Advice From the Experts: Enterprise Software Cost and License Optimization Must-Do’s

September 26, 2022

Interested in learning more about NPI’s services?

Contact Us

NPI and Procurement Foundry recently hosted a Topics in Technology Sourcing panel on Optimizing Licensing and Cost in Large Software Estates. Procurement executives from American Airlines and ADM as well as NPI’s own software licensing experts covered a lot of territory on how IT procurement can reduce cost and improve license management across their largest software deployments.

Below are some insightful highlights on how to reduce enterprise software costs and improve license optimization.  If you’d like to watch the recording, you can do so here.

IT Procurement Should Embrace Program Manager Role

For large software purchases, more companies are turning to IT procurement to fulfill a program management role. Software purchases now touch a broad array of stakeholders – IT, business users, asset management, compliance, finance, risk management, legal and more.  Coordinating those resources to optimize cost and risk is a natural fit as IT procurement tends to sit at the center of transaction activity. IT procurement is also innately positioned to find out what vendors’ goals are, how they intersect with the goals of stakeholders, and how to move forward on an established transaction timeline and foster the best relationship possible with software vendors.

Know Your Licensing Rights (and How They’ve Changed) Before Engaging in Deal

There was consensus among the panelists that product use rights across large, complex software estates like Microsoft, ServiceNow, IBM, Oracle, SAP and others are a critical factor in the purchase and renewal process.  IT procurement either needs to have deep internal expertise of licensing rights, or they need to rely on outside vendor-specific subject matter experts for product use rights guidance. Coming to the deal table without this knowledge is a major misstep that will cost you.

Another no-no is relying on vendors to provide use rights guidance. There are often knowledge gaps on the vendor side and what your account rep says may not be accurate. They are also incented to sell you more than you really need. The onus is on IT procurement to:

  1. Understand exactly what use rights are needed given your technical environment and your business needs
  2. How your requirements compare to what vendors will allow
  3. Negotiate the delta between 1 & 2 specifically and explicitly

Another word of caution echoed across the panel is to beware of mergers/acquisitions and their impact on licensing rights. A good example is IBM. If a vendor you’ve been doing business with for years is acquired by IBM, there’s a good chance your product use rights have changed.

Consolidate Buying Power and Know Your Roadmap

We all know that some software estates have distributed “owners” across the business (we’re talking to you, Salesforce customers!). And we also all know there is power in centralized volume purchasing with a specific vendor, so herding those cats is very important at renewal time.

As program manager, IT procurement has (or should have) a broader understanding of user requirements, license types, product use rights, current and forecasted demand, and contractual specifics. It’s the totality of this picture that allows the enterprise to negotiate an agreement that meets end-user requirements while protecting against bloat and inflated pricing.

This is especially important for legacy software estates. Take SAP as an example. Over a 20-year relationship, a customer will have several agreements and addendums covering a broad set of products (some acquired, some native), each carrying their own licensing rights. Understanding the hierarchy of these agreements and which terms take precedence are crucial inputs to achieving a world-class renewal. Also important is knowing which products should be taken off maintenance, which can drastically impact the cost of on-premise software.

Protect Against Year-Over-Year Enterprise Software Cost Increases

Direct and indirect tactics should be leveraged to protect against annual cost increases. Direct examples include asking software vendors to “flatten” the cost of an agreement over the length of the contract (versus ramping up cost), taking certain products off maintenance or moving to third-party support, and performing price benchmark analysis to ensure all fees (including support) are within best-in-class pricing targets.

Indirect tactics include having a clear line of sight into what you’re consuming today, who’s using it and how – e.g. not every Microsoft 365 user needs an E5 subscription. Have a very rigid bill of materials where quantity/usage of each product is justified. Another measure is restricting purchases on private marketplaces, which often happen outside of the purview of IT procurement and are not governed by previously negotiated terms. Marketplaces are a new area of “rogue” spending, and they are growing.

Engineer Cloud Transition for Value and Leverage

Software vendors are phasing out on-premise products. Some are taking longer than others, but the writing is on the wall. Depending on where your vendor is on that journey (e.g. Microsoft no longer discounts on-prem), the window for leverage is shrinking for companies making the on-premise to SaaS transition.

Know your vendor’s product roadmap and how to take advantage of credits and incentives (like Oracle’s shelving credits) as you transition from on-prem to SaaS. It’s also important to partner with legal to identify security and compliance risks so these discussions can factor into deal requirements and negotiations. Finally, understand that vendors are getting smarter about what they put into their agreements and how those terms serve their goal to extract the maximum amount of revenue over the duration of your agreement. Contract optimization is every bit as important as price optimization.

Track Software Renewal Dates and Allocate Adequate Runway

Many organizations rely on CLM solutions to manage IT contracts. Some rely on spreadsheets. Whatever your case may be, it’s imperative to track renewal dates for all software agreements – especially larger ones. At a minimum, companies should begin preparing for renewals 90 days in advance of their renewal date. For larger, complex renewals, or for transactions involving a change in delivery models (e.g. on-prem to SaaS), or for vendors that are difficult to deal with (Broadcom, anyone?) significantly more runway should be allocated. In some cases, this could be 12+ months out. Remember, your vendor starts planning your renewal before the ink is dry on the current agreement. Taking a “T minus X” approach to renewal planning and preparation is an effective countermeasure.

If you want to learn more about how you can optimize your largest software estates, NPI can assist. Contact us today.