Price-Hike Surprise - InformationWeek

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Software // Enterprise Applications
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10/24/2003
10:15 PM
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Price-Hike Surprise

It's been a buyers' market for years, but now some software vendors want to charge more. One CIO warns that the attempts could backfire

A sign of desperation or a rebounding I.T. market? Whatever the explanation, business-technology managers say some software makers, after several years of deep discounting to prop up declining sales, are trying to raise prices and fees--in many cases, without providing much in the way of new features or services. That's not going down well with customers, many of whom are still struggling under difficult business conditions and trying to stretch IT budgets.

Richard Hoffman -- Photo by Sacha Lecca

Hyundai CIO Hoffman suggests adding an escalation clause to software contracts.

Photo of Richard Hoffman by Sacha Lecca
Richard Hoffman, director of IT and CIO of Hyundai Motor America and Hyundai Motor Finance Co., has seen more than one vendor try the tactic in recent months. One supplier tried to change the contract for its proprietary Web software to reflect named users rather than concurrent users. Under the old contract, 50 people could use the software at any given time, but the vendor wanted to charge Hyundai for all potential users--more than 800 people, which would mean nearly a 1,300% spike in costs. Another vendor changed the way users are defined under its enterprise-resource-planning contract, pushing more employees into a high-use category with higher fees. That would have resulted in a more than 40% increase in software licensing costs. Hoffman resisted both increases.

Software vendors are "hurting for revenue, sales are down, and what's happening is they're redefining their contracts," Hoffman explains. And what they're offering in exchange isn't worth it, he adds. "They tell you, 'Now we're giving you all this extra stuff.' The problem is, it's all stuff you don't want."

Roger Berry, CIO at Walt Disney World Resort, has been hit up by vendors seeking higher maintenance fees. Such fees usually run 7% to 12% of overall license costs, he says, but some vendors have tried to raise them to as much as 17%.

Steven Buege, chief technology officer at Thomson Legal and Regulatory Ltd., a $3 billion-a-year publishing company, says one vendor proposed a license fee hike of almost 39% for a three-year contract renewal. It wants an increase in maintenance fees for the contract, which provided for unlimited use of the software by employees, because employees use the software so much. "If that's going to be the model for pricing," he says, "watch how fast I can reduce the need."

It's difficult to determine how widespread this trend is, partly because software pricing has always been complex. Customers interviewed for this story didn't want to cite specific vendors or products, in many cases because they still use the applications and want to maintain good relationships with the vendors. Software developers generally are reluctant to discuss prices of their products because they want to retain the flexibility to cut deals. Plus, there are so many factors that can go into the cost of software--number of users, number and types of servers, number of CPUs, amount of usage, and so on. It isn't always clear whether a proposed price hike is reasonable or even if it is a price hike.

Take Microsoft. The software company changed its volume licensing program last year, angering many customers who believed the changes would increase their costs. Microsoft argued that companies that upgrade frequently would actually save money with the new licensing plan. Still, in response to the backlash, Microsoft added more services to its software and maintenance contract. "They made it more palatable to customers," says Dwight Davis, an analyst at Summit Strategies. "They sweetened the pot by adding additional services."

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