by Andy Hayler

Procure for all ills

Nov 28, 20114 mins
IT LeadershipIT StrategyTelecommunications Industry

Many years ago I was actively engaged in the evaluation and selection of enterprise software, and peripherally involved in the setting up of procurement contracts associated with large-scale software purchases.

In a later life, running a software vendor, I was involved on the other side of several such deals. A number of recent conversations suggest to me that many companies may be losing money through inadequate management of their software contracts.

Some large enterprises apply the same processes (and often the same people) for all forms of procurement, whether they are buying office stationery, machinery or software.

This can be a problem, since there are a number of peculiarities with enterprise software that do not occur with more tangible assets like pens or factory spare parts.

Procurement professionalsare often targeted with negotiating a discount on the list prices, which works fine for tangible things.

If you are purchasing washers, pencils or vehicles then it is easy enough to establish the list price of the product by looking up a catalogue, and then trying to negotiate a discount with the supplier based on a volume purchase.

However in enterprise software there is often no available list price. What a suite of software is worth is rarely as clear as that of, say, car or a biro.

Software companies price their software in deliberately opaque ways, pricing perhaps by number of servers or processors, by the number of users, the volume of data handled or even the type of data, and often a combination of these.

I discussed a new product with a vendor last week, and was told that the price according to which industry the buyer was in — presumably some industries are more price-sensitive than others.

Essentially vendors will charge what they think they can get away with depending on who they are competing with and on how anxious they are to meet quarterly targets.

Contracts also have clauses that explicitly prohibit the terms being shared, so a prospect can’t ring up another customer and ask what they paid for the product.

Canny software sellers exploit this opaqueness, quoting a very large list price and then offering a substantial saving on this, giving the illusion of a large discount on list, which keeps the procurement people happy.

Yet it may well be that the identical software is offered to one company at a very different list price to another.

One salesman told me that in one case where it was clear that there was no real competition, the customer was quoted a price of six million dollars for an enterprise deal, a number in fact more than the software company had turned over that year, and probably more than the vendor was worth in total at the time.

The customer could easily have obtained a price of perhaps a tenth of that if it had done its diligence properly and realised that the vendor was in a poor negotiating position, but paid up in full.

In another case, a contract was negotiated with a 10-year renewal date. The contract had been correctly drawn up at the time, with an option to renew at the end of the 10 years on the same terms as the original deal had built in to the contract.

However by renewal time the vendor knew that all the staff involved in the original contract negotiations had long since moved on, suspected that the customer was unaware of this clause and observed that the new procurement staff seemed disorganised.

They told the company that to renew this widely deployed software was going to cost several million dollars, and stuck to this line, hoping that the procurement staff would not read the lengthy original contract properly.

They were correct, and my source told me that in this case over two million dollars was paid by the customer to the vendor unnecessarily, making a very nice commission for the salesman.

Companies all too often seem unaware of the peculiarities of software contracts, and the degree of flexibility that software vendors really have over their pricing.

Moreover, once contracts are signed, all too often buyers do not maintain and monitor their contracts effectively, leaving them vulnerable to unscrupulous vendors at renewal time.

Customers would be advised to engage procurement staff familiar with the software industry and its ways, and to rigorously monitor existing contracts, taking careful note of when contracts are due to expire and what the options are when they do. Leaving such things to the last minute can be an expensive choice.

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