As companies adapt their IT ecosystems to changing business requirements, the cost of change is becoming harder to gauge. More specifically, it’s becoming harder to determine if companies are paying a fair price for these changes. It’s worth revisiting certain IT budgeting best practices that govern this aspect of IT sourcing.
One is identifying the true cost of doing nothing – otherwise called the Business as Usual (BAU) comparison. For example, if your vendor is sunsetting support for a certain product, the cost to “do nothing” and remain on outdated software can be significant and should be factored into whether it makes sense to upgrade. But, in other cases, BAU comparisons can be fraught with false assumptions.
Understanding the Drawbacks of BAU Comparisons
BAU comparisons are often used as sales tools to help vendors generate additional revenue. When vendors are pushing their customers to move in a particular direction that is advantageous to them, they will commonly show a BAU comparison along with the proposal they would prefer the customer to move forward with. We see this frequently with vendors trying to convince customers to move away from perpetual licenses to the cloud, or when vendors want to move customers into an enterprise agreement.
What many customers don’t realize is that many vendors drastically inflate the BAU model cost. Customers then use the inflated (BAU pricing to make the EA or move to the cloud seem more attractive.
When presented with a BAU comparison, it’s important to ask how confident you are that you received strong pricing on the current deal you have. Many times, NPI has found that the current deal is priced higher than fair market value, which is a fundamental flaw in the comparison of the cost of doing nothing versus moving to an EA or moving to the cloud.
There are a couple important metrics to be aware of when reviewing and comparing a new proposal from your vendor against a BAU proposal:
- NPI typically observes, and would expect, that an EA should provide a 10 to 20 percent benefit (or possibly more) over a fair market value BAU estimate.
- As a general rule, which can vary depending on circumstances, a subscription will cost approximately one-third of the on-premise cost. As such, determining whether the current cost is within fair market value is critical to knowing if the proposed SaaS costs are favorable.
BAU, FMV and IT Budgeting Best Practices
Before considering any BAU cost comparisons, IT procurement practitioners should perform IT price benchmark analysis on current agreement pricing. This will ensure an accurate baseline for decision-making. Furthermore, it’s important to apply that same analysis to BAU pricing to ensure this pricing is indeed at least within fair market range. The savings can be material – NPI’s objective price benchmark analysis services reveal savings opportunities on over 80 percent of purchase quotes that our clients submit for review. Resultant savings range from 10 to 50 percent (or more) .