Beware of 'free' vendor offerings

Beware of vendors that offer entire product suites for "next to nothing". It is a trap that snares IT managers into paying high maintenance costs that spiral each year.

IT manager at fashion manufacturer Espirit, Roger Spraggon, said it is common practice for vendors to push deals where IT managers buy suites at a discount. However, they then face maintenance costs for use of the software at a percentage of the full listed retail price which they are expected to pay over the life of the contract.

And Spraggon should know: before joining Espirit he spent 15 years working in software houses.

Responding to a story in last week's edition of Computerworld (September 9, 2002, p1), in which Gartner warned that getting the best deal on software licensing and hardware purchases is not easy in an industry where there are no "real" published prices, Spraggon agreed that vendors do try to squeeze every cent out of buyers.

"The initial cost of product can be insignificant, but the annual maintenance charges for ongoing support will be 20 per cent of full retail price. Then there are cases where a lot of companies are buying other companies and upping the retail, therefore increasing the maintenance costs. A lot of users may have invested time and money in the software, then suddenly the maintenance costs jump," he said.

IT managers then face the choice of paying more or abandoning the software and startingagain, he said, adding that this tactic is something that could be on the increase in the current economic climate.

Gartner analyst Jane Disbrow claims that a few years ago, maintenance averaged 17 per cent of the initial licence, but now it's 20 per cent and rising to 21.3 per cent.

With the downturn in the IT industry, particularly in the past 12 months, Spraggon said software vendors are looking at ways to increase revenue.

He recommends IT managers negotiate hard upfront so they don't see their costs doubling over the course of a three- to five-year contract because of maintenance fees.

"You've got to negotiate it up front, sit down and nail the thing. Read what's in the contract. If you are going to pay 20 per cent of retail, then what you are going to pay is out of control, because they can call the retail [price] anything they want," Spraggon said.

IT managers need to identify what isn't locked down in the contract, he said, because that is what vendors could change to increase revenue.

Esprit is a large Microsoft customer, but Spraggon said he won't be signing on to Software Assurance, under the new licensing model 6.0. Instead Spraggon is looking at alternatives, including StarOffice from Linux.

"In Microsoft's case, people have limited options, but people are looking for alternatives. Linux is making significant inroads at the moment, but it is not at critical mass yet," he said.

"We don't regularly update enough for Microsoft. We're not keeping up with the new releases that [Microsoft] want us to".

Vendor tactics

Beware of "all you can eat" deals in which companies buy every suite the vendor has at a discount; support costs could skyrocket.

According to Gartner, vendors are coming up with elaborate pricing models such as charges based on a percentage of the corporate revenue or 'role-based' usage where there is no clear definition in the contract of what the term really means.

There should be clauses in contracts to assure predictable costs when the number of employees rises or falls.

Beware of 'revenue mining' -- vendors try to hook buyers into contracts where software costs are linked to the consumer price index each year. According to Gartner this could mean a periodic 8 to 12 per cent boost in price.

When software prices are published it might only be a starting point for negotiations, large organisations can be a 10 per cent plus discount.

-- Sandra Rossi and Ellen Messmer.

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