by Andy Hayler

Software is a buyer’s market

Apr 10, 20095 mins
IT LeadershipIT StrategyMobile

This is promising to be a difficult year for most companies, but if you have cash and are in the market to buy then life is sweet whether you are buying a new car or enterprise software. Having been on both sides of the software-buying fence I have seen a wide range of buying behaviour, from highly effective procurement to its polar opposite. If you are going to buy software this year, here are some tips. It is vital to understand a little about the economics of the enterprise software industry. Most companies still sell on a perpetual licence model, with annual maintenance on top (typically 15 to 20 per cent of purchase price). Software companies are pushed by their investors to hit quarterly and annual revenue targets, and their salesmen have a significant personal incentive to sell to you. Of course, this is also true of car salesmen, but there are two differences. Firstly, a car has a major incremental cost to manufacture but, once developed, it costs the seller almost nothing to produce one more copy of a piece of software. These 90 per cent-plus gross margins are why venture capitalists like software companies. It certainly takes a big R&D budget to build software in the first place, and plenty in marketing and overpaid salesmen to convince someone to pay hundreds of thousands or even millions of dollars to buy the software, but the incremental cost of manufacturing another DVD is negligible. Hence there is considerable flexibility in price. The second key difference is that, in the case of buying a car, there is a clear list price and easy access to what discounts are available. With enterprise software, you often don’t know what the last customer paid. Indeed, written into most software company contracts is a confidentiality clause specifically banning you from disclosing the terms. As a buyer, this makes things awkward. Imagine if you went to buy a car but you literally had no idea what it ought to cost – the salesman could make up any number that he felt you could afford. You could haggle and get a discount, but how could you be sure this was actually worth anything? This is a very real problem, and software salesman try and skip over pricing until they have a good idea as to how serious the buyer is, what kind of benefits they are hoping to get, and what sort of budget they have. It is critical as a salesman to find out whether you are in direct competition with anyone, and who that is. The dream situation for the seller is a purchase to solve some really urgent business problem, where for some reason the customer has come to you, not discussed money, made some commitment (maybe a trial with the software) and decided to purchase before asking you the price. When I was on the buying side, my procurement colleagues were constantly fuming because some person in the business had brought them in too late. They had chosen the software, then asked procurement to “get a good price”. In this situation the procurement person can huff and puff at the vendor, but has little leverage if the vendor knows that the client is desperate to close a deal. The key to getting a decent deal on enterprise software is competition. In most cases there is at least one alternative and as a buyer it is your job to ensure that true competition ensues. Decide on your requirements in detail before talking to any vendors, research the market and find alternatives. Then set up a carefully structured evaluation where you test out three or four alternatives against your real needs, ignoring any features which the vendor has pointed out but which you may not actually need. Get preliminary bids for the overall purchase, including maintenance. Find out when the vendor’s year-end or quarter-end is, and schedule the evaluation to conclude a little before this if possible. Once you have completed the trial and decided which product you want, negotiate with the shortlisted vendors in earnest, at no point giving any of them a clue as to who has won the technical evaluation. Be prepared to offer things which vendors value but cost you nothing, such as being an active customer reference. Remember to negotiate hard on maintenance, which is critical to you but less so to salesmen: they are usually driven by overall deal size, so rarely have a special incentive to fight hard over this. A well-constructed deal strategy can make a huge difference to the price you pay. I once managed to get a vendor to halve the price of an enterprise deal by convincing them that a competing company assumed they had sewn up the deal. If you are buying from a small vendor then you need to temper these strategies with the thought that you do actually want to work with this company afterwards, but larger vendors are going to pretty much ignore you once they have signed the deal anyway, so there is no need to leave money lying on the table.