemmady's triumph provides a fourfold lesson for IT buyers in search of a great deal: Arm yourself with the right information; know when you have leverage and use it; negotiate for the future as well as the present; and take a calculated risk once in a while -- as long as you know that's what you're doing.
If you don't, you may not sense when a deal is too good to be true, such as one cut by the CTO of a well-known nonprofit organization. "We got a great deal on some vertical, not-for-profit software from a second-tier vendor, only to realize later that we were their largest customer," says the CTO, who prefers to remain anonymous. "It soon became apparent that they couldn't really support us adequately and didn't really understand what we were looking for."
As this CTO experienced firsthand, enterprises don't merely shop for products; they form relationships with vendors, healthy or dysfunctional. Understanding how to build good relationships and how to leverage them -- and knowing when to step outside them -- is key to cost-effective IT purchasing. Learn the ropes, and you can maximize whatever resources are at your disposal.
1. Consider Your Needs
The first rule is to understand your own requirements -- not just current ones but your best guess at what you'll need down the line. "Know going in, 'Here's what we need today; here's what we'll need six months from now, a year from now,' " says Randy Kerns, senior partner at Evaluator Group, an analyst company that specializes in storage.
Michele Pavlyak -- author of Systems Survival Guide and founder of Linchpin Manufacturing Specialists, a consultancy that specializes in manufacturing performance and development -- believes that poor preparation for the purchasing cycle is rampant. "Many companies start the purchasing decision process in the middle," Pavlyak says. "They have a vendor come and knock on the door; or a system is outdated, and they just jump into a new one without really understanding what they need."
Not only does developing a deep view of current and future requirements help you find solutions for real rather than imaginary needs, but it also exudes a sense that you're in it for the long haul when it comes time to negotiate pricing. "You will be able to tell your vendor in very specific terms, 'Here's where I'm going, and you can be a part of it,' " Evaluator's Kerns says.
2. Know Your Vendor
After you've gone to school on your own organization's needs, find out all you can about your vendors and resellers. Good vendor relationships are valuable, but during negotiations your vendor is an adversary. "Vendors may describe your relationship as a partnership, but they're still in the business to make money," says Mike Chuba, research director at Gartner.
"It's very important to know the vendor's fiscal year and the compensation plan of its salespeople," Chuba says. "Do your best to get to know their incentive plans for various mixes of products and new products. Find out what is in the sales reps' best interest." All that information is ammunition for negotiation. Chuba adds that salespeople will often volunteer this information.
"Try to time your purchases to your vendor's end of year or end of quarter -- especially with software," Hemmady says. Sales representatives are often under a lot of pressure to meet sales quotas at those times. Hemmady adds that some vendors, particularly those from the second or third tier, are under so much pressure when a fiscal quarter or year is ending that they'll often approach you. "They'll say, 'Hey, I'll give you a phenomenal deal for the next five days,' but if you don't have all your ducks in a row, you won't be prepared to take advantage of it. If you know what you'll be buying anyway in the next six months, you'll be in a better position," he advises.
3. Know Your Vendor's Products
Gartner's Chuba also advises buyers to learn where vendors' products are in their lifecycles. "If a product is right out of the chute, you can be pretty sure there's pent-up demand, and it will be harder to get big discounts off the list price. As the product sits in the market longer, say a year, the likelihood that you can get larger discounts is greater." He adds that most vendors are willing to give you very detailed information about their product road maps.
Evaluator's Kerns advises that you know where the margins reside for the vendor. "In storage, the margins are much higher in storage management software than they are in the hardware itself. If you understand that selling you the management software that comes with the hardware is a boon for them, you'll know where there's more price flexibility."
Chuba adds that, as when buying a car, you want to know as much as possible about the vendor or reseller's cost. He suggests checking out data from the Transaction Processing Performance Council, which has discount pricing information for hardware, software, and maintenance.
4. Create a Competitive Climate
Don't allow a good relationship with a vendor to get in the way of making that vendor compete for your business. "We're very strong on vendor and reseller relationships," the nonprofit CTO says. "But it doesn't mean we don't pit one vendor against another when it's time to make a purchase." The CTO adds that his company has a very strong relationship with Hewlett-Packard but often uses "that four-letter word, 'Dell,' " in negotiations with HP. "That's what often gets them to readjust the price."
Kerns goes a step further to recommend an 80/20 rule. "Buy 80 percent from one vendor and 20 percent from another. The vendor that has the 20 percent will work very hard to get that 80 percent, and the vendor that has 80 percent will see what he has to lose if he doesn't compete," he says.
Gartner's Chuba says that for certain commodity areas such as PCs and low-end servers, it's foolish not to get competitive bids. "It's always good to bring in a wild card. If you go with HP and IBM all the time, throw in a smaller vendor to shake things up."
"Software licensing costs are a direct function of the vendor's market share," Hemmady says. "You'll get much more flexibility if you add vendors to the mix that are not market leaders." Everyone also agrees that you should keep those competitors in the mix until the very last stages of negotiations so that you always have a plan B and never lose your negotiating leverage.
5. Use Your New-Customer Advantage
Keeping existing vendors on their toes is one thing, but you always have the most leverage with that first sale, particularly if you're a large enterprise. Ask for the moon. "Vendors realize that once they have your business they'll be in the powerful position of incumbent for future business," Evaluator's Kerns says. "Otherwise, they know that they probably won't get another shot for three years or more. That's when you should go for everything you can get."
In that magic moment when the relationship starts, everything is negotiable, Gartner's Chuba says, "including that subsequent upgrades will not exceed a certain pricing level. If you run into resistance, go for an extra year of warranty coverage or maintenance. Vendors are usually willing to trade off downstream revenue to get that deal today."
By the same token, the first contract is the one that demands maximum vigilance. Hemmady feels that with those first sales, customers often forget important details that will cost them later. "You want answers now on how much additional software licenses will cost five years from now, including maintenance on those licenses," Hemmady says. "Make sure the percentage they charge you for maintenance is based on your negotiated price, not list. And ask them to throw in some free training and consulting."
You also want provisions for discontinuing licenses you don't use. "Six months later, your CEO may buy another company or divest the part that's using that software," Gartner's Chuba says. "Or you may think you're getting the right product, but the vendor goes in a different direction, and your product gets dead-ended." And for the same reasons, you don't want to lock yourself into an agreement that spans too many years. "A vendor may give you a better discount for a five-year contract vs. a three-year contract, but you may discover two years into the agreement that things didn't play out the way you thought."
6. Consider Alternative Software Lifestyles
Software as a service, in which a vendor hosts an application and offers it for little or no up-front cost, can provide a welcome alternative to traditional software licensing. Give this option serious thought, especially for apps that are labor-intensive to maintain but require little customization and are not core to your business.
For example, Kennametal, a global manufacturing enterprise, uses
e-procurement services from Ketera to manage and enforce purchasing across all its locations. "We discovered in our interviews with early adopters that maintenance of catalog and content data was extremely costly," says Jim Cebula, director of global purchasing at Kennametal. "We decided that it made sense to let the vendor manage all that for us." As a result, Cebula estimates that its costs were reduced from seven figures to six figures.
Open source software offers an even more obvious route to lower software costs. Hemmady, who uses a significant amount of open source software, feels it works best for organizations that already have a decent-size IT staff and for open source applications that have attained a certain critical mass. "With critical mass comes a great degree of contribution from the open source community that results in a less buggy and far … richer feature set," he says. "And the nice thing is not having any surprises from vendors that change their licensing to effectively raise costs."
7. Recruit the Right Negotiators
Perhaps the best buying advice of all is to know your limitations. IT managers aren't necessarily good negotiators, nor do they always have an intimate understanding of all the business units being served. "Many companies have actual individuals in the purchasing department that are trained contract negotiators," Linchpin's Pavlyak says. "You'll be a lot better off having them negotiate the deals."
Cebula says that, at Kennametal, IT never negotiates its own purchases. "The business units help define requirements; IT provides technical information and specs. IT and purchasing choose the vendor together, and then purchasing conducts the negotiations."
You might also consider hiring a consultant to negotiate for you. Miro Consulting in one such company specializing in helping Oracle clients structure and restructure Oracle contracts to drive down costs, a particularly useful service for software with complex licensing. "It's like hiring an accountant to do your taxes," says Miro CEO Scott Rosenberg. "You do this once a year. We live and breathe this stuff." Linchpin's Pavlyak advises, however, to beware of consulting companies that are aligned more with the vendor than the customer.
In the end, getting the best deal is not that different from other IT functions. It's all about gathering the right information, doing the right planning and preparation, cultivating the right relationships, and using the right people for the job. It's also about not being afraid to ask for what you want, no matter how unlikely it might seem at the time. Whether you're renewing a 1,000-seat license or buying a handful of low-end servers, a few simple strategies can reap significant savings -- and help you avoid those land-mine deals that are too good to be true.