Last year, Guardian Life Insurance was approached by one of its IT vendors with a very attractive offer to replace its leased equipment a year ahead of schedule. The deal ultimately let Guardian reduce its expenses by $6 million, netting a 25 percent reduction off the run rate, while simultaneously increasing its capacity by a third and operating its business on a much more advanced platform. That’s not the sort of accommodation the vendor would normally make — but as Guardian chief information officer Frank Wander says, this isn’t a normal economy.
Similarly, TD Ameritrade recently entered into its first IT leasing deal in years, tempted by heavy discounts and extremely low financing rates. “They’re not zero percent, but they sure feel like it,” says William Gerber, the online brokerage firm’s CFO. “And the prices we’re getting now are the best we’ve seen in comparable equipment in more than 10 years.”
It’s a buyer’s market for information technology, experts say, thanks to the recession and smaller corporate IT budgets. Nervous vendors are going out of their way to accommodate cash-strapped customers, cutting deals to win business, while companies are beginning to demand pricing breaks and other considerations. One tough shopper is ETS, a $1.2 billion private organization that develops, administers, and scores educational assessments. ETS slashed its 2009 capital budget for technology by 16 percent, to $50 million. “We are putting pressure on all our executives to be much more cost-conscious,” says CFO Frank Gatti. That includes negotiating with vendors aggressively.
Dell Computer and Microsoft recently took the unusual step of publicizing deals for corporate customers. To businesses with top credit marks that bought $40,000 worth of its hardware, Dell promised deferred payments for three years. Microsoft offered new customers of its Dynamics ERP and CRM software zero-percent financing if they invested between $20,000 and $1 million.
But CFOs shouldn’t expect other vendors to go so far as to advertise bargains. That’s because few IT configurations are standard, and too much transparency would work to buyers’ advantage. Instead, vendors that serve decimated industries, like banking, expect — if not downright fear — that their clients will demand better deals.
“Technology vendors are kind of hiding under the table and hoping they don’t get a phone call from customers” looking to renegotiate existing deals, says David Rutchik, partner at Pace Harmon, a consultancy specializing in vendor program management. “But if vendors are smart, they’re going to engage in those conversations and work through things.”
That’s music to a CFO’s ears. Traditional software vendors in particular should be open to negotiating. Their business is under assault — not only from budget cutting, but also from the gradual migration from perpetual licensing to software-as-a-service.
Perpetual licenses give the buyer the right to use the software for as long as it wants, but generally require it to book a capital expense. Such licenses also come with a fee for maintenance, including support and upgrades, that can run another 12 to 22 percent per year of the original contract value. To keep customers happy, “there’s more willingness from vendors to allow flexibility in these contracts,” says Sharyn Leaver, a Forrester Research analyst. Buyers used to acquiesce to annual hikes in maintenance fees, but now they are “pushing back,” she adds. Many are using their newly acquired leverage, for example, to lock in maintenance rates for longer periods.