I had no idea.”

This is the comment I often hear – a result of a simple business discussion.  After working in Enterprise software and application service sales for many years, I’ve seen that Technology Executives often don’t realize the financial impact of being held vendor hostage.  Or, how to break free.

There may be numerous definitions of vendor hostage, but the typical circumstance involves vendors who provide mission critical applications and systems to client corporations and charge significant annual maintenance fees for very little support or provide new platform releases only every few years.  When the client requires modifications to the system to make it more customized for their business needs, in many cases, the vendor charges development fees at above industry standards, sometimes $250-300 per hour.  Then, when the client is required to move to the next platform “n.1” version release, the upgrade can be very challenging [due to the modifications] and require additional vendor development costs to move to the next version.

Many vendors also charge a per-seat license fee for use of the system.  With the numerous mergers and acquisitions taking place today, if the client corporation doubles in size… so does the annual maintenance fee.  Once the system is implemented, the client corporation also loses most if not all leverage to renegotiate these expenses.  If the systems have been in-place for several years and the client is dependent on the application, considering a replacement system may be too time consuming and costly.

Client corporations for years have simply believed that these annual maintenance fees (sometimes above 25% for the initial system’s purchase price) and development costs are a required Opex expense (or recurring operating expenditure) of utilizing a system necessary to conduct their business.

How to avoid being a Hostage by your IT Partner

Tips on discussions with current partner:

  • If you’re like many Technology Executives who have joined a new employer and the multiple company-wide systems and applications have been in-place for years, it’s never too late to approach your system vendors to discuss fee reductions. Although, not many vendors are willing to renegotiate.  They understand you have a 100+ hour work week, and to add a project to conduct reviews of alternate systems just isn’t feasible.
  • Negotiate, negotiate, negotiate upfront during the initial contract stage. Trust me – the vendor wants your business.
  • Most clients feel they received a “great deal” when they negotiate the system price down 20-30% for final contract signing… but never focus on the recurring expense incurred with the annual maintenance fee or the hourly rates of the vendor’s development staff. If the maintenance fee is a standard 25% annual expense, you’re effectively repurchasing the system every four years.
  • If the system price is based upon a per seat license agreement, negotiate this too. Especially if your organization could increase in size organically or through a merger – you could experience a significant increase in your annual maintenance expense just to own the system.
  • Be careful also that the contract agreement’s annual maintenance fee isn’t based on the original system price prior to discount – ensure that it’s based on the purchase price. You’re also able to add a clause into the agreement allowing for an “X” percentage company growth with no additional increase in annual maintenance fee.

Tips on discussions with an agile partner:

  • One way to potentially reduce vendor development expenses is to utilize the support of professional services software and application development groups. Yes, these are also vendors, but similar to professional services, accounting or legal firms, these organizations provide software engineering and application development services on an as-needed project-by-project basis, or offer service contacts to provide system support at a much cheaper rate than your system vendor.
  • These software engineering and application development firms typically also provide an enhanced customer service experience – Have you ever contacted your system vendor’s technical support? Enough said.
  • Professional service developers are able to create many custom applications that can then be supported by your own on-staff IT team – most of these developers provide you the application’s source code upon project completion – you own the system outright and can further enhance the application any way your business requires an update to the application.
  • Professional service developers are also likely to be in a unique position to provide advice on industry trends, best practices and value-add system functionality or enhanced reporting capabilities other clients have built into their systems which could benefit your organization greatly.

It’s important that Technology Executives understand they have an ability to break the revolving vendor hostage circle.