IT vendor price increases are coming
Many experts are predicting software price increases, including higher support service costs. Reports show that some increases are already here. According to The Register, “Oracle support prices are set to rise by 8% in the U.S., and the company will also impose increases commensurate with inflation in other regions.” Craig Guarente, founder and CEO of software licensing advisor Palisade Compliance, said “clients had contacted his advisory firm notifying them of the price changes.”
In another example, Intel said earlier this month it plans to increase prices for a “majority of its microprocessors and peripheral chip products” due to “inflationary pressures.” The price increases are really amazing since many vendors have outrageous margins for support already. According to Jeremy Sayler, senior director, License Advisory Services at Rimini Street, “Oracle Executives are known for quoting 94% support margins in Oracle quarterly earnings calls.”
Looking at software and databases specifically, are we to believe that vendors need to raise annual renewal uplifts by as much as 8% to maintain those margins? Using the Oracle example, if they absorbed the cost of inflation and maintained a 4% annual increase, wouldn’t 90% margins be enough? When considering the ever-increasing cost of software and database support, what are clients getting in return for their significant investment?
The question for CIOs and application leaders becomes “What do we do about it?” Simply eat the cost, perhaps by belt-tightening elsewhere or cutting investments in new technologies? Or begin an evaluation of the vendor’s software support services, seeking to get just the right mix?
“When you get notified of a price hike, look at what’s behind the higher costs,” advises Pat Phelan, Rimini Street VP, Market Research. “When an IT vendor raises the price for software support services, that can be an important time to reevaluate the costs and benefits of the service.”
“It’s the economy, stupid”
A good initial line of inquiry investigates whether an economic reason exists for soaring costs. Recently, some vendors have blamed rising inflation, claiming that they must pass that burden on to the client. But smart customers look at how the software price increases match the rate of inflation. A mismatch indicates something else could be afoot.
Some IT services firms attribute higher pricing to the costs of acquiring and retaining scarce tech talent. There can be some truth in that. After all, IT professionals are in high demand, and they expect greater compensation these days. “Ask the vendor how that factored into higher prices,” says Phelan. “And whether you the customer should be the one to bear those costs, rather than them.”
“When prices go up,” adds Phelan, “it’s time to ask questions.”
The impact of higher prices on tech acquisition and maintenance
From comic books to cars, nothing stays the same price forever. When a price increase letter comes for hardware, software, or maintenance, a smart CIO confronts it and advocates hard decisions that support the organization’s strategic goals.
“Some costs, such as for software and its support, you just can’t do without, even in a difficult recession economy,” admits Phelan. For example, if your business is retail, you simply cannot skimp on the platform that facilitates the online business you depend on. Cybersecurity is another area where companies must devote resources, even when costs increase. Although it can be tempting to cut funding there, the potential damage can be difficult to undo.
Cuts must be made, though. Deciding where to make them has crucial repercussions for your business.
Take a hard look at the hard sell
The vendor’s next price increase letter might drop jaws at your company. As soon as you have put those mandibles back in their correct position, think about what you need and how you can afford it. Phelan offers a few considerations:
- Justify the cost. “Ask your vendor why you should pay more for what you’re already getting,” recommends Phelan. “What justifies the higher prices if the offering doesn’t improve? If they can’t answer, ask yourself whether you should pay a higher price.”
- Protect your staff. “It’s harder these days to retain staff, so you certainly don’t want to lose them. The costs of replacing them could be even worse,” she says. Instead, continue to devote funds to your people, even in the face of higher IT costs.
- Keep strategic focus. “Try not to short-change strategic investments, even if you feel pressure to keep up your IT support,” warns Phelan. Keep long-term priorities in mind even while balancing them with near-term needs.
- Reconsider bells and whistles. Cost increases present an important opportunity to reexamine the link between tech and business outcomes. A newer, costlier technology (cloud, for instance) is not necessarily better for every organization. She encourages considering whether some needs can be met with less-expensive solutions that still get the job done: “Vendors are coming out with larger SaaS offerings — at a higher price point, for example — but that’s often something you don’t really need.”
- Think creatively. “CIOs should investigate all options for getting required IT services.” For example, replacing vendor maintenance with third-party support can decrease costs while increasing coverage. Another benefit of third-party providers: They fully support older software that works just fine, which means the vendor cannot pressure you into a costly upgrade.
Your company has its own enterprise software roadmap, tailored to its overarching business goals. IT vendors have their own. And as their prices rise, those roadmaps may finally diverge. At the end of the day, it’s important to be diligent: Check your contracts for support uplift protection.
Using Oracle as an example again, Sayler advises “Oracle licensees should review their Oracle ordering documents for support uplift language that may protect them against Oracle’s 8% annual increase. In some cases, Oracle will provide support uplift guarantees for the first several years of support following a new license purchase. Large purchases may even have language to eliminate support uplifts. These contractual terms are even more valuable considering Oracle’s proposed large increase to upcoming support renewals.”
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