The Story: Look in the mirror, Mr. or Ms. IT buyer. You’ve got more muscle than ever — and you did it without steroids.
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Despite the wave of consolidation sweeping the industry, buyers have actually gained more leverage than ever when it comes to making deals with their vendors, notes a PricewaterhouseCoopers analysis. “Software buyers need to realize that the pendulum is beginning to swing in their favor and that there are an increasing number of alternatives in today’s software market,” concurs Gartner analyst William Snyder (no relation to this writer).
There are a lot of reasons for the swing, but one certainly stands out: The shift to SaaS (software as a service). The poster child for this phenomenon is Salesforce.com. "Both its development and delivery models are having a disruptive effect on the entire CRM market,” notes Forrester Research analyst Bill Band. But it’s not just Salesforce: By 2011, Snyder says, fully 25 percent of all new business software will be delivered as a service as Salesforce and other vendors push upstream from the small-business market. Already, SaaS providers make up the majority of sales for several segments of human resources applications, and is well-established for supply-chain management.
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SaaS is just the first wave of services that are pushing pricing power over to buyers: The more recent move to Web services and the beginnings of SOA (service-oriented architecture) deployment are encouraging the use of modular software, which in turn cuts development costs, makes it harder for vendors to sell expensive suites, and lessens the need for expensive consulting services.
And yet another factor is upping buyer’s power, notes Gartner’s Snyder: the emergence of third-party support options that are reducing software’s TCO (total cost of ownership). “Maintenance services have been a quasi-monopoly for software vendors,” he said. “For many years, only the software vendor had rights to the source code of the critical components of the system. This made it impossible to go to an open, competitive market to obtain upgrades, services and support, which in turn made it impossible to negotiate maintenance fees.”
Interestingly another software trend — the growth of virtualization — is beginning to affect pricing for hardware, particularly servers. A report by Infiniti Research suggests that server shipments will start declining in 2008: “The server market of tomorrow will be a value game and not a volume game.” And that means better pricing for hardware, too.