For small and midsize organizations, a hosted solution provides access to high-end systems and expertise they might not be able to afford otherwise, says Wang. For example, when 20/20's Warren evaluated tools for building a customized CRM system, he found that Force.com would cost about 75% less than a comparable packaged offering. Factors that drove up the cost of an on-premises product included licenses and the need for in-house IT infrastructure to support the software.
However, a large enterprise often already has most of the IT resources needed to support a new application. Further, it can depreciate the underlying hardware -- which it can't do with monthly SaaS fees.
Of course, SaaS providers are just as profit-oriented as traditional software vendors and can be hard bargainers themselves, says Warren. For instance, Salesforce.com offered a discount in return for 20/20 agreeing to purchase both developer and end-user licenses as soon as the contract was signed. But development stretched out for two more months, during which time 20/20 paid maintenance and support for end-user software it wasn't using. "We probably should have held out for buying the end-user licenses once the development was completed," says Warren.
Moreover, customers that expect SaaS to be strictly pay-per-usage are often disappointed, says Gartner's Snyder. In exchange for a good deal, "many providers want a three-year agreement with a guaranteed minimum usage," he says.
Even if you're not ready to go with an alternative like SaaS or open source, it doesn't hurt to let your vendor know that you're exploring those options, says Snyder. Vendors will be more willing to negotiate seriously "when true competition is a factor," he adds.
Not Too Rough
But don't treat your vendor like an enemy. Hard-nosed negotiating is fine up to a point, but "price and licensing discussions are very much part of a long-term relationship," Konary says.
"You may get the best price in the world," says TMP's Jefferson, "but if you alienate your vendor, you may not get the support and service you need."
For example, TMP went through a workforce reduction recently, but the company's contract with Microsoft didn't allow it to reduce the number of licenses it paid for to reflect the decrease in the number of end users. Nonetheless, Microsoft agreed to renegotiate the three-year agreement so TMP wouldn't have to pay for the licenses it wouldn't be using, Jefferson notes. He gives the economic downturn partial credit for the software giant's willingness to cut TMP some slack. More important, however, was TMP's partnership with Microsoft. As part of that relationship, Jefferson says, "we put all our cards on the table" and keep the vendor fully informed of business plans and software needs.
TMP does that with all of its vendors, Jefferson says: "We'd bring them in and say, 'Here's what we're doing; we need to maximize our spend.' Often, they come up with innovative solutions."
Know your software pricing options
Before negotiating with a vendor, figure out what pricing model works best for your organization. Then, if the vendor rep says, "We don't offer that," you can threaten to go to someone who does.
"Pay per seat" is the traditional pricing model. In such arrangements, vendors offer better deals for volume and commitment but generally include penalties for reducing the number of seats before the agreed-upon renewal time. At the very least, customers lose their volume discounts if they give back a significant number of seats, and they have to pay list price for additional seats if they underestimated user demand. However, vendors are starting to be more flexible on this point.
Here's a look at some newer pricing models:
•Pay per number of concurrent online users. This is particularly useful for global companies that have multiple groups of employees who work at different times in different locations.
•Pay for unlimited clients. The advantage of this type of arrangement is that the customer no longer needs to guess how many licenses it will need in the next year or two, nor does it need to keep track of license usage in case of a vendor audit. Such licenses are pricey, however, and work best when the software will get lots of use, says IDC analyst Amy Konary.
•Pay per usage. In this model, vendors typically charge an upfront fee plus a rate that scales up and down according to utilization of a given software package. This option is catching on among companies that are sick of paying one price for a monolithic software suite, such as Office, even if their workers are using only a tiny percentage of the features, Konary says. Pay per usage will potentially enable customers to pay on a highly granular level, not just by application usage but according to who is using which features or software modules and for how long.
Usage-based pricing models have a catch, however: They require IT administrators to spend a lot of time monitoring and recording utilization levels. The more granular the model, the more time-consuming and complex that task will be.
Horwitt is a freelance reporter and a former Computerworld senior editor. Contact her at firstname.lastname@example.org.
This version of this story was originally published in Computerworld's print edition. It was adapted from an article that appeared earlier on Computerworld.com.
This story, "How to Negotiate Better Business Software Deals" was originally published by Computerworld.