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It's a buyer's market in IT. But landing a good deal requires knowing where vendors are flexible — and what the risks are.
Robert Hertzberg, CFO Magazine
February 1, 2009
Last year, Guardian Life Insurance was approached by one of its IT vendors with a very attractive offer to replace its leased equipment a year ahead of schedule. The deal ultimately let Guardian reduce its expenses by $6 million, netting a 25 percent reduction off the run rate, while simultaneously increasing its capacity by a third and operating its business on a much more advanced platform. That's not the sort of accommodation the vendor would normally make — but as Guardian chief information officer Frank Wander says, this isn't a normal economy.
Similarly, TD Ameritrade recently entered into its first IT leasing deal in years, tempted by heavy discounts and extremely low financing rates. "They're not zero percent, but they sure feel like it," says William Gerber, the online brokerage firm's CFO. "And the prices we're getting now are the best we've seen in comparable equipment in more than 10 years."
It's a buyer's market for information technology, experts say, thanks to the recession and smaller corporate IT budgets. Nervous vendors are going out of their way to accommodate cash-strapped customers, cutting deals to win business, while companies are beginning to demand pricing breaks and other considerations. One tough shopper is ETS, a $1.2 billion private organization that develops, administers, and scores educational assessments. ETS slashed its 2009 capital budget for technology by 16 percent, to $50 million. "We are putting pressure on all our executives to be much more cost-conscious," says CFO Frank Gatti. That includes negotiating with vendors aggressively.
Dell Computer and Microsoft recently took the unusual step of publicizing deals for corporate customers. To businesses with top credit marks that bought $40,000 worth of its hardware, Dell promised deferred payments for three years. Microsoft offered new customers of its Dynamics ERP and CRM software zero-percent financing if they invested between $20,000 and $1 million.
But CFOs shouldn't expect other vendors to go so far as to advertise bargains. That's because few IT configurations are standard, and too much transparency would work to buyers' advantage. Instead, vendors that serve decimated industries, like banking, expect — if not downright fear — that their clients will demand better deals.
"Technology vendors are kind of hiding under the table and hoping they don't get a phone call from customers" looking to renegotiate existing deals, says David Rutchik, partner at Pace Harmon, a consultancy specializing in vendor program management. "But if vendors are smart, they're going to engage in those conversations and work through things."
That's music to a CFO's ears. Traditional software vendors in particular should be open to negotiating. Their business is under assault — not only from budget cutting, but also from the gradual migration from perpetual licensing to software-as-a-service.
Perpetual licenses give the buyer the right to use the software for as long as it wants, but generally require it to book a capital expense. Such licenses also come with a fee for maintenance, including support and upgrades, that can run another 12 to 22 percent per year of the original contract value. To keep customers happy, "there's more willingness from vendors to allow flexibility in these contracts," says Sharyn Leaver, a Forrester Research analyst. Buyers used to acquiesce to annual hikes in maintenance fees, but now they are "pushing back," she adds. Many are using their newly acquired leverage, for example, to lock in maintenance rates for longer periods.
A few product areas will prove resistant to discounting, analysts say, whether because only a few vendors dominate (as with enterprise resource systems) or because margins are thin and vendors have little pricing flexibility (as in some commodity-hardware markets). But in every other market, from enterprise storage to servers to software, buyers are unearthing bargains.
How Does 80% Off Sound?
Companies buying brand-new software licenses are in an enviable bargaining position these days. Recently, when a retail company wanted content-management software for its Website, the vendor initially set a price of $1.5 million, says Jon Winsett, managing partner at NPI, an Atlanta-based spend-management company. Winsett advised the buyer that such software would normally sell for $700,000. He also suggested that with the economy coming undone, the company might negotiate an even lower price. The final price tag: $300,000.
Some vendors may go beyond offering a cut-rate price to win a new account. Brainware, a vendor of accounts-payable management software, almost lost a prospective customer that had narrowed the selection to Brainware and a competitor. The company was leaning toward the competitor, whose bid was $225,000 versus Brainware's $400,000.
Brainware CFO James Zubok told the customer he could match the competitor's $225,000 price and go a step further: the customer could pay $6,250 a month to use the software over the three-year life of the contract, and then, after the three years were up, pay an additional fee to convert the contract to a perpetual license. The customer, relieved at not having to tap its capital budget, chose Brainware.
"Would I have liked the cash up front?" says Zubok. "Of course. Would I have liked to have the higher revenue? Yes. But I'd prefer to have the long-term relationship."
Giving to Get
Even in a buyer's market, companies must be smart about the concessions they exact. "You could get a very good price but not a very good deal," warns Guardian CIO Wander. A vendor asked to lower a price, for example, may do so by cutting back on contracted services. "All of a sudden the infrastructure is not refreshed as quickly or the staff is more junior," says consultant Rutchik.
To avoid this, Rutchik suggests that buyers prepare for negotiations by identifying contractual modifications they would be willing to make in return for a midcontract price break. Points of compromise could include stricter liability requirements (triggered by vendor nonperformance) and rigid service-level guarantees (such as 99.9 percent uptime), which can create costs for the vendor without adding much value for the customer.
Ultimately, vendors still have to see something in the deal for them. "It's got to be much more than pounding the table and saying, 'Hey, times are hard — lower my prices,'" says Rutchik. "There has to be a credible rationale and a well-thought-out argument." After all, vendors may be willing to share the current economic pain, but few want to shoulder all of it.
Robert Hertzberg is a freelance writer and editor based in Port Washington, New York.