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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
Some vendors claim price pressures are still working in the customer's favor. SAP's CEO, Henning Kagermann, said in September that 40% of the deals that SAP loses are because it was beat on price. "If the whole industry starts to compete on price," he said, "price will never come back."

Computer Associates sees a software market that's "competitive as hell," says Greg Corgan, senior VP of North America sales. CA hasn't raised maintenance fees, which are around 17% of license fees, in 10 years, he says. "On an individual basis, do we end up discounting our prices? Sure. Have we taken an overall price action? No. When it's a buyer's market, which it is, the customer has the upper hand.''

But ongoing vendor consolidation may reduce customer leverage, GM's McNicholl says. "If [the industry] overconsolidates, the balance of power shifts back," he says. McNicholl believes the "magic number" is three, referring to the number of leading vendors needed to maintain competition in such critical areas as database and ERP software.

There are things business-technology managers can do to ward off unexpected software price hikes. Demand that vendors set one price for the software and services, says Casual Male's Hernreich. Landstar's Wise is trying to build closer relationships with fewer vendors, so the company can establish longer-term deals that it can monitor closely. Hyundai's Hoffman suggests demanding escalation clauses that limit future price hikes. "We won't do business with a vendor that won't cap the inflation increase [at] 3% to 5% for the next five years," he says. The best tactic is to convince the vendor that you're ready to walk if you're unhappy with the contract terms, he adds. (See informa tionweek.com/961/pricing_side.htm for more negotiating strategies.)

Any trend toward higher prices could hurt vendors and buyers, Hoffman warns. If all of his budget increase is eaten up by price hikes, it will limit his ability to buy new technology. "It starts this death spiral, because nobody's buying," he warns. "They're going to kill this industry, because everybody's in the same boat."

-- With Beth Bacheldor, Chris Murphy, and Rick Whiting

Continue to online sidebar: "How To Keep Software Costs Down"