11:36 AM

Power Shift

IT buyers are gaining the upper hand; they're pushing back on software vendors, winning better terms and improved services

Software buyers and vendors are redefining their relationships-much to the buyers' advantage. Under pressure from CEOs and CFOs to cut costs, demonstrate return on investment, and drive revenue, IT executives are pushing vendors, winning concessions such as lower prices, better services, and commitments to meeting project milestones before extending deployments.

Software vendors aren't giving away the store, of course. But faced with more demanding purchasers and a slow-starting economy, they're working harder to serve customers.

Barclays Global Investors, a London subsidiary of Barclays plc, is asking more of its vendors. The financial-services firm cut its IT budget by 10% this year after enjoying 20% growth for several years through 2000, says Paul Stevens, global head of technology.

Like many companies today, Barclays is investing primarily in technology that's strategic to business goals and customer initiatives. So far this year, Barclays has bought only two commercial products, both designed to aid its core collaboration efforts: software from Intraspect Software Inc. that lets employees, customers, and partners share data in online workspaces and CollabNet Inc.'s collaborative-development tools for managing open-source code.

With fewer projects on their schedules, companies such as Barclays have time to thoroughly test software, making sure it performs as vendors promise, before buying it. Given his budget constraints, Stevens says, he's more likely to demand "demonstrable progress" from a vendor by phasing in software before buying companywide licenses. Companies like Barclays often set milestones for vendors that they must reach before the IT department will advance a project and buy additional software and services.

Vendors acknowledge that current trends have been sparked by the fact that the great majority of big IT projects come in late, and many have cost overruns and failed objectives, says Robert Eve, alliance VP at management-software vendor Kintana Inc. "Customers want to start small, try it, and then grow larger," says Sanjay Kumar, CEO of Computer Associates. CA has changed its sales strategy to accommodate shorter-term and more flexible licenses. "Say goodbye to the big-bucks layout up front," he says.

Customer-relationship management vendor Pivotal Corp. has seen the same thing, CEO Bo Manning says. Buyers are "making damn sure they're going to get returns," he says, so they want to see success with a number of small deployments before they'll buy a companywide license. Like Oracle, PeopleSoft, Siebel, and other software vendors that have reported quarterly results in recent weeks, Pivotal has felt the effects of more cautious buying-last week, it reported revenue of $17.7 million for its third quarter ended March 31, down from $26.6 million a year ago.

Royal Caribbean Cruises Ltd.'s buying plans tend toward smaller, smarter deployments, mainly because of the downturn in travel. In the wake of Sept. 11, the company has canceled several IT projects for this year, including plans to put PeopleSoft applications onboard its ships, a reservation system upgrade, and a Siebel CRM software call-center integration project.

The Miami cruise line is proceeding with just one major IT project this year, a supply-chain system using J.D. Edwards & Co.'s OneWorld software. But it has scaled back this year's budget for that project from $20 million to $2.5 million, CIO Tom Murphy says. Royal Caribbean plans to automate its supply chain and improve logistics management as part of a five-year plan to double passenger capacity. In the old days, Royal Caribbean would have bought the entire ERP suite rather than just the supply-chain modules in return for volume discounts, even though it wouldn't implement everything right away. But "those days are gone for good," Murphy says.

Customers today come to the bargaining table older but wiser. Some feel they've been burned more than once on software contracts, starting with the hype around the transformative power of the Internet that led them to multimillion-dollar, multiyear projects that didn't deliver. Companies often failed to implement all they bought because they were trying to do so many things at once, says Tom Topolincki, a Gartner analyst. Some IT departments even bought multiple versions of certain types of software just to see which one was most effective.

What's the single most important concession you've gotten from your major software vendors, as you negotiated or renegotiated deals in the last few months?

Take our poll

Contracts that led companies to pay the "soft costs" of ongoing upgrades that included features and functions they didn't really need further fanned the flames, says Ditka Reiner, president of Reiner Associates, a San Francisco consulting firm that negotiates software contracts for businesses. "Negotiating contracts has changed over the last year because [businesses] are becoming more savvy," she says. The combination of a tough economy and more astute customers is leading to better collaboration between parties during negotiations and fairer prices, she says.

"A couple of years ago, it was hard to get vendors to come to the table to renegotiate," says Stephen Yates, president and CEO of USAA Information Technology, which provides IT services to the USAA insurance and financial-services company. "They were doing too well, making too much money," he says. "Now that's all changed." The San Antonio company has gone from out-of-control spending to implementing cost controls that enable it to spend less but do more for its customers, Yates says. This is critical for success in technology-oriented organizations where executives are rewarded for closely aligning IT and business goals.

A key project this year is to gain better visibility of customers by replacing a hodgepodge of homegrown customer-facing applications across all lines of business with Chordiant CRM software. About one-third of USAA's customers buy only a single product. The new CRM platform will help the various units up-sell to customers, Yates says.

Technology buyers shouldn't necessarily equate better deals with bargain prices, Reiner says. Some vendors, for instance, may be less willing to negotiate on license fees and more willing to give away something that may not directly affect revenue, such as extra training or services.

In fact, some business-technology managers believe the pressure now on software vendors to be profitable under tough economic conditions is forcing them to institute standardized pricing. Larry Quinlan, global CIO at Deloitte Consulting, is uncertain whether this ultimately benefits the vendor or the customer. Nonetheless, Deloitte Consulting has gained some key advantages in its relationships with software vendors. Forced upgrades for hard-to-identify, incremental improvements are a thing of the past. And Quinlan has more leverage in angling for additional support in contracts. "Gone are the days when we throw your software out there, and we know it sucks, you know it sucks, and the support stinks," Quinlan says. "We won't tolerate that."

The cookie-cutter approach to services that once was common among vendors is no longer acceptable at Acterna, a Germantown, Md., maker of optical test equipment. "We have more leverage now, so we can be more demanding," IT director Beth Harvey says.

Suppliers are willing to come up with tailored service packages rather than forcing users to choose from fixed-menu choices. For example, Harvey's team, which is deploying mySAP applications at Acterna offices worldwide, wanted to change the order in which it deployed certain software components. SAP was flexible and helpful in determining the cost equations associated with various deployment plans, Harvey says.

F.W. Murphy Manufacturing Co. is another tech customer that has used its buying power to get a better deal on services and software. The company, which invested in excess of $100,000 on a Siebel CRM software project begun two years ago, recently jettisoned that in favor of a new CRM package from J.D. Edwards, which also supplies back-office software to the $40 million Tulsa, Okla., maker of industrial controls. F.W. Murphy switched because the promised level of integration between Siebel software, which J.D. Edwards resold, and J.D. Edwards' own applications failed to materialize. Suddenly, F.W. Murphy VP Mitch Myers was looking at an additional $100,000 in annual integration maintenance costs.

The manufacturer negotiated a new contract with J.D. Edwards for the OneWorld ERP suite, CRM applications, and services. J.D. Edwards was eager to keep F.W. Murphy's business. As a result, F.W. Murphy ended up getting the CRM applications, as well as implementation and deployment services, "virtually for free," Myers says.

Another factor entered into Myers' decision to rip out the Siebel software in favor of J.D. Edwards' product: its longstanding relationship with the vendor. Although the Siebel CRM software performed as promised and company officials worked hard to keep F.W. Murphy's business, the manufacturer felt it had a stronger relationship with J.D. Edwards. A company's partnership with key vendors will dictate how well it succeeds at maintaining its business model and reaching its goals, Myers says.

Other business-technology managers are demanding that vendors treat them as partners, not just sales opportunities. "There's a definite change in our relationships with software vendors," says Walter Peckham, CIO at Pacer International, an Oakland, Calif., shipping and logistics company. "Vendors are more willing to listen to my business problems and help me solve them rather than trying to force-fit their products to our needs, as they did in the past," he says.

Pacer is replacing all operations systems for its StackCar railroad container division. One of the first deployments will be a financial system, which is projected to have an 82% ROI. Peckham expects transportation software company Qiva to share its best-practices expertise with Pacer so it can improve its internal practices.

But every silver lining has its cloud. Some users are concerned that in the current climate, many software vendors will be squeezed out of the market. The number of viable enterprise application vendors is shrinking, and the resulting decline in competition is bad news for customers, Deloitte's Quinlan says. "That's a troubling-but probably inevitable-trend. It limits our options considerably."

Royal Caribbean's Murphy shares that concern, which is why the cruise line has made accommodations for struggling software vendors. For example, Royal Caribbean has rewritten some service-level agreements with software suppliers that have laid off service workers, making it hard for them to fulfill previous agreements. "Our philosophy is, everyone's having a tough time," Murphy says. "We don't want to chase any vendors out."

There's no doubt that the buying situation has changed-and not just for now, while the economy is unsteady. Software vendors must get used to the new expectations.

"Any strategy going forward, any projects, will have less of a transformational effect and more of an evolutionary approach," Murphy says. "This is a tactical change that's going to affect software suppliers for some time."

-- with Steve Konicki, Karyl Scott, Rick Whiting, and Jennifer Zaino

Comment  | 
Print  | 
More Insights
Newest First  |  Oldest First  |  Threaded View
Register for InformationWeek Newsletters
White Papers
Current Issue
Top IT Trends to Watch in Financial Services
IT pros at banks, investment houses, insurance companies, and other financial services organizations are focused on a range of issues, from peer-to-peer lending to cybersecurity to performance, agility, and compliance. It all matters.
Twitter Feed
InformationWeek Radio
Archived InformationWeek Radio
Join us for a roundup of the top stories on for the week of July 17, 2016. We'll be talking with the editors and correspondents who brought you the top stories of the week to get the "story behind the story."
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.