Volume purchasing programs may make it easier to buy a vendor’s offerings—but they also make it easier to overspend. IBM’s Passport Advantage program is no exception. NPI estimates a large percentage of enterprise customers overpay on IBM Passport Advantage purchases and renewals. Here are four ways to avoid that outcome.
Microsoft’s transformation from an on–premise software giant to a cloud-first leader has been nothing short of impressive over the last three years. The company’s perseverance and focus have been rewarded by soaring quarterly profits and stock prices, and a successful reorganization of its business.
It’s clear the vendor is committing its most powerful R&D, sales and marketing resources to the cloud. Yet, the reality is that most Microsoft enterprise customers are still operationally and contractually locked into on-premise implementations.
This has created some misalignment between Microsoft and its enterprise customers. It’s also prompted the vendor to take aggressive measures to migrate these customers to the cloud. Outcomes include several pricing and licensing changes, a spike in formal and informal license audits (often disguised as Software Asset Management engagements), and increased contractual complexity and inflexibility.
There are a number of risks to navigate when doing business with Microsoft, as well as new opportunities on which to capitalize. As Microsoft continues its metamorphosis, customers should prepare for a more challenging sourcing and vendor management environment.
TIPS FOR SAVING ON YOUR NEXT RENEWAL EVENT
Make sure your initial buy price is at fair market value. If it’s not, calibrate during renewals. The most common contributor to overspending during IBM Passport purchase and renewal events is an initial buy price (from way back when you first purchased the item) that is above current fair market value. This overspending is compounded when IBM tacks on its annual maintenance/support price increases (typically in the ballpark of 5 to 7 percent). If companies want to avoid significant overspending, they need to perform price benchmark analysis to determine whether their initial purchase prices were aligned with fair market value. If not, this information can be used during renewal negotiations to bring current maintenance and support fees into alignment with current rates.
Manage your IBM estate cost to market – not budget. The typical IBM estate within an enterprise is large, decentralized and spans multiple layers of the IT stack. As a result, many customers manage costs to budget and in the process lose sight of savings opportunities such as leveraging total revenue commitment and capacity optimization. This cost control “blind spot” is only becoming larger as IBM’s offerings, pricing and licensing/subscription models evolve at a faster pace than many customers can keep up with. It’s important to remember that most IT vendors view a budget number as a revenue target. Customers that want to keep IBM spend in check need to regularly evaluate their entire estate for savings opportunities—especially in anticipation of renewal events. Price benchmark analysis at the line item level is critical for both new purchases and renewals.
Continue to bring competitive pricing to the table. IBM’s Passport Agreement makes it easy for enterprises to purchase/renew IBM products – but it also breeds complacency in price negotiations. Customers should continue to apply pressure on IBM by leveraging competitive bids on new purchases, and on renewals of “classic” products for which there truly are apples–to–apples replacement products on the market. Even if the enterprise doesn’t elect to change to the competitive offering, IBM will recognize it as a true threat because many companies have made the switch.
Keep an eye out for discount erosion. It can be stealthy. The Passport Agreement renewal process has become automatic for both IBM and its customers. The vendor’s licensing desk automatically generates a renewal agreement (usually inclusive of a modest annual cost increase) and submits it to the customer, which usually performs a rudimentary inspection and approves it. However, upon closer inspection of these renewal agreements, some customers have discovered that certain elements of their renewals that have been previously discounted are now priced at list price. For this reason, customers should carefully review their renewal agreement to ensure its integrity. Once these “mistakes” are hardcoded into the renewal cycle, they can be difficult to fix.
Like many volume purchasing programs, passport advantage can open the door to material overspending.
UNDERSTANDING IBM'S MOTIVATION
IBM finds itself in a precarious position in today’s technology and business landscape. Its commercial cloud business hasn’t grown as successfully as many of its competitors, yet the vendor remains on the innovation forefront in areas like machine learning and blockchain. Meanwhile, it’s impossible to ignore that entire industries like finance and transportation still rely on IBM’s mainframe offerings to run their business.
This position is forcing IBM to improve upon what it has always done well - extracting large amounts of revenue from each and every customer. To counterbalance this dynamic, enterprise customers need to avoid the complacency that accompanies many Passport Advantage purchases and renewals, and perform rigorous price, discount and business term optimization for every transaction.