How to Avoid Over Purchasing Software in Your Organization

Recently I saw an article in the Register that talks about how the city of Cornwall spent two million dollars on wasted software from Oracle on a four million dollar contract. In other words, they had shelfware that was equal to 50% of what they paid for that contract. And so when I read the article, I thought it would be interesting to actually dive a little bit deeper than that article does into the reasons that I see that actually causes this problem of people either over buying and overpaying or, or purchasing shelfware. Hi there, Mike Austin, CEO of Metrix Data 360 here. During my time helping customers from the Fortune 500 even down into smaller organizations of a few hundred people, one of the things that I see a lot is wasted money in procurement or the dreaded shelfware licenses that are purchased and never used. So let's look at what leads to this over purchasing. The first is the way that software license models are built. The software vendors build those models for you to pre buy or prepay in exchange for large discounts. So in other words, I'm sure that Cornwall received some sort of discount from Oracle to buy $4 million worth of licenses that was greater than the discount that they would have received if they only bought $2 million worth of licenses. So, so when they looked at it, they looked at the discount, let's say it was 20 versus 40% and thought that they were getting a great deal at a 40% discount. Now why does that happen? That happens because the licensing programs are built based on buying up front. They're not built for you to purchase licenses as you roll out and gradually get to the price points that make sense. Or are they built to give you the discounts upfront for lower purchases they want the enterprise sale. You also have to look at the licensing metrics that are built within the contract. So the article didn't talk about what Cornwall actually bought. But if you look at it, if those licensing metrics were all users that access a system, then that might have forced them to buy for all users upfront, even if they weren't ready to use the system on day one. So licensing metrics themselves can actually drive to over usage of software. Another example there might be with Microsoft licenses. So if I have a license that once it's turned on and anybody that has access to it requires a license, I would then be forced to purchase licenses for everybody that has access, even though maybe only a small subset my pilot project are using it. I could be forced, depending on how it's architected, to buy for everybody in my organization. This actually leads to the second issue, and that's how customers actually buy. See, a lot of the times they get focused on that discount. So that example where, again, I don't know what Cornwall got for discount, I'm just using that as an example where maybe they would have received 20% for 2 million and 40% for $4 million in purchases. They got focused on the unit price, and by doing that, they bought software that they couldn't use, or potentially bought software that they couldn't use right away. We see this all the time. For instance, maybe an application that you're retiring and you're going to use a new vendor's technology to replace a legacy system. So you look at your current System, it's got 10,000 users on it or 5,000, and you basically know that your new system is going to have 5 or 10,000 users on it. So what do you do? You go out and negotiate an enterprise deal for the best unit price for five or 10,000 people. Well, the reality is now I'm paying for software maintenance on my old system, which maybe is going to take me 18, 24 months to retire, and I'm paying for it at the full use value for the new system for 5 to 10,000 users. This happens because you're following the vendor's rules. They have a licensing program, like we talked about, that's designed a certain way, and you're following into those rules and you're looking again at the unit price versus maybe looking at the full picture and what that full picture looks like within your environment. One of the biggest reasons that happens is because you don't have a viable alternative to the solution that you're looking to purchase. So, for instance, with Cornwell, again, I don't know. But did they have another vendor that could have done what they did, or did Oracle know that they had the business? Right. So sometimes what you'll see is you're purchasing a solution where that vendor knows they've won the deal. They're going to be less likely to negotiate and be flexible than if they think that they're up against some other viable incumbent. That's real. Now, people have tried this in the past, and so you have to make sure that this is a viable alternative and that it truly is real. For instance, I've seen so many people say to Microsoft, we're not going to use Office365, we're going to use Google. And in the enterprise space, Microsoft doesn't take that necessarily as a valid threat. They just sort of say, oh, okay. And they'll sort of appease you with entertaining it. But back at the office they're like, there's no way those guys are going to Google. So you have to make sure that your viable alternative is truly an alternative that that vendor is scared of and is truly competing against. So the third area that causes this problem is the current solutions. I sort of touched on this earlier. Most organizations have a ton of technical debt. So if you're looking to modernize or digitalize your environment, you've got these systems that you're currently running that you're paying support and maintenance on, that you want to get rid of and move to newer systems that unfortunately most of the time just doesn't happen overnight. There's lots of reasons for that. There could be a lot of technical integrations into these systems. You've got end users that you need to be concerned with and their training and their knowledge of new systems or their pushback and resistance to change and things like that. But you have to understand what your current position is and the technical debt that you currently have before migrating to new systems. So often we see that they're migrating and that old system is still on the books from a capitalization perspective. So even there, you're getting a double whammy because you're still paying for it in your budget through your capitalization. And then you're going to go out and buy a new system, making the problem of buying some of these new systems either more challenging or compounding the impact of on your IT budget in a greater way. So I actually suggest all the time that you have to understand this, you have to understand your current cost, how quickly you can get off what the impact from a licensing perspective is. Because if you're in a contract with a vendor, that's an all or nothing support contract from a maintenance perspective, even though you may decrease your users by 50% in year one and then by the end of year to be all off the system, you're probably going to have to pay your full pop of maintenance for two years because they're not going to let you reduce your maintenance by 50% because all of your licenses need to be maintained, not just the portion that you're using. So again, these are the sorts of things that become a challenge for you and you have to be working with your software vendor that you're going to buy from and make sure that they understand that these are challenges and that they're going to have to bake that into their proposals and their solutions from a pricing perspective. When you're looking at the new technologies and finally the last thing is just the software vendors themselves, there's lots at play here. Think about a software rep that has a quota. What are they going to want? Are they going to want that enterprise sale where you buy 4 million up front maybe for an increased discount or do they want the smaller sale, maybe a few licenses this year to run a pilot that then grows to 10,000 users over the course course of two years? Well, they're going to be looking at their quota and saying it's better for me to get a deal up front. So they're going to be pushing for those deeper discounts and for you to pre buy all of that shelfware. Most software companies will say that they're your partner and that they want to partner with you, but their compensation is going to dictate their behavior. And compensation plans are year to year. They are not focused on multi year compensation plan. So that's again going back to that pre buy up front. Your rep is going to push that because a they don't know whether they're going to be managing your account next year. They don't know whether they're still going to be there and the company itself is not motivating them to look at strategic long term business and growing the business long term. They want that revenue up front. And that's why I talk about the enterprise sale. Buying that big bucket up front for the entire enterprise versus buying a small project to get off the ground at a reasonable rate or allowing you to adjust your pricing as you grow to help you look at the technical debt and the capitalization that you still have on your budget and making things so that either it's a little bit beneficial to you or at least net neutral as you grow into their solutions. Those are a challenge but can be done if negotiated properly. So I hope that gives you an overview of how you can find that you're over buying or overpaying and getting that dreaded shelfware in your environment. If you'd like to discuss further how you can avoid these things happening to you, please fill out the form below and reach out to us. We'd be happy to have a discussion on how we can help you negotiate your software contracts. Thanks for watching and hope to see you soon. Sam.