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by duncan Jones, January 4, 2013 | updated: January 10, 2013 key TakeaWays software sourcing executives Need a New approach For The New World of BT Reactive, adversarial software buying is ineffective in the new business technology (BT) world of self-provisioning, cloud deployment, and mobile access. IT sourcing professionals colleagues bypass them in the sourcing process, while powerful technology vendors expect more revenue from them than they can afford to provide. strategic software sourcing delivers Better supplier Relationships Sourcing professionals need a more strategic approach that aligns the commercial model for each supplier with its place in the enterprises software sourcing strategy. You can get more for your BT spend by a tiered approach, partnering better with key suppliers while redressing the leverage imbalance with overly powerful incumbents. Create This alignment using Forresters discover, plan, act, optimize process Forresters software sourcing model helps firms implement and refine such a strategic approach. It involves four important stages: 1) Discover the transformation opportunity; 2) plan your creation of a software sourcing strategy; 3) act wisely to get the appropriate agreements; and 4) optimize ongoing software costs.

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For Sourcing & Vendor Management Professionals

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Get Better Software Deals By Aligning Your Sourcing Strategy And Commercial Approach
Executive Overview: The Strategic Software Sourcing Playbook
by Duncan Jones with Chris Andrews and Ben Jennings

Why Read This Report

This report outlines how sourcing and vendor management (SVM) executives can implement Forresters strategic software sourcing model. Our research has shown us that transactional procurement is ineffective in todays software market, with major technology trends such as big data, cloud, and mobile changing the way we choose and use software. IT colleagues and business users exclude sourcing professionals from their decision processes and ignore commercial criteria when picking suppliers. Yet they expect you to negotiate great deals, despite having little leverage with powerful technology giants, who expect more revenue than enterprises can afford to provide. Forresters strategic software sourcing playbook explains how to reduce reactive transactional battles using a more strategic approach that will help you improve supplier relationships and get more value for your software expenditure. It will also help procurement professionals who are already using a strategic approach to refine and optimize their software sourcing. Table Of Contents
2 Reactive Procurement Does Not Work In Todays Software World Too Many Enterprises Persist With Failing Approaches 5 Strategic Software Sourcing Maximizes And Focuses Your Leverage Strategically Aligned Deals Deliver Better Business Outcomes 7 Transform Your Software Sourcing From Reactive To Strategic
WHAT IT MEANS

Notes & Resources

For this report we used Forrester data from our Forrsights Budgets And Priorities Tracker Survey, Q2 2012, as well as resources published by software vendors.

Related Research Documents

Good Software Deals Balance Price, Flexibility, And Risk Mitigation January 02, 2013 Transform Your Strategic Supplier Relationships From Duels Into Duets January 18, 2012 Introducing Software License Optimization September 29, 2011

9 Strategic Software Sourcing Will Cut Some Suppliers Power 9 Supplemental Material

2013, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To purchase reprints of this document, please email clientsupport@forrester.com. For additional information, go to www.forrester.com.

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Reactive Procurement Does Not Work In Todays Software world The software market continues to change rapidly, but many firms are still procuring software through the same transactional method theyve been using for years, and it isnt working. Major business technology trends such as the big data explosion and the move to mobile applications using cloud-based servers are changing the way people acquire and use software, and sourcing professionals need to change too or remain caught between:

IT colleagues making key sourcing decisions on incomplete and inappropriate criteria. For

example, they may pick what they believe to be the best technology with more consideration of their own job prospects than the cost/benefit tradeoff. Alternatively they will favor standardization and alignment with their existing teams skills rather than the need to maintain a balanced stable of alternative suppliers. Then they throw their project over the wall to procurement, expecting it to negotiate a great deal with little or no leverage.

Business users self-provisioning software-as-a-service (SaaS) and mobile apps. Sourcing

professionals feel unable to stem the tide of departmental shadow IT accepting standard service agreements without any due diligence review by purchasing and individuals clicking I agree when they download apps.

Tech giants wanting more revenue than enterprises can afford to provide. The major

technology companies need to grow their revenue at around 10% per year to maintain their current stock prices.1 However, only 5% of enterprises with 20,000 or more employees expect their software expenditure to grow at that rate, while 21% actually want to reduce it (see Figure 1). Forrester forecasts global software spending to grow by just 6% from 2012 to 2013.2 Moreover, CIOs want to spend less on maintenance of ongoing operations, systems, and equipment (MOOSE) activities such as software maintenance and processor capacity expansion, which form more than 80% of software companies revenues, in order to free up budget to spend on vital new projects (see Figure 2).3 Sourcing professionals are expected to deliver these savings without being given sufficient bargaining chips to redress the leverage imbalance.

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Figure 1 Only 5% Of Large Enterprises Expect Their Software Expenditure To Grow 10% In 2012
How do you expect your software spending to change in 2012 compared with 2011? Decrease more than 10% 20,000 or more 5% N = 491 5,000 to 19,999 4% N = 577 Decrease 5% to 10% 16% About the same Increase 5% to 10% 45% Increase more than 10% Dont know/ dont use 2%

26% 5%

13%

47%

27%

8% 1%

Base: international IT executives from companies with 5,000 or more employees (percentages may not total 100 because of rounding) Source: Forrsights Budgets And Priorities Tracker Survey, Q2 2012
89241 Source: Forrester Research, Inc.

Figure 2 Over 70% Of Enterprise CIOs Want To Shift Budget From MOOSE To New Initiatives
Are you prioritizing lowering ITs operational costs to free up money for new initiatives in the next 12 months? Not on our agenda 20,000 or more 4% N = 491 5,000 to 19,999 6% N = 577 Low priority High priority Critical priority

20%

47%

28%

27%

47%

20%

Base: international IT executives from companies with 5,000 or more employees (percentages may not total 100 because of rounding) Source: Forrsights Budgets And Priorities Tracker Survey, Q2 2012
89241 Source: Forrester Research, Inc.

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Too Many Enterprises Persist With Failing Approaches Software companies highest cost category, representing around 75% of license revenue, is selling and marketing. So, more than in almost any other industry, their profitability depends on them focusing their marketing and sales dollars in the right areas.4 The amount they spend goes above 100% if they have to fight for their revenue in multiple competitive deals around the enterprise, which increases their selling cost severalfold and reduces their win rates. Thats why they offer the highest discounts to get a large irrevocable commitment or be made a sole source instead of being merely one of many approved suppliers. Its also why they drive their sales teams hard, with huge commissions for people who meet their challenging sales targets. In this context, negotiation skills alone are insufficient without solid leverage and a sound strategy. Forrester encounters many experienced procurement professionals who are losing a battle with a software company because they have little power and a meager plan for the future. In most cases, theyve relied on:

Inventing competition, which merely undermines their credibility. Generalist procurement

professionals who lack software specialization often try to buy software like they buy commodities, such as office supplies or metal ore, and for that they need alternative sources. Software sales teams know the prospects intentions and see right through a buyers empty threat to, for example, replace Microsoft Office with Google Applications, or convert applications from Oracles database technology to IBMs or vice versa.

Benchmarking, without a sound negotiation plan. Firstly, software deals vary too greatly

for fair comparison to be possible, in most cases. Even if you found a similar sale by the same supplier, it might involve different products, commitment level, timing, strategic importance, etc., all of which would affect the discount level. Secondly, without clear incentives and threats, a buyer whose only tactic is to complain that his price is worse than his benchmark is likely to find the salesperson replying, So what? Thats the deal take it or leave it.

Bulking up the transaction to secure a great price but a lousy deal. Software companies

are skilled at expanding a purchase by throwing in additional products and capacity that the customer doesnt need. It saves them a lot of money if they can sell those products now rather than having to go through a separate sales process at a later date. Forrester sees many clients who have wasted money by buying products that dont work and products they dont need and cant implement all to beat the benchmark headline discount. They end up with millions of dollars of shelfware, on which they still have to pay maintenance fees.5

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Strategic Software Sourcing Maximizes And Focuses your Leverage Forresters approach to software negotiation aligns each suppliers commercial model with its role in your sourcing strategy. It combines supplier relationship management, product selection decision-making, and commercial negotiation into one integrated process (see Figure 3). The three foundations of strategic software sourcing are: 1. Supplier tiering that identifies preferred and prohibited sources of new technology. A formal process that measures a software companys qualities such as trustworthiness, innovativeness, and cultural fit enables the sourcing executive to influence colleagues product choices. He can use the results to ensure that future sourcing decisions reduce the firms dependence on overpowerful incumbent suppliers and avoid those that habitually overcharge and underdeliver. 2. Software category sourcing strategies that take account of all relevant criteria. This strategy adds the supplier tiering described above to traditional functionality assessment in order to define whether the organization will sole- or multisource in a specific product area, and from whom. Including objective supplier categorization reduces individual stakeholders ability to pick products for selfish reasons, such as to bolster their own job security or to secure corporate hospitality at major events. A good category strategy also balances the need for enterprisewide technology and architectural standardization with the need for local autonomy across heterogeneous business units. 3. Commercial agreements that fit the suppliers place in this sourcing strategy. The overall sourcing strategy enables buyers to decide when they can safely commit to multiyear enterprisewide deals, and thereby get the best possible prices and contract terms, and when to target flexibility over price. It also increases the buyers negotiation power by using the suppliers strategic role as leverage rather than the individual transaction on the table at the time.

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Figure 3 Align Your Commercial Approach With The Suppliers Place In Your Sourcing Strategy

Software category sourcing strategies

that take account of all relevant criteria Middleware MultiCRM Database source Top priority MultiFinance source Phase 2 Keep existing sole source

Supplier tiering

that identi es preferred and prohibited sources of new technology Gold Silver Bronze

Combining tiering with functional criteria

Evaluate suppliers products

Aligned commercial agreements Supplier ABCs role in the software sourcing strategy
Partnerships Trust Innovation Shared goals Multiyear agreements Fixes prices Some commitment Cumulative frameworks Business unit autonomy Volume earns discount

Shortlist Long list Sole source

Approved

Strategically Aligned Deals Deliver Better Business Outcomes

Forresters strategic software sourcing approach empowers the sourcing executive giving him Inc. Source: by Forrester Research, 87701 accountability for supplier categorization and hence increasing his influence on colleagues choices between technology providers. It enables sourcing leaders to persuade their main software suppliers to reward them for their loyalty and strategic allegiance and financial commitment while restricting adversarial haggling to lower-tier suppliers and tactical software purchases. Matching commercial models with formal category strategies will enable you to:

Improve the business relationship with your important suppliers. Misalignment causes

friction on both sides. Your best suppliers deserve a more flexible commercial framework founded on mutual trust and shared goals, and this will be the foundation of better service,

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innovation, and business value.6 Conversely, if you feel the need to tie a supplier down contractually, haggle over every purchase, and continually protect yourself against mistreatment, then it probably shouldnt be a top-tier supplier in the first place.

Get lower prices and more favorable, manageable contracts. Large software companies like to
keep their contracts as close to the standard template as they can. A strategic sourcing approach helps buyers assemble as many bargaining chips as possible and target them at the most important clauses and where there is most flexibility. They need to execute those strategies with supplier-specific tactics and up-to-date intelligence to know what deals are available and how to get them.

Avoid unnecessary and unexpected costs. The buyers good work can be undone by lax

controls and undisciplined software usage and deployment, so sourcing professionals should take governance responsibility for managing and complying with existing software agreements. This reduces the risk of nasty surprises from compliance audits and also cuts waste, such as one department procuring additional licenses for products when there are spare ones elsewhere.

Transform Your Software Sourcing From Reactive To Strategic Forresters strategic software sourcing playbook explains to sourcing executives how to change their organization from one mired in transactional negotiation, in reaction to business unit needs, to one that proactively helps the organization set and execute optimized category strategies. We use a fourphase process to help you drive this transformation (see Figure 4).7 To maximize their chance of success, software sourcing professionals should: 1. Discover the business opportunity for strategic software sourcing. Ask yourself if you have the prerequisites in place, such as formal supplier tiering that can drive future choices, not merely manage existing contracts. Find out and list how you currently source each software category so you can better identify opportunities to centralize and standardize and where to retain business unit autonomy. Then commission an honest audit of your current procurement performance to evaluate where youve paid too much for your software, how much shelfware youve bought, and which deficient contracts represent future risks that you should mitigate. 2. Plan a transformation road map and the priorities for urgent action. Start by assessing your organizations current sourcing maturity and its willingness to change, because youll have to be more cautious in a decentralized organization than in one that allows only limited autonomy. Perform an opportunity assessment on each software category. Plan to tackle first those for which you already have a category strategy but have not aligned the commercial agreements with. Leave the most controversial until later, where there is internal disagreement about the enterprises future direction or the supplier is too powerful for you to be able to effect significant change.

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3. Act by creating and executing sound negotiation plans. Strategic software sourcing has empowered you, so now you can start to apply that negotiation strength to secure better, more aligned contracts. Obtain your colleagues support for your plan, including what you will do if you dont get an acceptable offer and what else you can offer to persuade the salesperson to give ground. Tailor your plan using up-to-date supplier intelligence, including the biggest flaws in its standard agreements, any special deals that might be available, and which incentives and threats will currently be most powerful. 4. Optimize current performance, future deals, and ongoing license management. Forresters approach helps procurement escape its historical obsession with negotiated savings and instead deliver improved business outcomes, lower total cost of ownership (TCO), and closer supplier relationships. Sourcing executives should use multiple deal metrics to look beyond the headline discount percentage and instead balance TCO, flexibility, and risk as you manage your teams performance and compare alternative proposals. The software sourcing function should also take charge of software license optimization (SLO). SLO supersedes obsolete, failing software asset management (SAM) by managing licenses as potential liabilities, not assets, using comprehensive needs assessment, demand management, and usage monitoring.8 Figure 4 The Strategic Software Sourcing Playbook

DISCOVER Vision

PLAN Assessment

ACT Supplier Intelligence

OPTIMIZE Performance Management

Landscape

Strategic Plan

Processes

Metrics

Business Case

Road Map

Tools

Continuous Improvement
Source: Forrester Research, Inc.

89241

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W h at I t M e a n s

Strategic Software Sourcing Will Cut Some Suppliers Power The more enterprises adopt Forresters recommended approach, the greater will be the pressure on the technology giants to change the way they do business. A solid sourcing strategy will reduce the power of the suppliers internal champions the people whose careers are tied too closely to that supplier to direct key decisions in its favor. Software companies that continue to care more about their own revenue recognition than their customers success will see their role in those customers sourcing strategies rapidly diminish. Theyll lose out to companies that:

Sell more subscription products than they sell perpetual licenses. Models such as SaaS,

term licenses, and pay as you go (PAYG) encourage suppliers to keep customers happy to make contract renewals easier. The traditional players will have to stop selling shelfware and leaving it unimplemented if they transition to subscription businesses.

Strengthen the partnership by how they react to unforeseen circumstances. Partners

help each other when stuff happens; they dont take advantage of the opportunity to make a quick buck. For example, many enterprises need to flex their agreements when they make acquisitions and disposals. Sourcing leaders will favor companies that accommodate such events over those that charge one-off fees to let customers split or merge agreements or share systems after disposal.

supplemental material Methodology Forresters Forrsights Budgets And Priorities Tracker Survey, Q2 2012 was fielded to 3,659 IT executives and technology decision-makers located in Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Japan, Malaysia, Mexico, the Philippines, New Zealand, Russia, Singapore, the UK, and the US from small and medium-size business (SMB) and enterprise companies with 100 or more employees. This survey is part of Forresters Forrsights For Business Technology and was fielded from February 2012 to April 2012. LinkedIn Research Network fielded this survey online on behalf of Forrester. Survey respondent incentives include gift certificates and research reports. We have provided exact sample sizes in this report on a question-by-question basis. Each calendar year, Forresters Forrsights For Business Technology fields business-to-business technology studies in more than 17 countries spanning North America, Latin America, Europe, and developed and emerging Asia. For quality control, we carefully screen respondents according to job title and function. Forresters Forrsights For Business Technology ensures that the final survey population contains only those with significant involvement in the planning, funding, and

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10

purchasing of IT products and services. Additionally, we set quotas for company size (number of employees) and industry as a means of controlling the data distribution and establishing alignment with IT spend calculated by Forrester analysts. Forrsights uses only superior data sources and advanced data-cleaning techniques to ensure the highest data quality. We have illustrated only a portion of survey results in this document. To inquire about receiving full data results for an additional fee, please contact Forrsights@forrester.com or your Forrester account manager.

Endnotes
1

For example, SAPs co-CEO Jim Hagemann Snabe said at SAPs annual general meeting that SAP planned to grow its revenue from 14.2 billion in 2011 to more than 20 billion in 2015. The markets expect similar growth from Oracle and IBM, as evidenced by their very similar price/earnings multiples to SAP. Source: Jim Hagemann Snabe, SAP 2012 Annual General Meeting of Shareholders, May 23, 2012 (http://www.sap. com/corporate-en/investors/governance/meetings/pdf/SAP-2012-Shareholder-Meeting-Speech-Snabe.pdf). By 2013, we are expecting Europes mild recession to end, growth in the US and the rest of the world to improve, and the US dollar to hold most of its 2012 gains against other currencies. As a result, tech market growth measured in US dollars will accelerate to 4.3% in 2013, led by software (6.1%). See the September 10, 2012, Global Tech Market Outlook 2012 To 2013 report.

Forrester asked international IT executives from companies with 5,000 or more employees, Are you prioritizing lowering ITs operational costs to free up money for new initiatives in the next 12 months? Seventy-five percent of companies with 20,000 or more employees considered lowering IT operational costs as a high or critical priority. Sixty-seven percent of companies with 5,000 to 19,999 employees considered lowering IT operational costs a high or critical priority. Source: Forrsights Budgets And Priorities Tracker Survey, Q2 2012 For more information on IT budget planning for CIOs in 2013, please see Forresters December 21, 2012, 2013 IT Budget Planning Guide For CIOs [86241] report.

For Oracles year ended May 31, 2012, sales and marketing represented 19% of total revenue and 72% of license revenue. As a comparison, the 2011 proportions for BMC Software, which is 20 times smaller than Oracles, were 29% and 72%. Source: Oracle Reports Q4 GAAP EPS Up 11% To 69 cents; Q4 Non-GAAP EPS Up 10% To 82 cents, Oracle press release, June 18, 2012 (http://www.oracle.com/us/corporate/investorrelations/financials/q4fy12-1666263.pdf) and BMC Software (http://investors.bmc.com/results.cfm). If youre a software sourcing professional, your main performance metric is probably pushing you in the wrong direction. You want to get an all-around good deal that includes vital long-term protection for your company, but your executives only care about measurable, short-term savings. But too often getting the best price involves paying too much money too early in the project. There are good reasons why software publishers want upfront payment, such as the financial markets insatiable demand for recognizable revenue,

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11

but thats their problem, not yours. Its more important to retain leverage later, for when you need to persuade the vendor to get a project back on track, cut your maintenance, or accept your interpretation of a licensing policy. Increasingly, savvy software buyers are rejecting this outdated approach and demanding flexible, phased commercial arrangements similar to those that they already get from their SaaS and services providers. You may lose some headline discount by refusing to give in to your sales reps demands for money down, but its worth paying that price, in return for a more balanced deal. See the October 25, 2010, Great Price, Shame About The Deal report.
6

The three keys to a successful partnership are trust, co-innovation, and shared goals. Forrester found examples of successful partnerships between enterprises and their technology providers. Such partnerships require mutual trust rather than contract clauses, co-innovation to deliver more than either party could create on its own, and shared goals, risk, and rewards. See the January 18, 2012, Transform Your Strategic Supplier Relationships From Duels Into Duets report.

Please refer back to the online document to see the associated reports in the playbook. See the xx, 2013, Get Better Software Deals By Aligning Your Sourcing Strategy And Commercial Approach report. Software asset management (SAM), as organizations such as ITIL and ISO define it, is obsolete. Its base processes come from a bygone era of floppy disks and unique license keys, whereas todays software licensing challenges include virtualized systems, a focus on usage instead of installation, and a proliferation of pricing metrics to track and control. Forrester has seen a few visionary enterprises, helped by innovative product and service providers, implement a more proactive, farther-reaching approach that we call SLO. Not only does SLO minimize the risk of unexpected costs caused by software audits, but it cuts total spend by enabling reharvesting and eliminating wasteful buying of licenses that wont be fully used. These smart organizations extended their SAM frameworks by: 1) defining central responsibility for proactive license management to avoid nasty surprises; 2) establishing a contractual framework for compliance tracking and cost optimization; 3) implementing complete, up-to-date discovery and license reconciliation processes; and 4) performing demand management to analyze what users need, not merely what they have. See the September 29, 2011, Introducing Software License Optimization report.

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Forrester Focuses On Sourcing & Vendor Management Professionals

To help transform your organization for sustained business innovation, youre challenged with balancing business value, cost, and risk when sourcing and managing technology vendors. Forresters subjectmatter expertise and deep understanding of your role will help you create forward-thinking strategies; weigh opportunity against risk; justify decisions; and optimize your individual, team, and corporate performance.

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Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forward-thinking advice to global leaders in business and technology. Forrester works with professionals in 17 key roles at major companies providing proprietary research, customer insight, consulting, events, and peer-to-peer executive programs. For more than 29 years, Forrester has been making IT, marketing, and technology industry leaders successful every day. For more information, visit www.forrester.com. 89241