Robert Kugel's Analyst Perspectives

Manage Your Software and Providers or Waste Money Unnecessarily

Posted by Robert Kugel on Sep 19, 2011 11:51:10 AM

I was reminded by a recent piece in InformationWeek about the need to manage the mounting cost of software more carefully that this issue never seems to become old news. I have read variations of it in IT trade publications for two decades now, reminding me of the quip attributed to Mark Twain: Everyone talks about the weather, but nobody ever seems to do anything about it. (Like many of Twain’s “quotes,” he wasn’t the author of this one either.) I believe that at the heart of this issue is a lack of oversight on software contracts, at the time of signing and especially in subsequent billings. Some companies don’t let these costs get out of hand because they have defined processes and responsibilities for managing them. The careless ones are fodder for the aforementioned articles, while the rest are somewhere in between. 

There’s no doubt that larger companies have a challenge in managing software licensing costs. Our research has found that organizations continue to have significant number of technology vendors to manage across the enterprise of business processes. Large numbers, yes, but they can be dealt with. Unfortunately, not many deal with it successfully. Only one-fourth (26%) of the companies we assessed do not overspend on vendor-supplied software maintenance while 54% do (the rest aren’t sure). Almost three-fourths (72%) of those that say they overspend also say that it’s not a problem, which, when you think about it, is an important part of the problem. 

We advise finance and IT executives to ask themselves whether they have the right people and processes to handle software contract life-cycle management. These managers need to have a defined process for managing both initial and recurring contractual issues such as tracking which and how many people are using the software, or considering the impact of new hardware purchases on the maintenance charges. 

I’ve heard it said in some cases that people feel “there isn’t enough time to review and evaluate all of the contract terms” before signing. I suppose this can happen from time to time, but most major software purchases involve a lengthy evaluation process and a healthy amount of dickering as companies try to run out the clock to secure better, end-of-the-quarter terms from vendors. Demanding a version of the licensing contract in advance that will serve as the basis of the marked-up final version is not unreasonable (many companies do just that). And it’s important that the people charged with reviewing and negotiating the terms covering future billing structures have an understanding of the financial impact of likely deployment scenarios. In other words, you need expertise regarding how software gets used as well as monetary sense. 

A related problem is that many companies do not assign responsibility for assessing the contract for ongoing annual costs or don’t have someone on staff who is expert enough to be of much use. There is no good excuse for this neglect. A corporation that’s going to spend $100,000 initially to license some software will probably pay the vendor two to three times that amount over the life of the contract for maintenance fees and additional licenses. Given the amount of money involved, it’s certainly worthwhile to have someone look over the contract and summarize key provisions that will affect annual maintenance and other charges. This summary must then be available to those who periodically review bills from vendors. 

Then there is the problem of not having the right people assigned to the task of reviewing vendors’ maintenance charges and other fees to determine whether they conform to the actual contract. Moreover, there’s the associated process issue of ensuring that these people have ready access to accurate information with which to do the review. Too often these elements are simply afterthoughts, and therefore overcharges slip between the cracks. 

Our research confirms that companies that closely track costs are less likely to overspend on maintenance and support costs: 41 percent of companies that have this capability do not overspend on maintenance and support, twice the share of companies that are aware of only some of the costs and just 16 percent that do not track them at all. About half (48%) of those that are spending too much said that establishing a better review process is the most important step they can take to address this issue. 

The research also suggests that it’s in the CIO’s best interests to track all costs of supporting applications. We found that those who do so had faster budget growth than those that do not: 43 percent of those that track all costs recorded 5 percent or more annual increases in their budget in the previous three years compared to 25 percent that tracked only some of them. In short, IT departments that demonstrate they manage resources competently and are good stewards of a company’s resources are rewarded. 

Companies that do not have people, processes and information resources in place that help them manage software costs easily and accurately should invest in them. CIOs must actively manage these costs and the factors that drive them more aggressively and intelligently. There is ample evidence that this is money well spent – unlike the sums lost through neglect. 

Best Regards, 

Robert Kugel – SVP Research

Topics: assets, Office of Finance, Portfolio Management, contract management, Business Performance Management (BPM), Financial Performance Management (FPM), Software

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.