12-Step Plan to Slash Software Costs

Nov 28, 2012 (03:11 AM EST)

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Controlling nondiscretionary spending is a perennial top priority for IT, and the cost of software licensing, operations and maintenance is a particularly sore topic. In our InformationWeek 2012 Enterprise Applications Survey, we asked respondents to rate their satisfaction with nine aspects of on-premises enterprise application technologies. Ongoing maintenance and support came in dead last; initial cost didn't fare much better.

We often see clients surprised by (sometimes substantial) unplanned costs, whether from new licenses to support last-minute projects, vendor changes to licensing metrics or maintenance on legacy platforms. Another problem is a discrepancy between your software licenses and what's actually in use. In our experience, these inconsistencies are driven by factors ranging from inadequate asset management to isolated procurement practices that limit enterprise-wide visibility.

When it comes to something as expensive and complex as software licensing, transparency is critical. Software maintenance is a key revenue stream for large software vendors -- Forrester says recurring maintenance fees can account for nearly 50% of most application vendors' total revenues, and that's growing by 10% annually, so they are being increasingly vigilant in gathering every bit of revenue from in-service agreements.

While we see some interest in dropping a primary software vendor in favor of getting support from a third-party provider such as Spinnaker Support or Rimini Street, we don't recommend that path until these providers mature a bit more. For now, you'll do better by effectively managing maintenance contracts with your primary software providers. To do that, we recommend 12 steps, which fall into two broad areas: getting advantageous terms and tightly managing licensing. (We delve into these in more depth in our full report.)

Terms And Conditions

The first six steps all involve securing favorable terms and conditions by implementing best practices in the contracting process:

1. Slow down year-over-year price escalation. Enterprise and even desktop software is typically in service for at least five years. Rather than settling for the maintenance caps of one or two years commonly offered by software vendors, lock in maintenance rates that are more closely aligned with the expected asset life of the software. Strive for at least five years of fixed maintenance, and address increases beyond five years via a cap on growth, generally no more than 2% per annum thereafter.

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2. Lock in pricing for future software purchases, including those resulting from unintentional overdeployment, throughout the term of the agreement, and even beyond if possible. Given vendors' aggressive compliance auditing, ensure that licenses for unintentional overdeployments are covered under the same pricing discounts as intentional, negotiated software purchases.

3. Create terms that allow for an upgrade path without incremental charges. You shouldn't have to pay a vendor more when an upgrade comes out unless you specifically request or want to use new functionality.

4. Create flexible terms that allow for selective termination of maintenance. Rarely does your application portfolio remain constant over the term of the licensing agreement. If you successfully consolidated and retire portions of your portfolio, you should get the cost savings -- and that includes the ability to cease payment for maintenance on licenses tied to retired applications.

5. Establish transferability rights to other business units. You should be able to shift a license among units and substitute individual products. This allows for use of one product to grow and others to wane as portfolio needs change.

6. Avoid "shelfware." While it's always advantageous to maximize discounts by consolidating purchases into large transactions, beware of software vendors bearing bundled product suites.

chart: What do you look for in an enterprise applications provider?

Focus On Life Cycle

After getting a strong initial deal, it's just as critical to effectively manage software licenses and ongoing maintenance throughout the product life cycle -- but often more difficult:

7. Establish effective asset management. Yes, that's easier said than done, but it's not uncommon for 30% or more of software purchases to be undeployed, resulting in a substantial effective increase in maintenance costs. It's a worthwhile effort.

8. Invest in reliable asset tools and supporting processes. There are many products on the market to support asset management, but the tool is only as good as the information that goes into it. We often see these systems become error ridden -- increasingly so over time.

9. Holistically manage the software supplier relationship. The ability to hold vendors accountable and ensure that internal contract and supplier management capabilities are nurtured is thankless but critical work. This role is a misunderstood and underserved specialty. (We discuss four ways to make this happen in our full report.)

10. Keep an eye on alternatives. Never let a software supplier believe it's the only game in town. Yes, we like stability in the application portfolio, but maintain at least the appearance that you have real options on the table.

11. Understand and manage the long-term impacts of software spending, and proactively manage the architectural choices that impact it. Nothing is more valuable to the enterprise IT function than an architect who understands the interaction of technological components within the portfolio.

12. Integrate operations and maintenance planning into project management office processes for project delivery. Few project teams consider "run" cost requirements. Most often, project teams are rewarded for on-time and on-budget performance related to delivery of project requirements and objectives -- despite trade-offs that may shift increased costs to ongoing operations.

Steve Keegan and Andrew Alpert are principals at IT consultancy and advisory firm Pace Harmon. Write to us at

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