Customers take charge



Welcome to the era of user activism. After decades in which suppliers have controlled product development, prices, the use of technical standards, and have even dictated most of the terms in service level agreements, customers are now aggressively managing their suppliers as never before.

The cause is mostly, but not entirely, economic. As the post-bubble recession took hold, IT buyers looked at the promises that suppliers had made and realised they were not getting a good enough return on investment. Budgets were slashed in 2002 as buyers ruthlessly rationalised their systems. That left a huge oversupply of products and suppliers, which, coincidentally, were suffering a cycle slow-down in technological innovation. The balance of power between IT suppliers and their customers took a significant shift towards the user in 2003.

“There has never been a buyers’ market like it,” says Julian Hewitt, chief analyst and co-founder of IT analyst group Ovum. “It used to be that customers did what they were told. Now it’s the other way round.”

Others, including Carly Fiorina, the CEO of Hewlett-Packard, have spotted it too. There has been a long-term structural change in the way that people buy IT,


Customer wins

Corporate customers, armed with the knowledge that they can always go elsewhere, are forcing a series of concessions and price cuts on their technology suppliers.

  • Lower licence fees. Faced with shrinking IT budgets and intense competition, some software suppliers have been forced to reduce licence fees by more than half. Fees for application integration products are thought to have fallen especially far – from $750,000 to around $150,000 to $200,000, according to one analyst. Suppliers frequently give away free modules to win business.

  • Zero charge outs. In the trough of the recession in 2002, some IT services companies sent their employees out on non-billable engagements such as free ‘training’ days. The problem for suppliers now is that customers have grown used to the idea.

  • Smaller consulting/integrator fees. Hourly rates have plummeted. In 2003, IT consultants on ERP projects commanded fees about one-third less than in 2002, according to research by Millennium, a recruitment company. And that fall comes on the back of a drop of 22% the year before.

  • Reverse auctions. Reverse or ‘Dutch’ auctions have come into their own, especially on commodity items such as PCs and basic support. Under the system, the lowest bidder wins. The reverse auctions drive down prices and also force buyers to write a much tighter specification.

  • Supplier consolidation. A large number of suppliers can increase procurement and support costs. So users have cut them – sometimes ruthlessly, with the bigger, global suppliers usually being retained. In a forthcoming Infoconomy report, this was identified as an effective cost-cutting measure by nearly half of IT buyers.

  • Free pilots. Suppliers have always carried out some proof-of-concept projects free of charge. But even if the pilot is a success, buyers do not expect to be charged retrospectively – and often, with the software installed, they bargain for a cut-price deal.



    she told an IT industry event earlier this year. “Things will never be the same again.”

    Duncan Williamson, the UK head of consulting for SAP, the enterprise resource planning (ERP) software vendor, agrees. “IT directors’ priorities have changed for good,” he says. “This shift in priorities has resulted in an enduring change in the supplier-customer relationship. Customers’ expectations of obtaining superior service and extended support from their IT suppliers are much, much higher.”

    Aggression and concession

    Customers, of course, have always pushed for as much as they can get. Witness, for example, the way in which big customers delay their systems purchases until the last few days of a quarter, knowing that the sales staff will give big discounts to close the deal.

    But now, that aggressive stance has spread to all aspects of IT purchasing. And whereas in the past they won few concessions, now they are pushing at an open door. “It’s the best market ever for technology buyers,” Michael Fleischer, CEO of analyst group Gartner, said at the beginning of 2003. And he was proved right.

    There are many examples. During contract negotiations, for example, many software suppliers are agreeing to slash licence fees. Some suppliers are offering free or low-cost proof-of-concept pilots, free modules or simply big cash discounts.

    In response to the discounting, SAP’s CEO, Henning Kagermann, said recently that “40% of the deals we lose are now on pricing – that’s an all-time high. If this continues to happen, prices will never come back.”

    Groups of users are also demanding – and winning – long extensions to ‘de-support’ deadlines – the date when suppliers will no longer continue to support older versions of a product (see below).

    Reverse or ‘Dutch’ auctions are all the rage. After being popularised by some Internet auction sites – and by some government purchasing policies – the facility to run ‘lowest bidder wins’ auctions has been built into many corporate e-procurement systems.

    And users are now routinely asking for, and getting, free software modules, training projects and even consulting days (see box, Customer wins). Recently, Oracle, for example, agreed to give free manufacturing and service management components to cost-conscious SME buyers that chose its ERP software.

    All of this is having a compound effect on suppliers, which are losing margins on new contracts at the same time as losing customers. Big businesses, including Dresdner Kleinwort Wasserstein, UBS, British Airways and Merrill Lynch, are all reducing the number of suppliers they use.

    Paul Coby, the CIO of British Airways, for example, has cut his overall IT budget by £93 million to about £180 million by slashing the number of suppliers and by encouraging competition among the survivors. “I prefer three-to-five year relationships with two or three suppliers in a particular area. They all know we have got choices, and that keeps them nice and hungry,” he says.

    One CIO of a major investment bank, who asked not to be named, called all his suppliers together in to one room earlier this year and told them that only one-quarter of them would be leaving as his supplier. He effectively told them to outbid each other for the right to keep his company’s business. Most left unhappy.

    Winter of discontent?

    Some observers say all this is return to the ‘old days’, back in the 1950s, 1960s and 1970s, when user groups frequently took a militant stance against their suppliers. But that comparison would be simplistic: then, user power was a reaction against the indifference of the powerful vendors that controlled the entire IT infrastructure.

    Now, the user revolt is more a reaction to the attitudes of suppliers in 1990s, when the supplier community became increasingly confident and buyers anxiously sought to gain a technology-based competitive edge over rivals. Customers,


    Strength in numbers

    User groups are like trade unions: some are sympathetic and supportive to their suppliers, others are militant and aggressive. And they are certainly less noisy and influential than they were in the 1980s.

    In the early days of business computing, big system suppliers – especially IBM – dictated product strategy, prices and software standards in a monopolistic fashion. Customers felt powerless, and formed large user groups to collaborate and attempt to bargain collectively.

    The trade union analogy even extended to seaside conferences and open voting, with suppliers lobbying on the fringes. At IBM conferences, users would vote for product enhancements, with IBM only agreeing to those that were cost effective or in overwhelming demand. In one case, the Olivetti user group sued the company because it refused to address the problems of a malfunctioning minicomputer.

    Most popular products and large suppliers still have user groups, but they lack the militancy that was once common. Like new age union bosses speaking of the need for a more constructive relationship with management, latter-day user group leaders talk the language of ‘partnership’ and ‘community’ publicly – even if in private they still give their suppliers a hard time. Perhaps their greatest achievement has been their resilience to repeated attempts by suppliers to undermine their independence or close them down.

    Others argue that the whole user group idea is anachronistic. The increased use of outsourcing, service level agreements and, above all, competition among suppliers, has rendered them unnecessary, they say.



    fearing they would be left behind, felt compelled to invest in certain technologies, including enterprise resource planning software (to make their computers Y2K-compliant) and web servers (to put their businesses online).

    With demand so high, suppliers were able to dictate terms and raise prices. One buyer recounts his attempts to buy software from IBM in 2000: “We were a small company, but we had about £300,000 to spend on an ecommerce project. It took several phone calls before we could get an appointment. Finally, a salesman met us for 20 minutes in a coffee bar. He seemed to think we didn’t have enough money. But at least IBM listened; some others screened us out before we got that far.”

    The opposite is true today. Suppliers are more careful to engage seriously with smaller customers, and they are very careful to dampen hype about the value of their products, fearing it will eventually rebound.

    If there is one area where suppliers and customers are still doing battle, it is over the length of time that software companies are prepared to support users. Ovum’s Hewitt, who carried out a survey of CIO priorities earlier this year, says maintenance disputes have become the main cause of complaint. “CIOs are often furious with their suppliers for withdrawing maintenance,” he says.

    The problem for suppliers is that their customers are choosing to stick with the same version of software products for longer. This seems to be partly because of a desire to cut or maintain IT spending, and partly because the rate of innovation has slowed, making new products and upgrades often less compelling than in the past.

    Those delayed upgrades, however, can have a big financial impact – because of the increased cost of providing support to many older versions, and because the supplier cannot bank the new licence revenue.

    Indeed, Wall Street regards new licence agreements as a more accurate barometer of a software company’s health than simple maintenance revenue – putting pressure on suppliers to force users to upgrade. But customers are determined to postpone upgrades. “It’s a standoff,” says Hewitt.

    The supplier is usually the first to blink. SAP’s Kagermann, for example, was recently forced into announcing extended support concessions at the Gartner Symposium. Weeks earlier, Oracle did likewise, extending maintenance support for customers of version 8i of its flagship database management software product until 2005.

    In one case, customers have sought ways to bypass the supplier altogether. In a classic example of companies uniting in a common cause, customers of Oracle’s business applications suite have banded together to offer each other support on version 10.7 of the suite, which was ‘de-supported’ in June 2003. The group, called the Oracle 10.7 De-Support Focus Group, is offering its members help as they ponder whether to carry on with the old version or upgrade to version 9i or 10i.

    Dell is another supplier to be swept along by this new wave of user activism. It has been forced into a review of a key part of its strategy in the face of customer complaints – this time over its controversial shift of hundreds of technical support jobs from Texas to India.

    The move offshore was designed to keep Dell’s operating costs low. But it did not go down well with some of Dell’s enterprise customers in the US. Egged on by a variety of protectionist pressure groups, users flooded the company with complaints. Faced with a full-scale revolt, Dell was forced into an embarrassing climb-down, announcing that it planned to move some technical support queries for desktop and notebook computers back to Texas.

    All the way to the top

    Even Microsoft, the world’s biggest and most powerful software company, has also been forced into some concessions from corporate customers – albeit small ones.

    Many users are still bitter about the introduction in 2001 of a new maintenance programme, renewable every two years, called Software Assurance. The scheme replaces new, one-off purchases for corporate software with a monthly licence fee – a move that is in line with modern thinking about software charging, but which, many analysts argued, only benefited those customers that upgraded their software every two years.

    Customers were also forced to buy the then latest versions of two of Microsoft’s key products – Office XP and Windows XP – in order to qualify for the new scheme. Some users tried free alternatives, while one UK user group even called for the Office of Fair Trading to investigate.

    In the end, Microsoft dropped the Office XP and Windows XP demands and extended the deadline for entry by about six months. The core Software Assurance offering has remained intact. But some customers are committing the ultimate act of rebellion, replacing Microsoft software altogether with open source alternatives. In the process, Microsoft’s market share for office applications is forecast to shrink – marginally – for the first time ever.

    Two years on, and against a background of a handful of widely publicised defections, Microsoft is busy improving the service ahead of the first round of upgrades in 2004. In September, it added a number of enhancements, including some free e-learning, training and home-use privileges.

    How long will all of this last? Both financial and industry analysts have been debating this intensively. Organisations such as Gartner and IDC have been forecasting a pick-up in IT industry sales and, with it, some increases in prices. But almost everyone agrees that a structural change has occurred, and, at long last, customers in IT are being treated like customers.

    “Suppliers used to watch us buying their products and chuckle ‘the dogs are eating the dog food’. You don’t hear that any more,” said one customer.

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    Ben Rossi

    Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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