Looking To Cut Costs? Check Those Software, Service Contracts

By Dan Orzech

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Enron. Worldcom. Xerox. Not to mention lackluster corporate earnings, falling consumer confidence, and a stock market that's going nowhere. No wonder companies are cautious about spending money. And that's putting the squeeze on IT spending: a recent study by Forrester Research of IT managers in Europe, for example, found that technology budgets this year at 70% of their firms had either stayed flat or shrunk compared to last year.

With money tight, some savvy IT managers are cutting costs by double checking their support contracts for too much coverage. They're also examining their software licenses to make sure they're not paying for software programs that aren't being used.

Boatloads of Software

Excess software licenses may be more common than many CIOs realize. Users "bought boatloads of enterprise software in recent years," says Laurie Orlov, Research Director for applications and services at Forrester Research, "and much of it is still unimplemented." Forrester estimates that 12% of technology purchases in 2000 represented overspending.

Orlov suggests that IT departments review their software purchases to see if they bought modules they have not implemented. If so, she says, they might consider the idea of asking the vendor to swap an unused module for one that would be of value to them. "That's not only in the customer's best interest," she says, "but it's also in the vendor's interest, because a module that gets implemented breeds follow-on sales, while a module that's not implemented risks cancellation of the maintenance contract, as well as disaffection from the buyer."

Even if a software package has been installed, companies might be paying too much, especially if their headcount has gone down. That's what several Oracle customers discovered earlier this year, when the software maker installed scripts on their computers to check that they had purchased licenses for all their users.

"It looked like Oracle was hunting for additional revenue," says Paul Campbell, CTO of systems integrator Oxford Global Technologies, in Peabody, Mass, which had helped the firms implement the Oracle software. "But lots of our clients have downsized since Sept. 11Th, and it turned out these companies actually had paid for more Oracle licenses than they needed."

They're not the only ones in that situation, according to the analyst firm Gartner Group, which believes that the majority of enterprises with more than 5,000 technology users are over-licensed. But Gartner suggests having an effective asset management program in place before an audit takes place, because being under-licensed can be costly. In addition to the license fees and interest, many vendors expect the customer to pay the costs of the audit if it is more than five or ten percent out of compliance.

Most software vendor license agreements include an audit clause, according to Gartner, which expects that the number of software audits will double over the next three years, as increasingly strapped vendors search for ways of increasing their revenue streams.

A Buyer's Market

But software vendors' shrinking revenues may actually work to the advantage of customers, by giving them leverage in negotiations. And it pays to negotiate, says Campbell. "I've heard of equivalent support contracts, for the same number of users and the same licenses, ranging in price from $47,000 to nearly $150,000," he says. "The price for support seems to be all over the map."

At Oracle, for example, the list price for maintenance is 18% of the cost of the software. And while CEO Larry Ellison recently announced that the company was toning down its high-pressure sales tactics, which included offering steep discounts to close deals before the end of a quarter -- like the $95 million dollar deal with the State of California, which was signed on the last day of company's 2001 fiscal year -- it is still possible to negotiate. "In this market," says Campbell, "Oracle's sales reps are willing to talk about the price of maintenance."

"It's a buyer's market right now," says Orlov. "Companies should be re negotiating support contracts in mid-period, especially if they have fewer people now than when they bought the product."

Many of Oxford's clients are indeed reviewing their support contracts, says Campbell, to make sure they're not paying maintenance for users who are no longer employees. They're also checking that they're not paying for support on modules which haven't been installed.

But Campbell cautions his clients not to stop paying support on a module that they intend to use in the future, even if it hasn't been installed yet. "When you put Oracle modules back on maintenance," he says, "Oracle can charge you for the period that wasn't covered as well. So you're really not saving anything if you skip a year."