Sourcing Enterprise Software — Ways to Ensure Cost Savings

Enterprise software is a term that we have come to associate with any software used by businesses (of all sizes and across industry verticals). Enterprise software can be categorized by distinct business functions. Each type of enterprise application can be considered as an individual system due to the integration with an organization’s business processes.

Per leading enterprise sourcing professionals – negotiations and cost optimization remain one of the foremost challenges when it comes to sourcing of software. As companies upgrade core functionalities, the spending on enterprise application software domain is anticipated to grow, with most spending dedicated toward replacing or functionally expanding their current business applications. Below, are a few pointers, which can be useful for sourcing professionals at the time of awarding a new software contract/renewal.

Trends Impacting the Sourcing Decision

The enterprise software landscape is majorly being driven by the consolidation among software vendors, rise of ”as-a-service” model, and increasing usage of SAM tools.

• Consolidation among software suppliers: To develop new platforms and meet market demand, industry giants are acquiring smaller vendors. Microsoft, Oracle, IBM, and SAP may not lose their foothold as the top players, but they may likely lose their market share. This will further intensify the competition. Hence, sourcing managers must leverage the situation and negotiate for higher discounts.
• The rise of ”as-a-service” model coupled with performance-based SLAs: With the presence of cloud, power is shifting from suppliers to enterprise buyers. The focus is moving from how the software is delivered, to the value the software is delivering – in the form of savings, revenue improvement or operating efficiency. While evaluating SaaS products, CIOs must focus on business value rather than technology cost.
• Increasing usage of Software Asset Management (SAM) tools: License management is essential for business operations and use of SAM can mitigate licensing challenges by managing compliance, audits and optimizing costs. In the next two to three years, enterprises plan to spend 10 times more on SAM than they are doing currently. With SAM, enterprises can reduce 20-25 percent of software expense within a year. Hence, sourcing managers must implement a SAM tool to optimize software spend.

How Enterprises Can Optimize Cost Savings?

Cost savings has been one of the prime concerns of procurement professionals. Sourcing managers with limited IT budget, face a lot of teething troubles to stabilize expense – including the extension of the functional life of software assets, price/cost which tends to increase year over year and additional licenses which need to be acquired. Below are some of the cost optimization methodologies, which can enable sourcing managers to save 10-15 percent of their software expenses.

• Reducing shelfware: Many enterprises suffer from wasted shelfware, by neglecting to include the possibility of reducing shelfware maintenance costs. Sourcing managers often seduced by higher discounts for higher volumes at the start of an engagement, are at a risk of acquiring potential shelfware. Hence, managers must reduce shelfware by including them in negotiations toward any new demand. Negotiate multiyear exchange rights that allow the enterprises to trade-in unused licenses and subscriptions for other licenses and subscriptions.
• Cost protection: Price holds for renewals or spurts in subscriptions is a key item that is often missing in the contracts. As per the current market practices, software renewals happen with the price increase ranging between 4-7 percent. The discount provided is at its highest during the initial purchase. Hence, sourcing managers must list prices and applicable discounts for potential future purchases, under the same licensing terms.
• Payment holidays: Payment holidays is a widespread practice with most software providers. It enables the buyer to stop payments for an agreed period. Category managers must negotiate payment holidays based on specific service implementation schedules. The duration of such payment holidays is a direct function of the alternate choices (that the category manager has) and the size of the deal. It is not uncommon to have payment holidays of up to nine to 12 months in situations where the category manager has a significant leverage.