techwatch
To get the best deal on
software, create uncertainty
COMPANIES SOMETIMES ASSUME THAT ONCE THEY’VE
signed on with a particular enterprise resource planning (ERP) vendor, they’re in it for good. From that point on, they figure, they’re captive customers. If they want to buy an additional application—say, a
warehouse management system (WMS)—they’ll have to pay whatever price the vendor sets.
But that’s not the case, according to one software procurement
expert. Customers do, in fact, have some leverage when it comes to
pricing. But in order to use it, they need to make the vendor nervous.
“You have to create uncertainty to get a better software deal,” says Tom
E. DeMarco, a managing partner at ClearEdge Partners Inc., which
advises clients on negotiating with information technology providers.
DeMarco and his associates know the pricing game
well; they all worked for software vendors prior to
starting the firm, which provides training and
advice on buying software.
For starters, DeMarco advises companies to
focus on getting a price break on the software
license purchase rather than on maintenance or
support services. “The capital event is where they
have the opportunity to negotiate,” he says. By contrast, the odds of getting a deal on maintenance
and other ancillary services are slim, he says. For
one thing, software sales reps generally don’t get a
commission for maintenance contract renewals, so
they have no incentive to advocate for price breaks
on the client’s behalf. For another, software makers
are reluctant to discount maintenance for book-keeping reasons.
Although it’s easier to create uncertainty with the first software
deal, DeMarco notes it’s still possible to create anxiety with an existing vendor, such as an ERP provider. That’s because despite what the
ERP vendor would like customers to think, the client is not actually
locked in to apps from the ERP’s own software suite. If the customer
looks around hard enough, it will likely find an app from a best-of-breed vendor that also meets its requirements. Once the ERP vendor
finds out the customer has other options, the company can play on
the provider’s “uncertainty” about making another sale.
To create uncertainty, though, a company has to plan ahead.
DeMarco advises his clients to start investigating their options at least
six months in advance of an anticipated purchase. That will give the
company time to identify alternative vendors and determine the cost
and amount of work involved in integrating an
app from outside the ERP family with the infor-
mation technology backbone. “If I have the abil-
ity to switch from another vendor and my costs
are low, I can then establish a Plan B to drive a
lower cost from my incumbent vendor,”
DeMarco says.
