The Art of the New Deal

Take it from the masters of vendor management: Despite a looming recession, now is the right time to push vendors for a better deal and to make industry consolidation work for you.

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Don't Fear Consolidation

Between them, Microsoft, Oracle and SAP have bought at least 76 software companies since 2005. PeopleSoft? Gone. Siebel? Gone. Business Objects and Pilot Software? Gone and gone. Fewer vendor choices, goes the conventional wisdom, means the CIO loses leverage.

Not so, says Stephen Guth, director of the vendor management office for the National Rural Electric Cooperative Association (NRECA). Guth, who is in charge of dealing with IT vendors, helps buy software for the association's 900 electricity co-ops and trains them to negotiate with vendors on their own. All told, the annual software spend is about $100 million.

"Consolidation isn't bad. I've never experienced that," Guth says. For example, he remembers being outraged at first by Hyperion's "enablement fee"—a levy the vendor assessed whenever any customer wanted to upgrade to System 9 of Hyperion's financial analysis software.

Hyperion reasoned it had so drastically rewritten parts of System 9, and added new business intelligence features, that it was like a new product, not a typical upgrade. Therefore, the maintenance fees customers had been paying didn't cover a switch, according to Hyperion's statements at the time.

Guth didn't see it that way. The enablement fee was, in his opinion, "a sign of desperation to drive revenue" at a time—2006 and 2007—when Hyperion's profit margins were slipping. Like Guth, many Hyperion customers complained, prompting IT research firm Gartner to warn last year that for the company to continue as a leader in business intelligence, it "will need to waive, or substantially reduce, the fee."

Some customers balked and negotiated better deals for themselves. The University of California at Berkeley, for example, paid an enablement fee of $168,000 to move to System 9—35 percent of Hyperion's initial $480,000 gauntlet, according to the college's fiscal 2007-2008 IT budget proposal.

Guth, however, wanted no part of the enablement fee. Meanwhile, Oracle had begun circling Hyperion, sparking acquisition rumors. Guth knew NRECA wasn't going to install System 9 immediately, so he decided to wait and see what might happen. He's a lawyer with four certificates in contract management, purchasing and procurement and 15 years' negotiation experience. He's steely.

In April 2007, Oracle bought Hyperion for $3.3 billion and Guth took up talks with his old Hyperion sales representative, who continued to "demand" the fee, Guth recalls. But when that rep was replaced by one from Oracle, Guth argued against the fee and, ultimately, he paid none.

"For some reason, when it comes to software vendors, people get squirrely, thinking, 'If a vendor has hooks into me, then I'm not going to be able to negotiate good deals,'" he says. Oracle has since dropped the fee altogether.

The Lesson

Even big vendors that acquire lots of other companies can't ask for the moon every time, says NPI's Muscarella. He's sat across from Oracle, SAP, Microsoft and other powerhouses, representing companies such as Boeing, Lands' End, Hilton and Tupperware. A recession hurts tech suppliers as much as anyone else. "Nobody is not feeling the pressure," he says. "Vendors make claims that sound immovable. But in reality, that's not the case."

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