Software vendors -- fear and loathing

America’s software industry is the most innovative in the world but an open secret clouds its success -- the industry’s customers fear and loath their software vendors, especially the most successful ones. The problem isn’t the products. Indeed, they frequently draw rave reviews. The problem is the industry’s sales model.

techfear
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Loathing

Every CIO who has ever dealt with a Fortune 500 software vendor has a story to tell.  Software vendors provide poor support, use confusing license terms to later ambush their clients with software audits, charge for every enhancement … the list goes on and on.  Customer surveys reveal deep dissatisfaction with software vendors.

For most customers, this is a way of life.  Indeed, it has produced its own echo system.  As I've noted before, a whole industry has grown up around managing software licenses.  Entire conferences focus on how to read Microsoft licenses.  Companies hire asset managers and consultants; law firms specialize in interpreting software licenses.

Fear

But no one wants to talk about these issues, at least in public.  Consider this example from a story on Forbes.com, "Oracle plays hardball, so what else is new?"  The piece quotes one CIO complaining that “Oracle and SAP are necessary evils.  You can’t not use them, but they are extremely painful to be in relationships with.”  The CIO is not named, however; the story notes that he or she “requested anonymity.”

Why?  Because the most successful software firms are masters at high-pressure, bullying sales tactics.  Take Oracle.  The company specializes in trying to convince potential new customers that its license terms and model are harmless and easy to use. 

Once the customer licenses the product, however, Oracle takes a new tack.  The company launches software audits and then argues that there are license restrictions it did not talk about during the sales process but that the customer has now breached.

How do Oracle and other vendors get away with these tactics?  Path dependency.  Software vendors know that once a large company has implemented an enterprise-wide or otherwise significant software tool it is hard to switch. 

Companies use software, after all, to run core business functions.  Changing tools is expensive, disruptive … and risky.  Vendors count on this reality to force their customers to choose between the lesser of two evils:  pay the vendor some more rather than risking significant business disruption.

Back in the driver’s seat

Some clearly feel that working with successful software vendors is a “necessary evil.”  If that’s true, it’s only because customers have ceded the playing field to their vendors.  The fact is, customers are fully capable of regaining control.  It won’t be easy.  But the return will far exceed the cost of vendor dominance.

Taking control requires customers to take two fundamental steps.

1. Determine switching costs

No customer will ever be in control of its purchases if it doesn’t feel like it has an option to fire vendors who perform poorly or abuse the customer.  Customers need to know, therefore, what it would take to replace a vendor.  For example, changing database vendors requires a data migration project that has to be carefully managed by internal resources and that poses risks to ongoing operations.

Customers should not assume all the risk and work is on them.  Competing vendors will be happy to support the switch.  Before they make any proposals, however, they should understand the customer expects them to share equally in the risk of project failure. 

Planning a transition is hard work, of course.  But the customer who finds it daunting should realize that the price of not assessing options is acceptance of continuing vendor poor performance and exorbitant pricing.

2. Negotiate a better deal

Once a customer has determined that switching is a viable option, it’s time to sit down with the incumbent vendor.  Some customers may feel empowered after analyzing switching options to fire a bad vendor, especially since the vendor has left a trail of ill-will.  But the problem isn’t that the vendor is “evil”; instead, they are simply responding to pressures to generate revenue and an opportunity to maximize that revenue when customers don’t push back. 

When the customer changes the terms of the relationship, every vendor deserves at least one shot to prove that they are worthy of a constructive, long-term partnership.  If they fail that test, then fire them.  In my experience, however, most vendors change their behavior when given a chance … especially when they realize a customer is ready to switch if they don’t.

The benefits of control

A customer in control of its vendor relationships will reap immediate rewards.  In a good customer-vendor relationship, the vendor is focused on:

1. Problem solving: Investing in learning the customer’s business drivers and needs.

2. Value optimization: Delivering robust product functionality, excellent service and world-class price.

3. Purposeful flexibility: Accepting fair and reasonable contract terms – even when they don’t fit the vendor’s sales model.

4. Risk sharing: Agreeing to terms that ensure risk sharing and accountability.

5. Trust: Discussing difficult issues and putting “elephants” on the table to the earn the customer’s trust.

Those are the only behavior worthy of the greatest software industry in the world.

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