Everything looks like a nail when your only tool is a hammer. That sums up the state-of-affairs in the world of procurement and vendor negotiations for enterprise software. Despite the rapid evolution from perpetual license software to subscription to SaaS, the industry’s vendor-customer pricing dynamic is unchanged. Maybe even archaic. As a customer, regardless of the future volumes you implicitly commit to when you select a vendor’s platform for your enterprise, to negotiate the lowest cost per seat you must agree to bulk buy and pay today for your future requirements. Often 18 months or more in license volume. Your other option? Choose periodic purchases and your cost per seat can be 25% higher or more. Lowest unit price notwithstanding, this business logic runs contrary to all the best practices you’ve been taught. Let’s discuss why.
Enterprise Software Takes Time to Deploy.
Today more than ever companies are changing s/w platforms and vendors. Neither is trivial for a Fortune- class company making a big bet on a new vendor. Think Salesforce or ServiceNow, they sell enterprise platform plays across multiple business areas. You’re hit in two ways. First, the complexity of enterprise transformation means regardless of SaaS vendor, you’ll have extended internal development, integration and project management timeframes. The result? Few organizations can install all licenses immediately. They deploy over time and regularly take longer than planned. Several years ago a major consulting firm reported that 33% of all software projects with budgets over $15 million missed their target completion dates. The result according to the same study? “…half of all large IT projects—defined as those with initial price tags exceeding $15 million—massively blow their budgets.” In projects with extended deployment, bulk software buys to secure the lowest unit price trigger immediate OpEx treatment and can cost significantly more than negotiating staged license deployment. Oh, and don’t forget outstanding budget commitments for the installed software that you are replacing.
Best Practices 101: Align Spend to Use and Delivery of Benefits.
Who wants to pay for a product several months or quarters before using it? Smart business logic prescribes the following. “I buy according to our implementation schedule, pay for product as it is deployed, use the appropriate budget bucket and begin accounting for it at that point.” In a 2018 survey of 75 Fortune 500 clients by Central Technology Services ( CTS ), over 2/3 reported the majority of their software purchases take longer than twelve months to deploy. If this sounds like you and you buy in bulk to get the best price, you’ve bought and paid for over 50% of your total purchase at least a year before you need it, incurred carrying charges and taken the budget hit before any benefit accrues. Consumption-based licensing solves these problems, with no increase in Total Cost of Ownership ( TCO ).
The OpEx Impact of Paying Before Use and Delivery of Benefits
Regardless of what your s/w vendor tells you, the budgeting move from CapEx perpetual license to OpEx SaaS accounting is not a walk in the park. You need to distinguish between ease of use and the effect on your income statement. Here’s an example. Based on your business case, existing vendor obligations and delivery of benefits, you want to buy 1,000 licenses and deploy them over 36 months ( 20% in year 1, 35% in year 2 and 45% in year 3 ). You have 2 choices. Buy on as-needed basis at $1,600 per license or buy in bulk on day one at $750 for a 62% discount. The discounted price is compelling but it there is downside….an immediate OpEx hit for product not in use and money spent before benefits are realized. If you have in-year budget and OpEx considerations and extended deployment, consumption-based licensing may be right for you. It offers a unit price equal to a bulk buy, deployment is aligned to business needs. Payment and OpEx match your deployment date. Flexibility plus no increase in TCO compared to your best vendor option.
Don’t be fooled by options that offer 0% financing or deferred payment. When you pay for the licenses does not trigger OpEx accounting. The beneficial use of the licenses determines OpEx accounting.
Optimized license spend. Better OpEx management. Tighter TCO control. Central Technology Services (www.centralts.com) is expert at assisting Fortune companies and their vendors manage the financial, operational and budgetary issues associated with acquiring enterprise software.
Visit us at our booth at the Gartner IT Sourcing, Procurement Vendor and Asset Management conference in Orlando Florida on September 5th-7th and ask us more about how Central can help your organization.