A few tips on how to negotiate the right price for CEM technology
Most analyst firms stay well clear when it comes to the tricky topic of prices for technology. The assumption is that vendor clients of the analyst firm may take umbrage – so the mysterious work of finding out what a new software product/project will actually cost is left to the buyer to fathom out. So, in this blog post, I am going against the grain and hope to provide some practical and actionable advice on costs and prices if you are a buyer of customer experience management (CEM) technology or indeed any business application software.
In my 20 years of experience in advising technology buyers, I have literally only come across a couple of instances where a buyer was ‘ripped off’ by a vendor. One of these was on quite a spectacular level, in the tens of millions of dollars. The short term, though very substantial, gain by the vendor turned into long-term pain and a loss for the vendor as rancor and distrust over the deal eventually lost them the account. The fact is that everybody wants to make a living and a good one at that. But good companies also want to build long-term, amiable, and productive relationships. You don’t do that by stiffing the customer in the first instance.
So, let us start this peek behind the pricing kimono by getting something straight: as a buyer you should expect to pay a fair price for good software. It won’t necessarily be cheap, but if properly selected and implemented, it will pay for itself many times over. With that in mind here goes… The single biggest complaint from buyers of business software is that vendors will not reveal their list prices. It’s a fair gripe as it’s perfectly true that many vendors will not publicly disclose their prices. This, in turn, can lead to suspicion and a lack of trust by the buyer. Not a good place to start. Here, though, is a secret I can reveal: they all cost pretty much the same as each other. What I mean is that any closely comparable WCM, ECM or BPM system will cost almost the same as one another in the long run. For that reason, I always advise clients not to eliminate a shortlisted vendor simply because of a high price quote too quickly. That being said you should always give a heads up to a vendor that has a high price that is at odds with the others. Make it clear that you are concerned and that you will need some flexibility from them if you are to proceed further. Transparency is the key here, for though nobody is going to agree to a final price too early, as its all about the negotiation, there is no value for either side of the negotiating table in wasting one another’s time. For example, a vendor that envisaged a half million dollar deal, only to find out that the buyer only has a fifth of that to spend may well walk away and save both parties a lot of inconvenience.
Over the years I have reviewed countless RFP or vendor submissions for buyer clients, and the thing I look for in the pricing is not the range of prices but the outliers. If we take five or six RFP submissions, most will come in roughly at the same cost point, but one will typically be much higher or much lower than the rest. Here’s the rub of it though: it’s not easy to detect the genuine outlier. That’s because the outlier usually comes in at the same total price as the others, only they have left elements out of their price quote or added in unnecessary elements that can later be removed. If you are at an early stage in your procurement process and don’t have any RFP or RFI price quotes yet and, in fact, are totally in the dark about what the software will cost, there are a couple of things you can do to at least get some ballpark figures.
1: Some vendors do publish their prices – Oracle is the best example. Anyone can go to Oracle’s website and look up the price of the software. Oracle is not going to be the cheapest option for sure, but it will not be as out-of-whack from the others as one might think.
2: US government departments – Federal government agencies typically have to publish what they paid for major IT projects.
3: A bit of smart Googling will usually pull up some actual prices.
A combination of all of the above is unlikely to take more than a morning’s work, and it will reward you with at least a basic understanding of the price range you will be dealing with. So, getting started is pretty easy, but then things can get complicated quickly as different vendors structure pricing in different ways. Historically, vendors have priced products based on a combination of seat prices, volume of data/content, per domain, per developer, number of CPU’s etc. It makes for a confusing bundle of pricing options and structures. Some firms like IBM have strict guidelines for their sales folk to follow when navigating these pricing labyrinths. Other firms give sales pretty much free reign to invent a price and price structure for a buyer. At worst this can mean that a sales professional will figure out what you can afford and develop a quote that meets that number. The key advice here for a buyer is, again, not to disqualify any potentially good fit technology due to pricing at an early stage. But, if one bidder is using some arcane pricing method, tell them so from the beginning and make it clear you need full transparency.
Probably the biggest single mistake I have seen buyers of technology make is to select a software option based on their analysis of the lowest price. Their calculations, in my experience at least, are almost always wrong. For example, on-premises software (still the dominant option for enterprise software) vendors can be dropped from the selection list in favor of an open source or cloud alternative that appears to be a much cheaper option. My advice is to undertake a simple five-year side-by-side cost analysis of all your shortlisted options. It’s simple math requiring a very simple spreadsheet. All you need to do is compare:
• 1st year license fees
• Cost of implementation
• Cost of migration (if applicable)
• Cost of training
• Recurring fees (cloud subscriptions – maintenance fees etc.)
• Cost of any upgrades (within a five year period)
It’s important to note that, with the exception of upgrades, all of these costs will be incurred whether you are buying on-premises or cloud software. The long story made short is that over five years most pricing evens out. If you are considering a cloud subscription option alongside on-premises software, you may want to extend this analysis out to ten years. In some cases, though certainly not all, the cloud option can come out as much more expensive.
To summarize, do a side-by-side cost analysis of the quotes over a period of a minimum of five years every time. Not only will you have a clearer idea of the real costs you will be hit with, you will also have a powerful tool for negotiation. Most buyers naturally want to pay the lowest price possible for any application software. But as I noted at the beginning of this blog post, everyone wants to make a living. Some vendors may be desperate for your business, others not so much. Negotiation isn’t going to be totally one-sided. What you need to agree to with the vendor is a fair price that establishes the basis for a long-term viable relationship. I strongly advise buyers not to try to strong-arm vendors by holding out until the last day of the quarter to agree to a sale, knowing that a salesperson’s numbers and possibly their job is dependent on signing at a slashed price. Just like the unscrupulous vendor sales person that rips you off, it could come back to hurt you, as there will be little love lost once the deal is signed. On a side note, for those keen on negotiating prices down hard, Cloud vendors can be very strict that the price offered is the price you will pay. On-premises vendors can be equally strict about the cost of their yearly maintenance fees. That said, where discounts can normally be negotiated are in first year on-premises license costs – here a salesperson may have plenty of flexibility and discounts of 50-60% are not uncommon.
Finally, as a buyer of technology, you need to understand that by far the biggest cost of almost any business application software project will be the associated services. These run from 2 to 8 times the cost of the software. Service costs can be far harder to negotiate down as the profit margins for the service providers are much leaner. Putting real people on a project is a hard cost that cannot be absorbed in the way a manufactured piece of software or hardware can. Moreover, most projects tend to get more complicated and difficult than they seemed at the outset. So, for the services partner the risk can be high and their willingness to negotiate down accordingly low. The worst outcome for you as a buyer, and for the software vendor quite frankly, is that you get in over your head and end up embarking on a project you really can’t afford. Getting a good understanding of the true costs from the outset is essential. In some cases that information may mean your project is not viable and at least you can walk away before you get in too deep. In other situations it provides you with something of a level playing field when it comes to negotiating a fair price.
The final word on pricing is that it is important, but is still only one of several key selection criteria. Use a critical eye when looking at pricing, but also keep in mind the other requirements such as functional and technical requirements and vendor viability. Ultimately, it’s the balance of all your criteria that matter most.