For CIOs Seeking Vendors, It’s a Buyer’s Market

“Nobody is buying software right now,” says Ken Harris, senior vice president and CIO of San Francisco-based retailer the Gap. “The market has stopped dead in its tracks.”

Harris overstates the case a little; the CIO magazine Tech Poll predicts overall IT spending will grow by at least 4.4 percent even if the economic downturn continues through the first half of 2003. But CIOs have been squeezing vendors for more than a year now, and in 2003 any vendor wanting to win new business or renew contracts will need to respond to very tough questions about ROI and demands for concessions that would have been unheard of a few years ago. “Buyers are saying, Give me the software for free and charge me annual maintenance,” Harris says. Free!? Vendors won’t do that, say analysts, but it’s the kind of proposition that comes up when both parties’ backs are pinned to the wall.

Another trend is rethinking maintenance contracts for hardware and, especially, software. After getting hit with maintenance bills of 18 percent to 25 percent of the software license fees annually, CIOs are pushing to lower their costs over the long haul with tighter maintenance contracts. Some CIOs are breaking with per-seat licensing and maintenance contracts because they’re losing the people that used to sit in those seats to layoffs and sell-offs. They’re inserting downturn clauses that account for downsizing and dramatic economic shortfalls. Some are insisting fees be based on headcount and be renegotiated annually. Others are eschewing maintenance contracts altogether, going to a per-incident policy. It’s riskier because the cost to fix individual problems is much higher, but CIOs are finding that after they’ve had big systems like ERP or CRM in for a few years, the systems are pretty stable, and they don’t need someone hanging on at the other end of the 800-line.

A friendlier negotiation approach that CIOs have used and will continue to leverage in 2003 is the hat-in-hand tack?as in, “Look, I’m suffering here, what can you do for me?”?in return for a pledge to try to swing more business to the vendor when better times return. Vendor consolidation is another tactic that can help CIOs without hurting the remaining vendors. When a customer consolidates its IT spending with fewer suppliers, those suppliers can lower their prices and offset the blow to their margins by the boost in volume.

But regardless of whether the negotiations are friendly or heated, we are in a buyer’s market unlike any since the early ’90s. And CIOs in 2003 will need a strategy to capitalize on it without permanently alienating the vendors that they need over the long haul. It won’t be an easy year for either side.