Foiled! How to beat software vendors' sneaky price increases
- 13 January, 2014 11:07
If you think software is getting more expensive, you're right. Not only that, it's getting harder to even find the price hikes, so you can avoid them or know it's time to switch to another vendor's software. It's only natural vendors will pull out all the stops to maximize their revenue. IT organizations need to do the same to maximize the value they get from their tight IT budgets.
More vendors are building hidden price increases into complex new variations to on-site licensing models, as well as to their newer cloud and subscription offerings. "Licensing is getting to be more sophisticated," and the complexity is driving price increases, says Daryl Ulman, chief consulting officer of the Emerset Consulting Group, which offers negotiating services to IT for Microsoft and Oracle licenses.
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Rather than having "clear-cut, outright, aggressive price increases," vendors are becoming "more subtle and devious," says Jeff Muscarella, executive vice president of the IT and Telecom Division at sourcing consultancy NPI. They're hiding price hikes within "changes to their licensing programs that are complex and multifaceted."
To get the best price on the software you need, do a better job of understanding exactly what you need now and in the future -- and what you could replace with a competitive offering. Such self-knowledge also tells you when it makes sense to buy more or different products or services if that will get you a better deal. The more you learn beforehand about the tweaks in each vendor's approach, the better you'll know when a seemingly good deal might come back to bite you.
How Microsoft, Oracle, and SAP squeeze youAs an example of the kind of price-increase-hiding complexity vendors are using today, Muscarella cites Microsoft's elimination of the Enrollment for Application Platform (EAP) and Enrollment for Core Infrastructure (ECI) licensing programs that had saved customers "a lot of money" on software such as Windows Server, SQL Server, BizTalk, and SharePoint. He estimates the replacement program, Server and Cloud Enrollment (SCE), "means 9 to 12 percent price increases" -- but figuring out that hidden price hike required complex analysis and modeling for each customer's environment under both the old and new programs. Ulman says that, rather than impose direct price increases, SCE "requires organizations (to make) a higher up-front commitment" to receive the same discounts as the earlier programs offered.
In another example, he says Microsoft has changed how Microsoft prices the combined Windows Server Standard and Enterprise Editions from the number of physical servers to the number of processors in each server. Because most servers now ship with at least four processors, he says, "you're paying double the amount, or higher" without a formal price hike. (EMC VMware tried a similar tactic in 2012 that Microsoft ironically decried at the time, but customer outcry forced VMware to reverse course.)
Microsoft declined to be interviewed, but its PR firm says Microsoft bases pricing on "market conditions, increasing product value, customer deployment scenarios, and other factors."
Microsoft is not alone in playing the hidden-price-hike game. Businesses that don't pay attention to Oracle's "very specific" terms around licensing software for testing and backup "will be exposed to Oracle audits," according to a September 2013 post on the Wikibon advisory site by David Vellante based on interviews with Oracle customers and consultants. This shows "the importance of simplifying agreements with Oracle and eliminating unnecessary terms and conditions." Oracle declined to comment for this story.
Because maintenance fees are calculated as a percentage (usually between 17 and 22 percent) of a customer's software license fees, some vendors try to raise long-term maintenance revenue by artificially bundling as many products as possible into a licensing deal, says David Blake, CEO of sourcing advisory firm Upper Edge. At the very least, he advises using "the next purchase as an opportunity to negotiate a cap on maintenance increases going forward" or at least stop paying maintenance on software you're not using.
Virtualization -- running multiple virtual servers on a single physical server -- can also result in nasty surprise price hikes if the vendor requires a separate license for each virtual server.
SAP customers face particularly large and unpredictable price hikes courtesy of its Indirect Access license fees for anyone who uses data generated by SAP, even if they don't use SAP software itself. That could mean major new costs for the many organizations that use SAP as the information-sharing backbone for multiple non-SAP applications.
"We've been involved in about eight compliance claims tied to Indirect Access, and the fees are huge," says Blake. Those involve not only license but maintenance fees. A company that has licensed SAP to 1,000 users for 15 years could be told, he says, "You owe SAP back maintenance for 15 years," at 22 percent of its $2 million license fee, or $6.6 million.
Trying to understand Indirect Access drove one client "absolutely bananas," recalls Muscarella. That client's CEO asked SAP about his potential exposure but was told estimating those costs would require examining every one of the applications that interfaced with SAP. That, to the client, sounded like "a paid shopping trip" for SAP to look for new licensing opportunities, Muscarella says.
Blake recommends that SAP customers "look at their application environment, their landscape, and where they have everything interfaced. From that, determine what the potential magnitude of the impact could be." Then, he says, consider other SAP products they might need "and use that as a leverage opportunity to negotiate" down the Indirect Access fees.
SAP declined to comment, but its website says any access to SAP "directly and through any intermediary technology layer" requires an SAP license.
Watch out for pricing tricks in the cloudMany software vendors are aggressively promoting software-as-a-service (SaaS) cloud offerings and subscription pricing, in which the customer never owns the software but pays for its use (and for updates) as long as it need the software. Both models can save you money, at least in the short run, but analysts warn they can also carry hidden costs and dangers of lock-in.
With an on-premises implementation, you can stop paying maintenance and still run your current version. But if you want to leave a SaaS platform over a price hike, you own neither the software nor the infrastructure on which to run it. That makes moving off the SaaS vendor more complex, expensive, and risky.
Also, don't assume SaaS is always cheaper, says Scott Feuless, a principal consultant at Information Services Group (ISG), an IT consultancy. Be careful to factor in the full implementation costs, such as for configuration and building interfaces to other systems. Also factor in the expected future price hikes. If the ability to scale up and scale down is important to you, push back on vendors that urge long contracts with baseline volume commitments and limited options to terminate for convenience, he advises.
Microsoft, for example, "is doing a very good job of getting a foothold for Office 365," its subscription version of Office, SharePoint, and Exchange, says Ulman. The risk, however, is that the price can go up in the future "and you're locked in." That doesn't mean Office 365 is always a bad choice, he says, but "overall, Microsoft is increasing its long-term recurring revenue, and you need to be aware of this."
Feuless recommends fighting for the option of moving your current licenses at will from your on-premises infrastructure to the cloud (a shift that open source vendor Red Hat recently made easier). He also recommends making sure your charges for the cloud service begins only when you enroll users, not before.
IT needs to work harder to get a good dealKnowing whether and when you can walk away is essential to any negotiation. But with today's more complex terms and changing delivery models, IT customers need to do more and better preparation than historically have.
Most consultants recommend starting three to six months in advance to understand exactly what functionality you need now and in the future, and how hard and expensive it would be to shift vendors in each case. The preparation might include deciding if your users can skip a generation or two of software upgrades to avoid a price hike, or whether a desktop virtualization license justifies the cost of continuing Microsoft's Software Assurance program.
Ulman recommends including business, financial, and legal staff members who can examine every possible scenario. For example, if the organization divests a business unit, must it keep paying licensing fees for the software that unit used until the end of its contract? And can the new owner of the business get the same discounts the seller had?
Another piece of knowledge many customers lack is how many of their users work with multiple devices (such as a notebook and a tablet) or access software through a shared device such as a kiosk, says Mike Hogan, general manager for Microsoft at IT advisory En Pointe Technologies. That's important, he says, because a user Client Access License (CAL) that allows software to be accessed on multiple devices costs 15 percent more than a device CAL that limits such connectivity to one device.
Muscarella warns users of "friendly" vendor-paid services that assess how well a customer is managing its software. These are often "really not that friendly once you start," he says, because if the vendor finds unlicensed software, the result is an audit. In 80 percent of such engagements he's seen, "the vendor winds up asking for more money."
If you threaten to shift suppliers, prove you're serious, says Blake. Rather than just put together a list of competitors, invest the time to do it right. When an incumbent provider starts seeing proposals from competitors and hears a customer ask about termination rights, "you're really getting its attention" and making it more likely it will compromise, he says.
If you can't realistically threaten to abandon your core software, consider switching subcomponents. Although migrating a large organization from Oracle's ERP applications to SAP's is "pretty audacious," says Blake, an Oracle customer could threaten to move from Oracle to a competitor for just the database that underlies the ERP apps.
Tips for better deals from IBM, Oracle, and SAPConsultants say that when it comes to price hikes, the most aggressive vendors are those with a large suite of interconnected products on which customers have come to rely. For customers of companies like IBM, Oracle, and SAP, this can make shifting to a competitor too expensive, difficult, or risky.
Negotiation consultants offered these tips for negotiating with several such vendors:
IBM: Customers can get the best deals on agreements for software and services (and combinations of both) because "these represent strategic growth areas with recurring annuity streams" for IBM, says a 2013 Upper Edge PDF report. Companies like IBM are under heavy pressure to show rising earnings per share (EPS), and recurring-revenue deals do that the best, so publicly traded vendors will favor them. Customers that can provide faster payments to IBM "can use this as leverage in negotiations for additional concessions on price and other terms," the report says. IBM declined to comment.
Oracle: Some users delay negotiating with Oracle hoping for end-of-the-quarter deals. But in his September 2013 Wikibon post, Vellante advised against it, at least for customers negotiating deals under $2 million. It instead says such customers should "negotiate hard early in the quarter" when sales reps are less busy chasing larger deals and are trying to build their sales pipeline.
The post also said Oracle was offering "extremely competitive" deals for its Exadata storage hardware, especially for customers buying large bundles of Oracle products and services. But it warned Exadata's appeal will fade "as competitive offerings enter the market and Oracle's terms become more onerous" once users are locked in to it.
SAP: In a blog post, Upper Edge predicts that SAP will begin annual support fee increases after Dec. 21, 2016, the date on which many current "locks" on maintenance fees expires. At that point, Blake predicts, SAP will try to make up for its lower-than-usual maintenance increases during the recent recession. It may do this, he says, by raising maintenance fees based on cumulative increases in the Consumer Price Index (CPI) since the last renewal, not just since the CPI increase in the previous year. This means, he says, that if SAP did not raise its support fees for five years, and assuming the CPI increases 3 percent each year, SAP could argue for a nearly 16 percent increase in year six.
Both Oracle and SAP are also "making it very attractive" for customers to move to their cloud HR platforms (SAP SuccessFactors and Oracle in the Cloud, respectively) due to competition from Workday, says ISG's Feuless.
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