Last year, Salvatore Emma began searching for a new enterprise resource planning (ERP) system for medical device manufacturer Arrhythmia Research Technology Inc. after top executives decided that ART's aging software could no longer support its growth-through-acquisition strategy. After narrowing down an original list of five potential vendors to three whose software had the functionality that ART needed, Emma's team began to talk price.
"We told them we wanted to avoid the typical used-car sales approach, where they start with an artificially high price, then we go back and forth before agreeing on the real price," says Emma, ART's director of IT.
Instead, two of the three vendors started with high prices, which they later negotiated down. One of those, Emma says, proposed a price of $840,000 for software and implementation services before eventually agreeing to $260,000, a discount of nearly 70%.
Rather than jumping at that apparently attractive deal, however, ART went with a different vendor, one that had bypassed the artificially high initial quote and started with a price much closer to the final number. The $20 million manufacturer selected IFS, even though its final fully implemented price was higher than the heavily discounted competition.
"What we were looking for from the beginning was a highly professional sales process," Emma says. "With the vendors that started high, we got the feeling that they were trying to take advantage of us and to make an obscene profit. That made us feel as if we couldn't trust that vendor."
ART's experience illustrates two important points about the enterprise application buying environment: First, although analysts, vendors, and customers say the deep discounting trend of two years ago has abated somewhat, even mid-size manufacturers, such as ART, can still expect vendors to offer significant discounts off list prices under the right circumstances.
And second, having gone through multiple enterprise software procurement cycles over the past few years, enterprise software buyers like Emma are becoming much more savvy about the process. Many, for example, now understand that software license price is only one element in their eventual total software lifecycle cost. As a result, more buyers today are focusing more of their efforts on understanding long-term costs related to enterprise software maintenance and upgrades, experts say.
"Even in the mid-market it's increasingly rare to sell to someone who has never bought an ERP system before," says James Utzschneider, general manager of marketing for Microsoft's Dynamics enterprise applications. "They've been around the path once or twice, and they know about the true back-end costs. They're much less likely to say, 'Wow, look at this great deal we're getting on the license cost.' "
But that's not to say that significant discounts on list enterprise software licenses aren't still available. The steepest discounts are available to large enterprises that may be considering a software platform switch and to businesses of all sizes able to live with a relatively vanilla ERP implementation that is not significantly tailored for a specific industry, says Ray Wang, a senior enterprise applications analyst at Forrester Research.
"At the high end of the market, we're seeing discounts routinely in the 40%-to-60% range, with some in the 60%-to-80% range, Wang says.
This relatively steep discounting remains on the table at the high end of the market despite rampant vendor consolidation in recent years, Wang says. Although the number of vendors pursuing very large accounts has shrunk, the intense competition between SAP AG and Oracle Corp., most notably, and the relative scarcity of new or replacement ERP purchases among large companies have served to preserve steep discounts.
"Discounts aren't getting any steeper. Prices stabilized somewhat when the economy turned around a couple of years ago," says Jim Shepherd, senior vice president at AMR Research. "But there's still often very heavy discounting."
In the mid-market, where customers' budgets are usually more restricted, discounting is more muted, though still significant. Mid-market manufacturers making an ERP decision can expect off-list price discounts of 25% to 60%, Wang says.
Vendor consolidation has hit the mid-market as well, but discount levels have been propped up by a couple of factors, experts say. First, new vendors such as SAP, Oracle, and Microsoft have aggressively entered the mid-market, increasing competition, particularly for customers with relatively simple business models and needing little industry-specific customization. Second, competitors say, mid-market aggregator vendors, such as Infor and Oracle, have been willing, in some cases, to ratchet up discounts to hang onto customers.
"Customers have to ask if a given product is going to be around in three years, and [consolidators] have to discount to offset perceived risk," says Steve Andrew, director of marketing for IFS North America.
Executives at both Oracle and Infor declined to comment for this article.
Manufacturers also report significant discounts from vendors of software, such as business intelligence, that works in conjunction with enterprise applications. "We've been able to obtain significant discounts for BI products," says Ray Thomas, director of IT and finance at medical equipment manufacturer Beekley Corp. "Those vendors are trying to get a foot in the door, so there is some flexibility there."
Is the Price Right?
In response to ongoing pressure on enterprise software pricing, many vendors are taking steps to more clearly demonstrate the value of their products to potential manufacturing customers, or at least make themselves easier to do business with. Both IFS and Epicor Software Corp., for example, continue to tailor their products for specific vertical markets. And IFS has begun engaging in more detailed, customer-specific product demonstrations that can take three weeks or more, Andrew says.
SAP is taking that approach a step further. The company has created a Value Engineering program that strives to help potential customers build detailed return-on-investment (ROI) and business case analyses for large, strategic enterprise software deployments. The program comprises about 75 people who spend months — at SAP's expense — working to model potential customers' businesses, assess how much time and money it takes potential customers to accomplish certain tasks, and estimate how much in cost reduction and new opportunities the potential customers could expect to realize from enterprise software deployments. In two and a half years, the team has completed 1,000 business case analyses, says John Nugent, SAP America Inc.'s executive vice president of sales.
The program doesn't necessarily result in higher average selling prices for SAP. But it does often induce potential customers to commit to long-term, strategic deployments of SAP software.
That's what happened at heating and cooling equipment manufacturer Lennox International Inc., which has used SAP's Value Engineering team to help it develop business cases for major customer relationship management (CRM), supply chain management (SRM), and product lifecycle management (PLM) deployments. Lennox originally brought the Value Engineering teams in after an internal shift to a shared services approach to managing its IT resources placed a greater premium on building air-tight ROI and business cases for technology spending.
SAP experts spent up to six months modeling and measuring aspects of Lennox's business. The experience resulted in a broad, three-year CRM rollout plan that is now under way. On the PLM side, after SAP spent months modeling Lennox's engineering operations, including interviews with 72 engineers, the company produced a six-phase PLM deployment plan. Lennox management so far has funded two phases of the plan — an enterprise CAD data management system and an engineering document management system.
The Value Engineering projects were officially independent of Lennox's vendor selection and software price negotiation processes, company officials say. Still, they solidified SAP's role as a preferred vendor. "It obviously gives SAP an advantage to learn about our business, including all the pain points," says Kathie Kelsey, manager of manufacturing IT systems at Lennox.
SAP competitor Microsoft, meanwhile, is taking a different approach, one that acknowledges customers' increasing familiarity with the enterprise software buying process and their desire for more simplicity and transparency. The company's Business Ready Licensing Model, introduced in July 2006, augments per-module-style licensing with a per-user scheme that features three basic pricing levels for all of Microsoft's enterprise applications, ranging from $2,250 to $3,980 per user. The simpler pricing structure helps manufacturers understand how much enterprise software costs will grow over time since they're based on the number of users, says Gayle Hoshino, general manager for Dynamics pricing at Microsoft.
While vendors attempt to make software license pricing more transparent and to better explain the value of their products, many manufacturing buyers of enterprise applications are beginning to understand that up-front licensing fees — discounted or not — are just one piece of the software cost lifecycle. As more manufacturers tend to run their enterprise software releases longer, they are realizing that, over an extended lifecycle, the cost of maintenance, platform upgrades, and training can easily exceed license costs.
Cutting Maintenance Fees
Take maintenance, for example. Most enterprise applications vendors charge annual maintenance and support fees equal to 16% to 19% of the initial license charge. That means, in just five years, most enterprise applications buyers will end up paying nearly as much for maintenance as they did for their initial software licenses — more, in fact, when you consider that many customers don't deploy all of the modules they purchase as part of an enterprise suite, yet they pay for maintenance on all of it.
"Buyers are getting smart enough to realize they can squeeze out significant savings if they can do something to bring down maintenance costs," says Sanjiv Bhatia, vice president for consulting services at Patni Computer Systems Ltd., an outsourcing and IT services provider.
In most cases, enterprise software vendors are loath to discount maintenance and support services, experts say. But one way to reduce maintenance costs is to drop vendor-provided support in favor of maintenance from a third-party provider, such as Rimini Street Inc. or TomorrowNow (owned by SAP). Rimini Street, for example, offers maintenance and support services on PeopleSoft, JD Edwards, and Siebel applications at 50% of Oracle's rates, says Rimini Street President and CEO Seth Ravin.
Ravin estimates that 330 to 350 enterprise applications customers have opted to buy third-party maintenance and support services from either Rimini Street or TomorrowNow, up from about 100 when SAP bought TomorrowNow two years ago.
One customer that opted for maintenance from Rimini Street is Beekley. The company bought Siebel's CRM applications in 2002 when the vendor made a push with Microsoft to sell into the mid-market. But Siebel turned out to be reluctant to deal promptly with issues raised by Beekley, Thomas says.
"They only wanted to deal with major problems," he says. "For the other stuff, they said, "Go to the [value-added reseller].' " Between maintenance charges from Siebel and its VARs, Thomas says, Beekley was paying $40,000 a year to support 40 users. Support from Rimini Street is less than half that, he says. (Oracle acquired Siebel in 2006.)
Of course, not all manufacturers are ready to drop vendor-provided maintenance and the scheduled upgrades and patches that go along with it. But even those organizations can keep a lid on enterprise software lifecycle costs by negotiating intelligently with vendors up front, says Forrester's Wang, who has developed what he calls a "software licensee bill of rights" to help them do just that.
Enterprise software buyers should be particularly mindful of accounting in their software purchase contracts for major business changes, such as acquisitions, consolidation, or downsizing. Such changes can alter software implementation decisions and user counts. Some organizations, Wang says, have significantly downsized only to discover that their enterprise software vendor was unwilling to lower fees because the license discount the company originally negotiated was based on a minimum number of users.
Other organizations have run afoul of enterprise software vendors by using implementation and hosting partners that weren't vendor-approved, Wang says. In at least one case, he notes, a vendor attempted to extract additional fees and withhold training and upgrade tools if the customer didn't switch to an approved vendor.
Explicitly accounting for such situations in contract language is vital to holding down long-term enterprise software costs.
"You need to think about things like what happens if you get acquired or need to make a hardware platform change," Wang says. "Costs associated with changes like those, on top of maintenance, can get very expensive over a 10-year period. Compared to those costs, buying the original software license can be the cheapest part of the deal."