"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.