Most of us are familiar with the concept of Lean manufacturing. A key notion in Lean is the idea that waste is eliminated by building product only when it is needed and there is a clear line of sight to customer demand. Why is it then that these same companies waste millions of dollars on purchasing software that they do not really need at the time of purchase? The reasons is simple: software suppliers have become very savvy in offering superficial discounts when the deal is super-sized and often play the quarter-end card to drive the deal to closure in days.
So how can you take advantage of lower pricing and structure a deal that aligns with your current and growing needs? In cases where bundles make sense, what could you do to mitigate your risks and protect your investment? While there’s no simple answer for all situations, there are some themes that we have observed in negotiating software purchases throughout our consulting practice:
- Look Beyond the Discount Percentage: What’s the right percentage discount for a software solution? This is hard to say and varies based on a variety of factors that can include size, timing, market conditions, the strategic value of a supplier entering a new industry, and the supplier’s financials, to name a few. The problem with a discount percentage applied to a bundled software purchase is that either (a) you are getting a discount off of an inflated list price, or (b) you are merging discounts for a group of products that could have different discount structures. These are subtle points that are often missed. When a software supplier bundles products at list price and then discounts them at what seems to be high discount percentage, a customer may think that an attractive deal is on the table. In reality, however, there may be products on the list that a supplier could give away at no cost, that is, a 100% discount. But when this is all included as part of the bundle, the deal is inflated and then discounted.
- Develop a Cost Model. Bundles can be complex and very confusing. This complexity is exacerbated by each supplier structuring its licenses and its bundles in a different way. To add insult to injury, the plethora of contract terms and conditions surrounding the purchase can have a substantial influence on the cost of your investment and how you can optimize the use those licenses. The only way you can navigate your way through this complex maze is to map those contract t’s and c’s into actual costs, and then map each supplier’s licensing scheme into your demand projections over the expected lifecycle of the solution. Once you can model what you are really going to use out of a bundle, then you can more accurately judge the value of the “special deal” with which you are presented.
- Get Creative with Suppliers. As with any negotiation, it’s important for you to understand the needs of the other side. Bundles are a means of selling you more and in return, offering a lower price. If you’re being offered a bundle of multiple product lines in one deal, what flexibility do you have to make changes to that deal if your demand does not materialize? Where can you make favorable changes to boilerplate contract terms that seem so restrictive? As you attempt to understand the points that are important to your suppliers, you can look for other ways in which you can add value to the deal from your supplier’s perspective. In one example, a software supplier was trying to expand its footprint in the medical device industry and was willing to de-bundle a portion of their original offer in return for publicity through speaking engagements and a press release.
- Don’t Give into Pressure. Time and time again, we encounter situations where a client is facing buyer’s remorse for purchasing a software package that they realize they did not need. They were offered a “special deal” at the supplier’s quarter-end or year-end, and they were fearful that they may never have such an opportunity again. This is an unfortunate outcome of relentless supplier pressures to use the quarter-end to create the perception of a one-time opportunity. In reality, however, we have consistently seen suppliers extend the same or better offer post quarter-end. A software supplier will not walk away from a revenue opportunity especially when there’s competition. There are times that a quarter-end deal can yield better results since senior management at software companies are generally more attentive at that time. But this only works well if know your needs upfront.
In general, it is our opinion that a-la-carte deals that are clearly mapped against a demand projection should be the preferred approach unless there’s due diligence exercised in structuring a bundled purchase. Having said that, bundles are not always a bad idea. In fact, if you structure the deal right, negotiate flexibility, and have a reasonable demand plan, you can benefit from a well-structured bundle. The question then becomes when you buy each piece of the bundle, when you pay for it, when you deploy it, how you deploy it, and what “out” clauses you negotiate. This work takes weeks and sometimes months, not days. If you are making a large investment in any type of an enterprise or SaaS software solution, take a Lean approach towards your purchase, that is, buy what you need when you need it – unless you have negotiated a killer bundle that you know you will use with little to no risk for waste.
If this is an area that you may need some focused expertise or bandwidth, Symphony is staffed with seasoned consultants that specialize in negotiating and structuring these deals. Feel free to send us a note at info@symphonyconsult.com