By Andy McCue, 16 November 2007 14:54
NEWS
Software licensing costs are set to fall over the next decade as IT industry trends converge to give buyers more bargaining power.
Analyst Gartner predicts vendors will find themselves increasingly challenged as IT departments look to reduce software costs as they have done with hardware and services.
In a research note Gartner VP William Snyder said: "Up until now the unique nature of the software market has meant that buyers had very little negotiating power after the initial purchase of a software licence. We expect those dynamics to change considerably over the next five to 10 years giving CIOs and software procurement officers more bargaining power while potentially reducing software vendor profit margins."
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Gartner has identified seven major trends converging to change software delivery models, reduce dependence on the giant application vendors and force prices down.
These include business process outsourcing; software as a service (SaaS); low-cost development environments, such as China and India, combined with modular architectures and service-oriented architectures; the emergence of third-party software maintenance and support; growing interest in open source; the rise of Chinese software companies; and the expansion of the Brazilian, Chinese and Indian markets.
Although Gartner says open source won't topple the likes of IBM and Microsoft the analyst believes it will put pressure on traditional software margin structures, particularly in areas such as servers, operating systems, development tools and database technologies.
Gartner also predicts a quarter of all new business software will be delivered by SaaS by 2011.
Synder said buyers need to realise that the pendulum is beginning to swing in their favour with an increasing number of alternatives in the software market.
He said: "We would advise IT organisations to use BPO and open source alternatives to improve their negotiating power with software suppliers as well as employing the emergence of third-party vendors as a means to reduce higher maintenance fees on older versions of software. Costing out the possibility of using offshore skills to build application functionality as web services will also help negotiations with vendors."
Earlier this week silicon.com's CIO Jury found IT departments are increasingly scrutinising the value for money of Microsoft's Enterprise Agreements because of question marks over tangible benefits.
Comments
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1. Steve Hull
I can understand buyers wanting more negotiating power, however, as the owner of a software company which delivers SaaS products, I would ask them to have a little respect for business like mine when they strive to reduce the price.
Development costs and labour costs unfortuantely do not decrease and therefore if SaaS prices are driven down, software firms may strugle to survive financially.
If this happens then not only will it be disasterous for the specific companies effected, but the firms that have purchased their software will also be left with an unsupported product, which may cease to function. Obviously this will render their investment completely useless.
All I ask is that when buyers are negotiating on price, they think not just of the initial costs, but also of what value the software will add to their business. With this in mind they should be able to agree a suitable and repectful price.