nformation technology managers are noticing some refreshing changes in the software market this year. The VP of IS at a networking equipment manufacturer in Maryland recently led negotiations to buy applications from vendors, including CrossWorlds and Siebel Systems, and he could feel the shift in power at the bargaining table.

CrossWorlds discounted the list price of its business-integration software by 50%, Siebel threw in 30 days of free consulting, and the VP got a higher level of service and support for the price of a lesser service package from another vendor--concessions he says wouldn't have been made a year ago during the height of the technology boom. "You go through this process even in good times," says the VP, who requested that his name and company not be used. "But the vendors, from what I'm seeing today, are a little hungrier for the business."

That's because these are lean times for many software companies. Ariba, i2 Technologies, and Oracle, to name a few, missed revenue and earnings estimates in their last quarters as companies cut spending on IT. With no end to the economic downturn in sight, dot-coms dying instead of buying, and IT budgets under close scrutiny, software vendors are cooking up new pricing schemes--or, in some cases, recycling old ones--to clinch deals. Aggressive discounting, alternative licensing methods, and fixed-cost implementations are meant to induce customers to sign on the dotted line. But buyers must sort out the real deals from illusion. While some businesses are confident they're getting steals on software, others are wary that licensing and packaging arrangements promising lower up-front price tags will cost them more in the long run.

Even discounting isn't as straightforward as it may seem. In a recent Morgan Stanley survey of 225 CIOs, 37% say software vendors are providing better deals or discounting more compared with six months ago. But it's hard to judge the actual market value of a product. Software vendors routinely offer standard discounts on the list price ranging from 20% to 70%, depending on the size of the transaction. But they require customers to keep the deal quiet, sometimes even insisting on nondisclosure agreements. Says the networking equipment VP: "The list price of software isn't reality."

That said, some software companies these days are cutting prices deeper than their standard discount schedules. Bob Malone, director of E-business product initiatives at Applied Materials Inc., a maker of semiconductor production equipment in Santa Clara, Calif., is finding a buyers' market. That may be some consolation for the $9.6 billion company, which last week reported its net income plunged 52%, to $226.7 million, or 27 cents per share, from $468.8 million in the same quarter last year, amid the slowdown in the chip industry. Malone was recently involved in buying several large software packages, the centerpiece of which was a data-management system that stores information such as product designs and the standard components a company uses to manufacture its goods. He was able to whittle the price for an annual service maintenance contract, which lets customers receive ongoing upgrades, patches, and support, to 12% of the software's discounted price, down from the typical 20% of the list price. "If vendors want to do a deal, they'll negotiate on the price," Malone says.

One software vendor also agreed to provide Applied Materials with some free user training, which can cost as much as $1,000 a day. But Malone warns that the quest to drive a hard bargain should have its limits. "What you're trying to do is form a long-term relationship, not create havoc for your vendors," he says.

Manugistics Group Inc., a provider of supply-chain planning apps, knows how easy it is for vendors to slip into a discount death spiral. Two years ago, the company was in a financial mess and rumored to be a takeover target. Because of concern on the part of potential customers about its viability, Manugistics was forced to compete on price by selling software for far less than competitors, compounding its financial problems. Nate Wallace, VP of investor relations at the company and the man responsible for pricing on every deal, warns of the perils of extreme discounting. "Discounting is like heroin--a little bit feels good to get something done in a quarter, but you can't get off it," Wallace says. "Discounting is a disaster to your margins, and once you start it's extremely difficult to get back to the point where you have a reasonable percentage of return on your product."

Manugistics has bounced back from the edge of disaster, posting seven straight quarters of license revenue growth. It was one of the few enterprise software vendors to meet its earnings projections in the first quarter. Now that the company has gotten its prices back in shape, Wallace says, discounting is more measured at Manugistics--rarely more than 10% off the list price.

In a slump, when IT budgets can least afford to be blown, Wallace says buyers should do their homework before signing contracts. He says software vendors often play a disingenuous numbers game to make it look as if they're offering deep discounts. "Some vendors have a way of walking into a deal and saying, 'OK, $40 million,' and every now and then they get a customer who says OK," Wallace says. "But usually the client says no and they respond, 'OK, how about $10 million?'"

Some businesses with tight IT and capital budgets are closely examining subscription licensing policies as a way to cut costs. The advantage is similar to any lease: lower up-front costs in exchange for a stream of payments. But unlike outsourcing to service providers, customers remain responsible for providing the infrastructure and IT personnel to maintain the applications. The initial cost of a subscription license is less than contracting for a product under perpetual license agreements, where the customer pays annual maintenance fees and owns forever the right to use the software.

Ariba, Oracle, and webMethods have offered subscription licenses for more than a year; vendors such as Computer Associates and, most recently, Microsoft are joining their ranks. Most vendors offer these licenses in addition to perpetual license plans, which are still more popular.

That's the route Microsoft is taking. Earlier this month, it unveiled a subscription-pricing option that will kick in this October (see "Microsoft Price Change Rewards Frequent Upgraders," May 14, p. 30). Microsoft Windows and Office products will be available to companies with at least 250 PCs for an annual subscription that's 15% less than the price of a perpetual license. The rate is set for the first three years based on the number of PCs and servers in a company, after which it's subject to negotiation. Some see the new model as Microsoft moving toward a future in which Internet delivery of software doesn't require users to buy applications.

Subscription licenses also can be attractive in a slowing economy for another reason: They're recurring charges that companies can count as expenses, rather than assets. That reduces tax liability.

That's one reason webMethods' pricing plan appealed to Cargill Inc., a $47.6 billion agricultural products company. Cargill is implementing webMethods software that lets customers place and check orders directly from their own purchasing systems and through E-marketplaces such as Novopoint. Cargill says webMethods' model, based on a $125,000, two-year contract, was attractive because it didn't require any capital outlay and therefore helps the company lower its technology risk in case the software turns out not to suit its needs. Says Jay Singleton, manager of enterprise application integration for the Wayzata, Minn., company, "If a newer, better technology comes along, we'll be able to adopt it with minimal cost impact to Cargill."

Vendors say this model also makes them more accountable for getting a product to work for customers. "With a perpetual license, there's less incentive for a company to ensure customers' success if only maintenance fees are at risk," says Mike Destein, director of product marketing at webMethods. "We rely on customers renewing licenses at the end of two years, so we have to make sure they're successful, instead of just hoping that they are."

Maybe, says Jim Shepherd, senior VP of AMR Research. If the software becomes a core part of a company's operations, such as an enterprise resource planning system, it requires significant resources to implement, configure, and integrate into a computing environment and can't easily be replaced. Leasing that software leaves a company subject to fluctuations in list pricing and conditions after the term of the contract has expired. "Whether the buyer understands it or not, they're locked in," says Shepherd. "It's very annoying and painful to renegotiate two years later. Now you have no leverage, and they can charge you anything they want."

Applied Materials' Malone says it's not worth the time and resources to constantly re-evaluate critical platforms. "The desire to enter into longer-term relationships is growing," he says. "I don't have time to do vendor selections frequently."

Regardless of the economic straits in which some businesses find themselves, analysts say the rule of thumb is that it's more cost-effective for companies to own perpetual licenses if they're fairly certain to stick with an application for some time. Like leasing a car, the cost of subscribing to a technology will eventually surpass the cost of buying it. Microsoft says the break-even point with its new subscription model is five to six years.

For emerging technologies like those Cargill is adopting--such as XML tools, online exchanges, and Internet security systems, all of which are evolving rapidly--analysts concede that a subscription model is a way to test the waters and make a change if a superior technology or provider emerges. Such a plan also may appeal to companies that make frequent staff changes or whose user base rises and falls unpredictably. For instance, Microsoft's new model will let a company that suddenly has to lay off many employees cut its subscription fee for the PCs no longer in use, though not until the following year.

Software vendors also derive benefits, namely increased revenues, from subscription models. Lisa Savino, CA's VP of investor relations, says the company hopes to reduce discounting, or at least "instill more discipline in our discounting practices," by offering month-to-month contracts. Savino says short-term contracts let customers test the software's value before making a big monetary commitment. However, businesses are subject to fluctuating list prices every month, with little opportunity to negotiate discounts. The shorter a contract, the less of a discount the customer will get. The days of "deep, excessive discounts for seven-year contracts" are numbered, Savino says: "We have to give away too much to get that commitment."

Microsoft's recent licensing changes also include one that will affect businesses that buy Microsoft Open and Select licenses: They'll lose the ability to buy discounted upgrades at any time. Instead, Microsoft will make those customers either buy annual maintenance agreements, renewed every three years, or else purchase full-priced new versions when they want to upgrade. The maintenance deals compel buyers to upgrade more regularly, says Meta Group analyst Kurt Schlegel. But the change shouldn't cost companies more in the long run, though it removes flexibility. "It sounds worse than it really is," he says. Perhaps more troubling was Microsoft's move last June to introduce per-CPU pricing for its SQL Server database and other E-business servers, effectively raising prices.

But Brad Simpson, assistant director of IT sourcing at the Principal Financial Group, an insurance and financial-services firm in Des Moines, Iowa, is concerned about the higher costs of Microsoft's new maintenance program. The $8.9 billion company owns Select desktop licenses and will have to decide by October whether to purchase the upgrade package, which at 29% of the software's list price is well above the industry average for maintenance contracts. "It's less complicated, but it's going to cost people more money," Simpson says.

There's another option emerging for acquiring software under tighter budget constraints: fixed-price, rapid-implementation projects. ERP vendors have been offering such models for core modules for a few years but most recently have extended them to fast-growing markets such as customer-relationship management and supply-chain management. Last month, Oracle and PeopleSoft Inc. enhanced their rapid-implementation programs. PeopleSoft launched Accelerated Supply Chain Management, promising deployment in as little as 12 weeks at a starting price of $40,000 per application module. The PeopleSoft Accelerated program, also available for human-resources, finance, and CRM products, is designed for companies with less than $500 million in annual sales. Oracle introduced a program promising its global CRM suite deployed in just 90 days for less than $395,000.

But look carefully at quick-and-dirty implementation programs; the devil's in the details. And the fine print is extensive for Oracle's 90-day CRM promotion. The project is limited to installation at one site or on one computer and is available in an English version only. It excludes basic, but time-consuming, activities required in most software projects, such as data conversion, and doesn't allow customization or integration with other applications. In addition, the system must be implemented and tested in an Oracle-hosted environment and installed on select Hewlett-Packard and Sun Microsystems hardware, with a new copy of Oracle's database. Oracle consultants will tackle customization and integration tasks after the software is deployed as-is, but that adds to the bill. "For a fixed price and fixed implementation time, you have to have some constraints," says Jeremy Burton, a senior VP at Oracle.

Are the sacrifices worth it? Rapid deployment programs may appeal to startups with no IT infrastructure, but such rigid programs may have limited value for companies with existing processes. As much as IT buyers love bargains, price ultimately isn't the only factor important to them. In a recent InformationWeek Research survey of 500 business and IT execs on customer loyalty, price ranked behind usability, customer service, vendor stability, return on investment, and cost of integration among top technology-selection criteria. "Cheap technology just costs you more in the long run," says the VP at the Maryland networking equipment vendor who opted for Siebel over Oracle CRM software, at a price premium.

Not only that, software licensing and maintenance costs are often just a fraction of the total cost of an implementation. Consulting, user training, and new networking and hardware equipment together can cost three to five times the price of the software. "Getting a better software price doesn't hurt," says Chris Mortenson, managing director at the investment bank Deutsche Banc Alex. Brown, "but it's not the answer to your problems."--with Steve Konicki and Aaron Ricadela