How to Mitigate the Cost Risks of IT Vendor Lock-in

May 24, 2023

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IT vendor lock-in – should companies fight it or embrace it? Historically, IT procurement best practices have suggested companies should push back against vendor lock-in. Competition provides buy-side leverage. But the reality is IT vendor lock-in is virtually impossible to avoid in the current enterprise IT landscape – especially with mega vendors that power critical business operations.

Rather than take an avoidance approach to vendor lock-in, many enterprises are better served to take a more realistic approach. IT procurement teams can benefit from exploring three things:

  1. What drives IT vendor lock-in in the current market
  2. How to mitigate and minimize risks at a contractual and transactional level
  3. How to use vendor lock-in to the organization’s advantage

What Causes IT Vendor Lock-in?

One of the biggest challenges of IT vendor lock-in is that it can’t be attributed to a single issue. The factors that drive lock-in are numerous and vendors have grown more adept at systematically promoting it within their customer’s IT ecosystems.

Mega vendors are experts in expanding their broad solution portfolios into different areas of a customer’s business. Once engaged, it’s difficult to disentangle one department/user group/business unit without affecting master or enterprise agreement pricing. Interdependencies between certain vendor offerings (example: Microsoft SharePoint and SQL Server) also make it difficult to disrupt the existing vendor footprint. Subscription models and contract terms, particularly with SaaS vendors that push multi-year terms, are also a challenge. It’s usually impossible to downsize during the term.

Compliance risk is another contributor to vendor lock-in. It’s commonly known that certain vendors use the threat of a software license audit as leverage to encourage customers to extend their existing agreements, purchase additional solutions and accelerate migration to the cloud (and subscription-based fee models that add to lock-in…).

Softer vendor lock-in tactics include things like vendor-sponsored training and certification programs as. Salesforce and Microsoft are great examples of vendors that train and certify customer-side resources that become part of the organization’s IT fabric. And for many solutions, implementation and integration create technical barriers to leap – just ask any SAP customer that’s undergone a major solution implementation and integration how motivated they are to revisit that process and cost – even for a better performing or less costly solution.

Tips for Mitigating IT Vendor Lock-in Risks

Here are tips to help you lessen the risks commonly associated with IT vendor lock-in:

Optimize commercial terms for flexibility. Several commercial terms in customer’s purchasing agreements are key to mitigating lock-in risk and maintaining flexibility. Examples include the addition of swap or exchange rights, the right to transfer licenses from one part of the business to another, and well-negotiated downgrade rights for extraordinary events like M&A, layoffs, etc.

Reclaim, reduce, and realign SaaS licenses. SaaS users should regularly assess their largest deployments for bloat. NPI routinely sees clients over-purchase SaaS products, then renew on autopilot. Another pitfall is choosing overpowered (and more costly) license types. On large SaaS estates, these factors can easily lead to toxic spend rates of 10 to 25 percent.

When it comes to IaaS and PaaS, consider a multi-vendor strategy. Your provider is much more willing to negotiate price if they believe there is a realistic chance that you will spend money with competitive providers already utilized in your environment.

Turn the tables on vendor lock-in. If you’re committed to a vendor, you can leverage that commitment for better pricing, discounts, and terms, as well as help influence the vendor’s roadmap to your advantage.

Reduce the Risks of IT Vendor Lock-in

The optimization of contractual terms, pricing and licensing may not eliminate vendor lock-in, but it significantly mitigates the cost risks associated with it. Aligning your purchase with fact-based demand requirements will lead to cost savings and accurate baselines for renewals. To mitigate the cost risks of IT vendor lock-in, IT procurement teams should focus on optimizing pricing, terms, and licensing, and negotiating an agreement that gives their organization the most flexibility and protection over the term of their agreement.

If you need assistance analyzing your IT vendor agreements for cost savings and business terms optimization opportunities, NPI can help. Contact us to learn more.

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