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    Fs rsh, i., 60 a Pk dv, cmb, Ma 02140 uSat: +1 617.613.6000 | Fx: +1 617.613.5000 | www.s.m

    Get Better Software Deals By AligningYour Sourcing Strategy And CommercialApproach

    by d Js, Jy 4, 2013 | up: Jy 10, 2013

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    Wrl of BTReactive, adversarial soware buying is ineective in the new business technology

    (B) world o sel-provisioning, cloud deployment, and mobile access. I sourcing

    proessionals colleagues bypass them in the sourcing process, while powerul

    technology vendors expect more revenue rom them than they can aord to provide.

    strtgc sftwr srcng dlr Bttr slr Rltn

    Sourcing proessionals need a more strategic approach that aligns the commercial

    model or each supplier with its place in the enterprises soware sourcing strategy.

    You can get more or your B spend by a tiered approach, partnering better

    with key suppliers while redressing the leverage imbalance with overly powerulincumbents.

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    Forresters soware sourcing model helps rms implement and rene such a

    strategic approach. It involves our important stages: 1) Discover the transormation

    opportunity; 2) plan your creation o a soware sourcing strategy; 3) act wisely to get

    the appropriate agreements; and 4) optimize ongoing soware costs.

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    2013, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Inormation is based on best available

    resources. Opinions refect judgment at the time and are subject to change. Forrester , Technographics, Forrester Wave, RoleView, TechRadar,

    and Total Economic Impact are trademarks o Forrester Research, Inc. All other trademarks are the property o their respective companies. To

    purchase reprints o this document, please email [email protected]. For additional inormation, go to www.orrester.com.

    For Sourcing & Vendor ManageMent ProFeSSionalS

    Why Read This RepoRT

    Tis report outlines howsourcing and vendor management (SVM) executives can implementForresters strategic soware sourcing model. Our research has shown us that transactionalprocurement is ineective in todays soware market, with major technology trends such as bigdata, cloud, and mobile changing the way we choose and use soware. I colleagues and businessusers exclude sourcing proessionals rom their decision processes and ignore commercial criteriawhen picking suppliers. Yet they expect you to negotiate great deals, despite having little leveragewith powerul technology giants, who expect more revenue than enterprises can aord to provide.

    Forresters strategic soware sourcing playbook explains how to reduce reactive transactionalbattles using a more strategic approach that will help you improve supplier relationships and getmore value or your soware expenditure. It will also help procurement proessionals who arealready using a strategic approach to rene and optimize their soware sourcing.

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

    ReaCTive pRoCuReMeNT does NoT WoRk iN Todays soFTWaRe WoRLd

    Te soware market continues to change rapidly, but many rms are still procuring soware

    through the same transactional method theyve been using or 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 soware, and sourcing

    proessionals need to change too or remain caught between:

    IT colleagues making key sourcing decisions on incomplete and inappropriate criteria. Forexample, they may pick what they believe to be the best technology with more consideration

    o their own job prospects than the cost/benet tradeo. Alternatively they will avor

    standardization and alignment with their existing teams skills rather than the need to maintain

    a balanced stable o alternative suppliers. Ten they throw their project over the wall to

    procurement, expecting it to negotiate a great deal with little or no leverage.

    Business users sel-provisioning soware-as-a-service (SaaS) and mobile apps. Sourcingproessionals eel unable to stem the tide o departmental shadow I 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 aord to provide. Te majortechnology companies need to grow their revenue at around 10% per year to maintain their

    current stock prices.1 However, only 5% o enterprises with 20,000 or more employees expect

    their soware expenditure to grow at that rate, while 21% actually want to reduce it (see Figure

    1). Forrester orecasts global soware spending to grow by just 6% rom 2012 to 2013.2 Moreover,

    CIOs want to spend less on maintenance o ongoing operations, systems, and equipment(MOOSE) activities such as soware maintenance and processor capacity expansion, which orm

    more than 80% o soware companies revenues, in order to ree up budget to spend on vital new

    projects (see Figure 2).3 Sourcing proessionals are expected to deliver these savings without being

    given sucient bargaining chips to redress the leverage imbalance.

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

    Figure 1 Only 5% O Large Enterprises Expect Teir Soware Expenditure o Grow 10% In 2012

    Source: Forrester Research, Inc.89241

    Source: Forrsights Budgets And Priorities Tracker Survey, Q2 2012

    Base: international IT executives from companies with 5,000 or more employees(percentages may not total 100 because of rounding)

    Decrease morethan 10%

    Decrease5% to 10%

    Aboutthe same

    Increase5% to 10%

    Increase morethan 10%

    Dont know/dont use

    How do you expect your software spending to change in 2012 compared with 2011?

    4%

    5%

    13%

    16%

    47%

    45%

    27%

    26%

    8%

    5%

    1%

    2%

    5,000to 19,999

    N = 577

    20,000or moreN = 491

    Figure 2 Over 70% O Enterprise CIOs Want o Shi Budget From MOOSE o New Initiatives

    Source: Forrester Research, Inc.89241

    Source: Forrsights Budgets And Priorities Tracker Survey, Q2 2012

    Base: international IT executives from companies with 5,000 or more employees(percentages may not total 100 because of rounding)

    5,000 to19,999

    N = 577

    20,000or moreN = 491

    Are you prioritizing lowering ITs operational costs to free up money for new initiativesin the next 12 months?

    Not on our agenda Low priority High priority Critical priority

    6%

    4%

    27%

    20%

    47%

    47%

    20%

    28%

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

    T Mn entrr prt Wt Flng arc

    Soware companies highest cost category, representing around 75% o license revenue, is selling

    and marketing. So, more than in almost any other industry, their protability depends on them

    ocusing their marketing and sales dollars in the right areas.4 Te amount they spend goes above

    100% i they have to ght or their revenue in multiple competitive deals around the enterprise,

    which increases their selling cost severalold and reduces their win rates. Tats why they oer the

    highest discounts to get a large irrevocable commitment or be made a sole source instead o

    being merely one o many approved suppliers. Its also why they drive their sales teams hard, with

    huge commissions or people who meet their challenging sales targets.

    In this context, negotiation skills alone are insucient without solid leverage and a sound strategy.

    Forrester encounters many experienced procurement proessionals who are losing a battle with a

    soware company because they have little power and a meager plan or the uture. In most cases,

    theyve relied on:

    Inventing competition, which merely undermines their credibility. Generalist procurementproessionals who lack soware specialization oen try to buy soware like they buy

    commodities, such as oce supplies or metal ore, and or that they need alternative sources.

    Soware sales teams know the prospects intentions and see right through a buyers empty threat

    to, or example, replace Microso Oce with Google Applications, or convert applications rom

    Oracles database technology to IBMs or vice versa.

    Benchmarking, without a sound negotiation plan. Firstly, soware deals vary too greatlyor air comparison to be possible, in most cases. Even i you ound a similar sale by the same

    supplier, it might involve dierent products, commitment level, timing, strategic importance,etc., all o which would aect 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

    nd the salesperson replying, So what? Tats the deal take it or leave it.

    Bulking up the transaction to secure a great price but a lousy deal. Soware companiesare skilled at expanding a purchase by throwing in additional products and capacity that the

    customer doesnt need. It saves them a lot o money i 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. Tey end up with millions o

    dollars o shelware, on which they still have to pay maintenance ees.5

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

    sTRaTeGiC soFTWaRe souRCiNG MaxiMizes aNd FoCuses youR LeveRaGe

    Forresters approach to soware 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). Te three

    oundations o strategic soware sourcing are:

    1. Supplier tiering that identifes preerred and prohibited sources o new technology. A ormal

    process that measures a soware companys qualities such as trustworthiness, innovativeness,

    and cultural t enables the sourcing executive to infuence colleagues product choices. He

    can use the results to ensure that uture sourcing decisions reduce the rms dependence on

    overpowerul incumbent suppliers and avoid those that habitually overcharge and underdeliver.

    2. Soware category sourcing strategies that take account o all relevant criteria. Tis strategy

    adds the supplier tiering described above to traditional unctionality assessment in order todene whether the organization will sole- or multisource in a specic product area, and rom

    whom. Including objective supplier categorization reduces individual stakeholders ability to

    pick products or selsh 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 or enterprisewide

    technology and architectural standardization with the need or local autonomy across

    heterogeneous business units.

    3. Commercial agreements that ft the suppliers place in this sourcing strategy. Te overall

    sourcing strategy enables buyers to decide when they can saely commit to multiyear

    enterprisewide deals, and thereby get the best possible prices and contract terms, and when to

    target fexibility over price. It also increases the buyers negotiation power by using the suppliersstrategic role as leverage rather than the individual transaction on the table at the time.

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

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

    CRMTop priority

    Keepexisting

    solesource

    DatabaseMulti-source

    Middle-wareMulti-source

    FinancePhase 2

    Software category sourcing strategiesthat take account of all relevant criteria

    Evaluate suppliers productsCombining tiering with functional criteria

    Supplier tieringthat identies preferred andprohibited sources of newtechnology

    Supplier ABCs role in thesoftware sourcing strategy

    Alignedcommercialagreements

    Multiyearagreements

    Fixes prices Somecommitment

    Cumulativeframeworks

    Business unit

    Partnerships

    Trust

    Innovation

    Shared goals

    Bronze

    Silver

    Gold

    Short-list

    Solesource

    Approved

    Longlist

    strtgcll algn dl dlr Bttr Bn otcm

    Forresters strategic soware sourcing approach empowers the sourcing executive by giving him

    accountability or supplier categorization and hence increasing his infuence on colleagues choices

    between technology providers. It enables sourcing leaders to persuade their main soware suppliers

    to reward them or their loyalty and strategic allegiance and nancial commitment whilerestricting adversarial haggling to lower-tier suppliers and tactical soware purchases.

    Matching commercial models with ormal category strategies will enable you to:

    Improve the business relationship with your important suppliers. Misalignment causesriction on both sides. Your best suppliers deserve a more fexible commercial ramework

    ounded on mutual trust and shared goals, and this will be the oundation o better service,

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

    innovation, and business value.6 Conversely, i you eel the need to tie a supplier down

    contractually, haggle over every purchase, and continually protect yoursel against mistreatment,

    then it probably shouldnt be a top-tier supplier in the rst place.

    Get lower prices and more avorable, manageable contracts. Large soware companies like tokeep 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 fexibility. Tey need to execute those strategies with

    supplier-specic tactics and up-to-date intelligence to know what deals are available and how to

    get them.

    Avoid unnecessary and unexpected costs. Te buyers good work can be undone by laxcontrols and undisciplined soware usage and deployment, so sourcing proessionals should

    take governance responsibility or managing and complying with existing soware agreements.

    Tis reduces the risk o nasty surprises rom compliance audits and also cuts waste, such as one

    department procuring additional licenses or products when there are spare ones elsewhere.

    TRaNsFoRM youR soFTWaRe souRCiNG FRoM ReaCTive To sTRaTeGiC

    Forresters strategic soware sourcing playbook explains to sourcing executives how to change their

    organization rom 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 our-

    phase process to help you drive this transormation (see Figure 4).7 o maximize their chance o

    success, soware sourcing proessionals should:

    1. Discover the business opportunity or strategic soware sourcing. Ask yoursel i you have

    the prerequisites in place, such as ormal supplier tiering that can drive uture choices, not

    merely manage existing contracts. Find out and list how you currently source each soware

    category so you can better identiy opportunities to centralize and standardize and where to

    retain business unit autonomy. Ten commission an honest audit o your current procurement

    perormance to evaluate where youve paid too much or your soware, how much shelware

    youve bought, and which decient contracts represent uture risks that you should mitigate.

    2. Plan a transormation road map and the priorities or 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 thanin one that allows only limited autonomy.

    Perorm an opportunity assessment on each soware category. Plan to tackle rst those or 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 uture

    direction or the supplier is too powerul or you to be able to eect signicant change.

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

    3. Act by creating and executing sound negotiation plans. Strategic soware sourcing has

    empowered you, so now you can start to apply that negotiation strength to secure better, more

    aligned contracts. Obtain your colleagues support or your plan, including what you will do i

    you dont get an acceptable oer and what else you can oer to persuade the salesperson to giveground. ailor your plan using up-to-date supplier intelligence, including the biggest faws in its

    standard agreements, any special deals that might be available, and which incentives and threats

    will currently be most powerul.

    4. Optimize current perormance, uture 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 o ownership (CO), and closer

    supplier relationships. Sourcing executives should use multiple deal metrics to look beyond

    the headline discount percentage and instead balance CO, fexibility, and risk as you manage

    your teams perormance and compare alternative proposals. Te soware sourcing unction

    should also take charge o soware license optimization (SLO). SLO supersedes obsolete, ailing

    soware asset management (SAM) by managing licenses as potential liabilities, not assets, using

    comprehensive needs assessment, demand management, and usage monitoring.8

    Figure 4 Te Strategic Soware Sourcing Playbook

    Source: Forrester Research, Inc.89241

    DISCOVER PLAN ACT OPTIMIZE

    Assessment

    Strategic Plan

    Road Map

    Supplier

    Intelligence

    Processes

    Tools

    Performance

    Management

    Metrics

    ContinuousImprovement

    Vision

    Landscape

    Business Case

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    2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013

    W h a t I t M e a n s

    sTRaTeGiC soFTWaRe souRCiNG WiLL CuT soMe suppLieRs poWeR

    Te more enterprises adopt Forresters recommended approach, the greater will be the pressure onthe technology giants to change the way they do business. A solid sourcing strategy will reduce the

    power o the suppliers internal champions the people whose careers are tied too closely to that

    supplier to direct key decisions in its avor. Soware 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. Teyll 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. Te traditional players will have to stop selling shelware and

    leaving it unimplemented i they transition to subscription businesses.

    Strengthen the partnership by how they react to unoreseen circumstances. Partnershelp each other when stu happens; they dont take advantage o the opportunity to make

    a quick buck. For example, many enterprises need to fex their agreements when they make

    acquisitions and disposals. Sourcing leaders will avor companies that accommodate such

    events over those that charge one-o ees to let customers split or merge agreements or

    share systems aer disposal.

    suppLeMeNTaL MaTeRiaL

    Mtlg

    Forresters Forrsights Budgets And Priorities racker Survey, Q2 2012 was elded to 3,659 I

    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 rom small and medium-size business (SMB) and enterprise

    companies with 100 or more employees. Tis survey is part o Forresters Forrsights For Business

    echnology and was elded rom February 2012 to April 2012. LinkedIn Research Network elded

    this survey online on behal o Forrester. Survey respondent incentives include gi certicates 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 echnology elds 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 careully screen respondents according

    to job title and unction. Forresters Forrsights For Business echnology ensures that the nal

    survey population contains only those with signicant involvement in the planning, unding, and

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    purchasing o I products and services. Additionally, we set quotas or company size (number o

    employees) and industry as a means o controlling the data distribution and establishing alignment

    with I 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 o survey results in this document. o inquire about receiving ull

    data results or an additional ee, please contact [email protected] 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 rom 14.2 billion in 2011 to more than 20 billion in 2015. Te markets expect similar

    growth rom Oracle and IBM, as evidenced by their very similar price/earnings multiples to SAP. Source:Jim Hagemann Snabe, SAP 2012 Annual General Meeting o Shareholders, May 23, 2012 (http://www.sap.

    com/corporate-en/investors/governance/meetings/pd/SAP-2012-Shareholder-Meeting-Speech-Snabe.pd).

    2 By 2013, we are expecting Europes mild recession to end, growth in the US and the rest o the world to

    improve, and the US dollar to hold most o 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 soware (6.1%). See the September 10,

    2012, Global ech Market Outlook 2012 o 2013 report.

    3 Forrester asked international I executives rom companies with 5,000 or more employees, Are you

    prioritizing lowering Is operational costs to ree up money or new initiatives in the next 12 months?

    Seventy-ve percent o companies with 20,000 or more employees considered lowering I operational

    costs as a high or critical priority. Sixty-seven percent o companies with 5,000 to 19,999 employeesconsidered lowering I operational costs a high or critical priority. Source: Forrsights Budgets And

    Priorities racker Survey, Q2 2012

    For more inormation on I budget planning or CIOs in 2013, please see Forresters December 21, 2012,

    2013 I Budget Planning Guide For CIOs [86241] report.

    4 For Oracles year ended May 31, 2012, sales and marketing represented 19% o total revenue and 72% o

    license revenue. As a comparison, the 2011 proportions or BMC Soware, which is 20 times smaller than

    Oracles, were 29% and 72%. Source: Oracle Reports Q4 GAAP EPS Up 11% o 69 cents; Q4 Non-GAAP

    EPS Up 10% o 82 cents, Oracle press release, June 18, 2012 (http://www.oracle.com/us/corporate/investor-

    relations/nancials/q4y12-1666263.pd) and BMC Soware (http://investors.bmc.com/results.cm).

    5 I youre a soware sourcing proessional, your main perormance metric is probably pushing you in the

    wrong direction. You want to get an all-around good deal that includes vital long-term protection or your

    company, but your executives only care about measurable, short-term savings. But too oen getting the

    best price involves paying too much money too early in the project. Tere are good reasons why soware

    publishers want upront payment, such as the nancial markets insatiable demand or recognizable revenue,

    http://www.forrester.com/go?objectid=RES80301http://www.forrester.com/go?objectid=RES80301
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    but thats their problem, not yours. Its more important to retain leverage later, or when you need to

    persuade the vendor to get a project back on track, cut your maintenance, or accept your interpretation o

    a licensing policy. Increasingly, savvy soware buyers are rejecting this outdated approach and demanding

    fexible, phased commercial arrangements similar to those that they already get rom their SaaS andservices providers. You may lose some headline discount by reusing to give in to your sales reps demands

    or money down, but its worth paying that price, in return or a more balanced deal. See the October 25,

    2010, Great Price, Shame About he Deal report.

    6 Te three keys to a successul partnership are trust, co-innovation, and shared goals. Forrester ound

    examples o successul 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, ransorm Your Strategic

    Supplier Relationships From Duels Into Duets report.

    7 Please reer back to the online document to see the associated reports in the playbook. See the xx, 2013,

    Get Better Sotware Deals By Aligning Your Sourcing Strategy And Commercial Approach report.

    8 Soware asset management (SAM), as organizations such as IIL and ISO dene it, is obsolete. Its base

    processes come rom a bygone era o foppy disks and unique license keys, whereas todays soware

    licensing challenges include virtualized systems, a ocus on usage instead o installation, and a prolieration

    o pricing metrics to track and control. Forrester has seen a ew visionary enterprises, helped by innovative

    product and service providers, implement a more proactive, arther-reaching approach that we call SLO.

    Not only does SLO minimize the risk o unexpected costs caused by soware audits, but it cuts total spend

    by enabling reharvesting and eliminating wasteul buying o licenses that wont be ully used. Tese smart

    organizations extended their SAM rameworks by: 1) dening central responsibility or proactive license

    management to avoid nasty surprises; 2) establishing a contractual ramework or compliance tracking and

    cost optimization; 3) implementing complete, up-to-date discovery and license reconciliation processes;

    and 4) perorming demand management to analyze what users need, not merely what they have. See the

    September 29, 2011, Introducing Sotware License Optimization report.

    http://www.forrester.com/go?objectid=RES57935http://www.forrester.com/go?objectid=RES61018http://www.forrester.com/go?objectid=RES61018http://www.forrester.com/go?objectid=RES89241http://www.forrester.com/go?objectid=RES60435http://www.forrester.com/go?objectid=RES60435http://www.forrester.com/go?objectid=RES89241http://www.forrester.com/go?objectid=RES61018http://www.forrester.com/go?objectid=RES61018http://www.forrester.com/go?objectid=RES57935
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