When Negotiating a Software Deal, Information Is Key

For much of my career, I was involved with selecting and assessing software vendors and was often involved with the procurement of software. Later, I went over to the dark side and set up a software vendor, so I have been on both sides of the procurement fence. This has given me perspective on some of the things to do, and not do, during the process of buying enterprise software.

I will assume, for the moment, that you have selected your software - in itself a non-trivial procedure - and now want to purchase it from your chosen vendor. If you are in this position, you have already made a serious mistake.

Deal Maker, Deal Breaker

Enterprise software is not like buying a car. With cars, I can look in Parker's Car Guide and find the going rate for a particular vehicle. Software, however, does not have a transparent market; therefore, the going rate is -uncertain.

Buying software is more like haggling with a vendor in a Marrakech bazaar than popping down to Tesco. You might see a list price from a vendor, but that is not what people actually pay. On this basis, procurement departments typically aim for a target discount to list price - let's say 50 per cent - and will fight tooth and nail to gain it. However, it is hard to know what the list price really is.

Getting a 50 per cent discount on a list price of US$4m sounds great, but it is less impressive if the vendor anticipated this and greatly inflated the list price to begin with. Therefore, as a buyer it is important to gauge what the going rate is for the software you are interested in. You will find that most contracts actually have non-disclosure clauses, which is a good indication of how guarded vendors are about what typical prices are.

Competition is the key to getting good value in a software deal. If you carry out your technical assessment, pick a winner and then ask the price, you will not receive the best possible deal, and I have observed this as both a buyer and vendor.

In my experience, it is vital during the selection process to keep the short-listed vendors fully engaged and uncertain about the outcome. There needs to be an -environment where they are competing with each other on price, not competing with you. This may sound obvious, but it often does not happen.

So what about when there is no competition? On one occasion I recall well, a vendor was renewing a large enterprise contract, and because of the customer's blunder when the original deal was done, the vendor could do pretty much whatever it wanted at the expiry of the 10-year contract period. When approached about this, the vendor dug its heels in and came up with an outrageous price. Various hard-nosed negotiators were wheeled in, but to no avail. After four months of negotiations, the renewal price had not moved one dollar.

On that occasion, I managed to convince the software salesman that there was a serious prospect the company would switch to another vendor (a complete bluff) and the price halved that afternoon - saving literally millions of dollars.

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