To get the best deal on software, create uncertainty

Companies sometimes assume that once they've signed on with a particular enterprise resource planning (ERP) vendor, they're in it for good. From that point on, they figure, they're captive customers. If they want to buy an additional application—say, a warehouse management system (WMS)—they'll have to pay whatever price the vendor sets.

But that's not the case, according to one software procurement expert. Customers do, in fact, have some leverage when it comes to pricing. But in order to use it, they need to make the vendor nervous. "You have to create uncertainty to get a better software deal," says Tom E. DeMarco, a managing partner at ClearEdge Partners Inc., which advises clients on negotiating with information technology providers. DeMarco and his associates know the pricing game well; they all worked for software vendors prior to starting the firm, which provides training and advice on buying software.

For starters, DeMarco advises companies to focus on getting a price break on the software license purchase rather than on maintenance or support services. "The capital event is where they have the opportunity to negotiate," he says. The odds of getting a deal on maintenance and other ancillary services are slim, he adds. For one thing, software sales reps generally don't get a commission for maintenance contract renewals, so they have no incentive to advocate for price breaks on the client's behalf. For another, software makers are reluctant to discount maintenance for book-keeping reasons.

Although it's easier to create uncertainty with the first software deal, DeMarco notes it's still possible to create anxiety with an existing vendor, such as an ERP provider. That's because despite what the ERP vendor would like customers to think, the client is not actually locked in to apps from the ERP's own software suite. If the customer looks around hard enough, it will likely find, say, a WMS from a best-of-breed vendor that also meets its requirements. Once the ERP vendor finds out the customer has other options, the company can play on the provider's "uncertainty" about making another sale.

To create uncertainty, though, a company has to plan ahead. DeMarco advises his clients to start investigating their options at least six months in advance of an anticipated purchase. That will give the company time to identify alternative vendors and determine the cost and amount of work involved in integrating an app from outside the ERP family with the information technology backbone. "If I have the ability to switch from another vendor and my costs are low, I can then establish a Plan B to drive a lower cost from my incumbent vendor," DeMarco says.

Although it might feel awkward, the client company should let the ERP vendor know that it's talking to one of its rivals. "If a software vendor finds out a competitor is in there, they get real uncomfortable," says DeMarco. Sometimes, that discomfort will lead to a price break on the software, he adds.

For this strategy to work, it's important for the company to speak with one voice, particularly when dealing with an incumbent vendor. Software salesmen will often try to solicit information from the various departments on the software's value to their operations. They then use that info to pitch management on the software's overall worth to the corporation. To prevent that from happening, it's important for company personnel to close ranks and negotiate as a team, DeMarco says.

Creating anxiety can pay off handsomely, since software vendors typically enjoy huge margins—often as much as 80 to 90 percent. "The opportunity to carve out large savings is high," DeMarco notes.

But to net those savings, you have to start early, he warns. "If companies get started earlier in the process rather than at the end, identify what the fair price is, and organize the spending event around things that add uncertainty to the transaction," he says, "they are more likely to have a successful outcome."