Don't Pay to Support CRM 'Shelfware'

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1 Tactical Guidelines, J. Disbrow Research Note 3 May 2003 Don't Pay to Support CRM 'Shelfware' Enterprises license customer relationship management solutions that are often never totally deployed. Software inventory reviews can determine if the licensed software's value aligns with its maintenance and support costs. Core Topic Business Management of IT: IT Asset Management Key Issue What are the best practices for hardware and software contract negotiation? Tactical Guidelines Software inventory should be reviewed on a yearly basis to determine if the value of the software to the enterprise is in line with the costs being paid for maintenance and support. Recent Gartner research (see "Gartner Survey: 42 Percent of CRM Software Goes Unused") discussed customer relationship management (CRM) software that was purchased, but never used. Although "shelfware" is not a new concept in the industry, with downsizing and budget reductions taking place, the cost of such software is being scrutinized. Software costs can have a significant effect on an enterprise's budget and operations, and an enterprise should not pay the continuing cost of software that's not in use. An example that reflects the costs of idle software is shown in Table 1. What Was Licensed Source: Gartner Research (April 2003) Table 1 Annual Cost of Shelfware What Is in Production Module A $250,000 Module A $250,000 Module B $400,000 Module B $400,000 Module C $125,000 Module C 0 Module D $50,000 Module D 0 Module E $35,000 Module E $35,000 2,000 Named Users at $1,250 Each $2,500,000 1,200 Named Users at $1,250 Each $1,500,000 Total List Licenses $3,360,000 Total List Licenses $2,185,000 Discounted 50 Percent Yearly Maintenance at 20 Percent Cost of Shelfware per Year: $117,500 $1,680,000 Discounted 50 Percent $336,000 Yearly Maintenance at 20 Percent $1,092,500 $218,500 In some cases, the discount might be smaller, based on the reduced total expense of the software. However, because there Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 is a range of discounts for all size deals, this analysis will use the same discount for both examples. As can be seen from Table 1, if the discount remains the same, the upfront license fees paid for shelfware would amount to an additional $587,500. In many cases, for deals in the range of $2 million to $3 million, a 50 percent discount would be reasonably achievable. The cost of software maintenance and support (M&S) is generally in the range of 15 percent to 23 percent of the discounted (and sometimes list) price of the software. In addition, many vendors are offering higher levels of M&S (such as gold or platinum) at premium prices as alternatives. It's important that an enterprise ensure it's receiving value for its ongoing M&S costs. Here, we discuss two issues concerning shelfware: The licensing of too much software at the beginning of a deal The removal of software from maintenance and support that was licensed, but never put into operation, or is no longer in operation New Software License Agreements The negotiation of a software license agreement demands special skills and training (see "Professional Software Negotiators: Do You Need Them?"). In addition, for best practices, the enterprise should use a managed approach to any major procurement (see "A Team Approach to Technology Procurement"). Procedures and policies must be established and enforced by an enterprise to prevent stovepiped software licensing procurements from being made. When negotiating new software license agreements, consider the following advice. Follow Processes and Procedures: Make sure that the enterprise has followed the procedures and policies necessary to ensure that the relevant parties (such as the legal and IT procurement departments) have been involved with the deal as required. This should prevent overlicensing due to last-minute deals to meet a software vendor's quarter or fiscal year-end. Don't Over-License: License only the software that will reasonably be installed in the subsequent six to 12 months. For requirements past 12 months, build in price protections for additional licenses. Often, a software vendor will increase discounts for larger purchases. This might seem to make sense, but only for very aggressive discounts, and only if reasonable estimates of usage are considered. Complete Some Consulting Work: Consulting and systems integration costs are often three to five times the price of the 3 May

3 software licenses. Determining realistic time frames and costs to do software implementation can assist in the final decision as to which modules can be installed and put into operation within budget constraints. Completing some of the consulting work prior to signing the license agreement can establish realistic time frames for implementation. Acquire Clear Usage Rights: Include clear usage rights for any license metric and an explanation of how such a metric will be measured in case of an audit. This will reduce the chance that there will be a disagreement about usage when and if the enterprise decides to remove licenses from M&S. Many license models are difficult to understand, measure and administer. If such a license model is presented, require one that is clearly measurable. Negotiate Detailed Pricing: Include detailed pricing on each agreement that reflects list price, discount, discounted price, number of licenses, names of modules and functionality licensed. Gartner often sees agreements that leave out such information, leaving an enterprise unable to estimate the cost of software components. Ensure You Have the Right to Remove Licenses From M&S: Include in the software license agreement what will happen if additional usage rights are required (increases in the metrics under which the software is licensed), as well as how reductions in usage rights will be handled. This is a good place to include actual examples in the contract, such as a list of all software licensed and what the reduction (as a percentage of the total M&S payment) will be if unused software is removed from maintenance and support. As a check, be sure that several people in the organization who are not involved in the contract negotiation review such examples to ensure the clarity of each description. Do not lose negotiated M&S caps due to the removal of partial licenses from M&S. Currently Licensed Software Many software vendors still allow unused licenses to be removed from maintenance and support. The ability to do so had been an industry standard. The customer generally would write a letter to the software vendor asking that certain products be removed from M&S, and the software vendor would do so. However, some vendors are now making this difficult, partially because of the slowdowns affecting software vendors' revenue streams. The following actions will help reduce shelfware costs. Inventory Your Software: Complete an inventory of the software that is installed and in production and compare it to an 3 May

4 inventory of licensed software to determine what software is not in production. Obtain current pricing for all software by each component and license metric. This list should include a price for licenses, as well as M&S for each named user and module of the software. You'll need to review pricing to determine if the value received from the software is in line with the ongoing M&S cost for the software. In addition, if there have been reductions in the pricing of the software, this can be used as negotiating leverage for reduced M&S payments. If the software vendor offers a new licensing model, ask the vendor to calculate the cost if a decision is made to move to the new model. In some cases, this conversion may be expensive initially, due to conversion fees, but it might save ongoing M&S costs in the long run. Re-evaluate Your Level of Support: Request a written document from the software vendor describing the support level for each software product (some vendors are offering different levels, such as silver, gold and platinum). Get copies of the M&S "entitlements" for each level of support to determine which level meets your requirements. If the enterprise is under a "gold" level of M&S, but the "silver" level will satisfy requirements, move to the silver level in the next support period. Review Contracts: Read through software license agreements to determine how the original pricing was established. For example, some modules may have been based on the number of employees, employee records, or company revenue or budget. If there is nothing that states how such pricing was determined, ask the software vendor to produce a written statement listing the criteria that was used for pricing the software. If that criteria has changed significantly, this can be used as negotiating leverage for reductions in M&S payments. Review contracts before paying M&S invoices to ensure that negotiated caps on maintenance increases are being honored. Also, verify that the product names are the same as in the contract, and the M&S time period is clear, and review any revisions in the M&S entitlements. Seek clarifications from the vendor on any discrepancies. Leverage for Changes When contract terms and conditions are not in place to address rights to remove partial licenses from support, the leverage to do so can be a problem. However, the following strategies can be used: When there is sufficient pushback from customers, software vendors have been known to change their policies. Attend user groups and network with peers to discuss this situation. 3 May

5 Large enterprises spending significant amounts of money with a vendor should leverage their influence to get changes made in the software vendor's policies. Many sales representatives do not have the authority to approve changes to a software vendor's policies. If you receive a "no" answer from a sales representative, go higher in the software vendor's organization until you reach someone with the authority to agree to such changes. Be persistent in such negotiations. Customers need to know, in advance of making changes, the prices and discount structures for software they are currently licensing. Require software vendors to give you a complete inventory of software, with the current list prices and their standard discount structures. This will point out any possible price reductions by the software vendor. When spending any additional money with any software vendor, insist on terms and conditions that enable licenses to be removed from support with a corresponding reduction in M&S cost. Bottom Line: Many enterprises have grand plans for installing and implementing their CRM solutions; however, unexpected changes can cause this software never to reach implementation. Ensure that provisions are included in the software license agreement to handle reductions in usage requirements for a subset of the total amount of software licensed. 3 May