Smart CIOs can still create cost savings

The price is right, or is it? When times are hard, prices come down: the logic seems inescapable. And yet software suppliers seem to have spent much of 2008 trying to buck the markets, with a string of major players including SAP, Oracle, IBM and Citrix Systems raising the price of some, or all, of their offerings.

The price hikes look completely at odds with the objectives of CIOs who are under pressure from their CEOs and CFOs to cut expenditure and postpone new projects. In many cases IT departments still have no agreed budget for 2009, but must prepare individual business cases to justify each and every outlay.

The round of rises began in June 2008 when SAP announced that the company would increase its annual maintenance fee from 17 per cent of licence fees to 22 per cent - nearly a third higher - from January 2009. The price increase would be phased in over four years. In exchange, customers were promised an enhanced service including 24-hour support and help with problems involving third-party software.

The same month, Oracle increased prices on a swathe of products in the US. Among the biggest increases were an 18.75 per cent rise in the cost of Oracle Database Enterprise Edition and an 18.75 per cent leap on Oracle's Express Server.

Not to be outdone, IBM notified users of five per cent price rises for a number of its Tivoli and WebSphere products for the System Z mainframe, which were due to take effect in January. By September, server-based computing software company Citrix had padded its price list by an overall 10 per cent to counter, the company said, the increased cost of doing business around the world.

Some prices have been adjusted but is this a case of market power cynically trumping economic imperatives or is there more going on than meets the eye?

Returns on investment

One of the drivers for price hikes by software majors, they claim, has been a desire to recoup heavy investments in new technologies such as service-oriented architecture tools and in enabling customers to access their products as hosted services.

SAP even recently rejigged its software offering under the slogan ‘Best Run Now' to concentrate on those applications, such as risk management, inventory and business intelligence, deemed most likely to help customers in difficult circumstances. But if the rises were an example of market power, it may well be that the high-water mark has already been passed.

"For those increases that are related to upfront purchase prices (of software), most had occurred prior to September 2008," is how Ray Wang, vice president for enterprise applications and strategies at Forrester Research sees it.

"At that point in time, market power had a slight upper hand. Many users faced tougher negotiations. However, since the worsening and continued downturn, we do not see the price increases holding when compared to street pricing. In fact, pricing has fallen for many vendors."

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