Why Market Consolidation Hurts CIOs

During the past few years, IT organizations have got an assist in their quest for fewer vendors from the software industry. For example, as Oracle acquired Siebel, PeopleSoft and others, the acquired products have been integrated at the Oracle corporate level, and license and maintenance fees have become standardized.

But this isn't exactly a standardization fan's dream. Customers have to worry about organizational disconnects between the acquiring and acquired vendor teams, variability in pacing of technology upgrades, prospective higher license and maintenance costs, and new product development priorities. As my former Forrester colleague vice president and principal analyst Andrew Bartels notes: "Customers need to worry that the acquired vendor's product might not be a core part of the acquiring vendor's technology universe."

Even when an acquisition is based on acquiring the new technology (rather than absorbing the competition), customers should be concerned about the potential for diminishing entrepreneurship within the acquired company.

Five Ways to Reverse a Flawed Strategy

Given the downsides to the one-throat-to-choke approach, should IT organizations abandon it? In some cases, such as in prime contractor service vendor relationships (where a single consulting firm manages relationships with smaller subcontractors), it may be useful. But in the world of software, having one throat to choke has virtually no benefit. Enterprises need leverage with vendors to manage and maintain costs that can get out of hand as their organizations grow and the software market shrinks. Here are five ways to maintain your leverage.

1. Prioritize a common data model over common software. Sometimes IT migrates to a single software vendor but doesn't get around to running identical application versions, or worse, enables users to enter non-standard data. Making data usable is more important than having a standard version or vendor. Getting agreement on the data model is more difficult than decreeing a software standard, but the business results are more compelling than the number of vendors you use.

2. Retain more than one vendor in every important category. Even though it may be tempting to reduce IT support costs by limiting vendors to one, maintaining multiple products in a strategic software category protects your future leverage. Even if switching costs are high, you should keep vendors guessing by continually reminding them of their competitors' unique and state-of-the-art product and service benefits.

3. Maintain your balance of power with competitive or reference bids.Vendors know that if you are fully dependent on their products, you will have difficulty eliminating them. Keep them guessing about how much you need them. One mid-market CIO I know attends the user conferences held by his current vendor's competition, meets with the competitor's salespeople, solicits bids from them, and considers their products for new deployments and at upgrade time.