Sales teams for enterprise IT vendors have always had to be creative in order to make quotas. Meanwhile, customers are scrutinizing larger purchases as IT spend continues to climb year over year. That’s leading many to question the value of vendor’s sales propositions – including whether an Enterprise License Agreement (ELA) makes sense.
Gartner recently reported that customers are struggling to realize the value of ServiceNow’s ELA-style agreements. Consistent with these findings, NPI finds that with ServiceNow in particular, ELA’s require increasing commitments but not necessarily a commensurate benefit in return. Salesforce, as reported in recent filings, is also feeling the pressure of longer sales cycles as “deals are inspected by higher levels of management” as a way of “taking a more measured approach to [customer’s] business.”
Translation: Enterprise IT vendors are having to defend their proposals more vigorously than ever, and ELAs are a prime example – they are an easy way to overbuy and overpay.
NPI recommends focusing on a few key areas when reviewing ELA-like arrangements with IT vendors.
Don’t Assume ELAs Automatically Provide Better Value Than “à La Carte” Purchasing
ELAs and similar purchasing agreements are often pitched as the most cost-effective way to buy for customers with substantial demand. However, this isn’t always true, and in many cases “a la carte” purchasing can be a better fit for enterprises being pushed to overcommit in exchange for “increases on current discounts.” Perform financial modeling to contrast ELA and a la carte models across the term of the commitment, paying particular attention to your roll-out and demand plan.
Involve Senior Decision Makers on Both Sides When Pricing Is Above Fair Market Value
One of the ways to make vendors more receptive to price reductions or other concessions is to involve senior decision makers on both sides. But it’s also important they are prepared to deliver the appropriate level-headed messaging. In many cases, offering a fair price protects future business opportunities and creates a “win-win” for vendors and customers. Vendor-side executives need to be made to “see the light” when prices are knowingly unfair and out of line with the wider market.
NPI recommends making sure execs are prepared for conversations by providing them a business-as-usual scenario and highlighting how any increases need to be justified. Providing details on utilization and any other important factors like growth trajectories will also make discussions more effective and productive.
Does an ELA Make Sense for Your Organization?
The short answer is “it depends.” ELAs can be a good fit. But that depends on the customer’s demand forecast and technology roadmap, how the ELA is structured, and the vendor’s willingness to negotiate key business terms.
As mentioned, ELAs make it easy to overspend and overbuy. That’s why it’s important to perform IT price benchmark analysis for all enterprise agreement purchases, and to optimize pricing, licensing and business terms to assure that the value received matches the commitment required.
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