Shoring up the software procurement and contracting process is the first line of defense in controlling current and future software spend.
By Andrew Alpert
Non-discretionary IT spend is a top priority among CIOs, especially in software licensing and maintenance. However, a number of factors are driving up enterprise software costs.
These factors include software vendors’ vigilance in assuring every bit of revenue due to market pressures from declining software growth, high margins for software maintenance/technical support and still-maturing competition for enterprise-class secondary software support market. This makes diligently managing what are often surprise IT costs imperative. Successfully managing software license and maintenance spend involves two parallel paths of activity, including improving and securing favorable contract terms and conditions and implementing and sustaining effective management practices for software license and maintenance spend.
Path 1: Lock Down Favorable Contract Terms and Conditions
Shoring up the software procurement and contracting process is the first line of defense in controlling current and future software spend. To secure protections against at-risk areas for cost escalation:
*Address clauses that affect year-over-year escalation of pricing – As enterprise and desktop software is typically in service for 5-15 years or more, secure maintenance caps that are more closely aligned with the asset life of the software.
*Lock in pricing for future software purchases, including unintentional overdeployment – Needs-based forecasts often have shortcomings, so lock in pricing for future software purchases and associated maintenance costs throughout the term of the agreement and beyond. Given vendors’ aggressive compliance and audit practices, include language that allows for unintentional overdeployments to be corrected to avoid large licensing and maintenance payments that are not required.
*Create terms that allow for an upgrade path without incremental charges – As software suppliers try to force-migrate to new products, strive for terms that allow for an upgrade path without increasing licensing and maintenance fees–especially if the existing product is no longer supported. Unless you specifically request the product or desire to use the new functionality, the supplier should not retain any leverage to increase their own revenue without your consent to pay for it.
*Create flexible terms that allow for termination of maintenance on portions of the products portfolio – To address the natural ebb and flow of your applications portfolio, establish provisions that allow for annual realignment of maintenance needs without committing to a fixed spend for a fixed array of products. Alternatively, purchase products in smaller orders to allow for termination or shelving of an individual order specific to an application or set of related applications.
*Establish flexible license migration/re-use rights to utilize spare license capacity – It is imperative that the agreement contain rights to utilize licenses across the enterprise so that they can be shared as the portfolio needs for a given business unit change over time. This should include rights for substitution of individual products (e.g., migrating from higher-class user to lower-class user), allowing for one product to grow and others to wane as the portfolio needs change (e.g., migrating licenses from one OS/Server platform to another).
*Know what you are buying – While consolidating purchases into large transactions can create discounts, the potential for long-term “shelfware” increases and will drive larger annual maintenance costs for products that you aren’t using
Path 2: Institute Effective Spend Management Practices
Create a culture that owns and stewards the software licenses costs and the associated maintenance obligations. To implement these best practice approaches:
*Establish effective asset management practices – Most IT shops tend to overbuy due to compliance concerns. It is not uncommon for 30 percent or more of the software purchased to be undeployed, resulting in a substantial effective increase in maintenance spend.
*Implement reliable asset tools and supporting processes – Make sure product owners have dedication and ownership in managing their software assets as the tools are only as good as the information that goes into them.
*Maintain sufficient personnel and skills to understand and manage the software supplier relationship holistically – Supplier relationship management is a misunderstood and underserved capability. Ensure your team is able to represent the enterprise and possesses a detailed, accurate and comprehensive understanding of deployed software as well as a forecast of future demand, to maintain appropriate leverage to achieve its overall objectives.
*Keep an eye on software alternatives for key components and renegotiation leverage – To maintain advantage in negotiations, ensure that you have viable vendor options that you can execute on when needed (e.g., jboss vs. websphere). Typical software maintenance agreements may be renegotiated every 3-5 years.
*Empower architects to understand and manage the long-term impacts of software spend – The architecture team is invaluable to the enterprise IT function. As such, they should maintain accountability for the long term TCO for each product suite and be a central part of the decision process for projects and upgrades–including any decisions that impact the long-term implications of software spend.
*Integrate O&M spend planning into the PMO processes for project delivery – Project teams, and particularly project managers (in the context of delivery methodology expectations), must render decisions with appropriate consideration of long-term total cost of ownership (TCO), not simply project delivery cost.
This strategic approach to software licensing and maintenance cost management will help mitigate long term cost risks, drive substantial savings and help stabilize spend. With potential savings ranging from between 5 percent and 35 percent savings in year-over-year maintenance costs, this could mean approximately $1 million in annual savings for an initial software purchase in excess of $10 million. Employing these strategies will not be a cure-all but will allow executives to focus on decisions that have a real impact on demonstrating business value through delivery of IT services and increasing the perceived value of IT services within the enterprise.
Andrew Alpert is a principal for business transformation and outsourcing advisory firm Pace Harmon. For 25 years he has worked with global enterprises to develop and implement technology strategies for improving internal operations and increasing company performance.