Jeffrey Sorenson is president and partner, A.T. Kearney Public Sector & Defense Services, and retired Army LTG/former CIO-G6.
The most recent post in this series looked at infrastructure sourcing. This post focuses on sourcing software, a difficult task for many commercial companies and government agencies, including the DoD.
Software represents a significant and highly specialized part of the IT expense base. It tends to be a complex procurement category with many suppliers, as well as many issues and challenges that extend far beyond price, but are nevertheless cost drivers. Each of these cost drivers have individual problematic considerations that need to be carefully managed.
Commercial companies that are successful at realizing the cost benefits of software sourcing typically manage these cost drivers by adapting strategies to create, capture, and sustain software value. Using this framework, they take a number of steps designed specifically to create value and others that capture and sustain it.
Moreover, they overlay this framework and their overall sourcing activities with the following four key concepts that further their ability to acquire the software best meeting their needs and to do so at the best possible cost.
Bundling Software
Successful companies almost always bundle their software sourcing purchases. This means that at the beginning of the year, they develop a thorough understanding of their software purchases needed over the next twelve months and make all these purchases upfront (this is sometimes referred to as "concentration"). For example, they would buy multiple Oracle licenses upfront, rather than allow individual business units or divisions, which might need these licenses, to buy them independently throughout the year. They know that by bundling their purchases, they increase their negotiation leverage and reduce the overall software cost because vendors see the advantage of selling a number of products together and will readily offer a substantial discount on the complete package.
Buying Software the Best Way
Everyone knows there are many different ways to buy software: license + maintenance, hosted, enterprise license agreements, cloud-based applications, etc., each with its own pros, cons, and costs. However, successful companies are also acutely aware of the consequences of the choices they make. Beyond evaluating the software they plan to purchase, they pay special attention to buying this software through the best distribution channel.
If, for example, they decide to "own" the software through a license + maintenance contract, they know they will have a large, upfront cost to pay and then smaller, recurring payments for maintenance costs over the length of the contract. This approach works for organizations wanting the large expense to occur in the current year. Other companies with different budget objectives may prefer to "rent" the software from a cloud-based vendor and pay the ongoing monthly costs to reduce the capital expenditure of owning the software.
The choice to own or rent software should be made from the viewpoint of managing the organization's future planning for maintenance, not just from a budgeting perspective. With a license + maintenance contract, an organization will receive ongoing maintenance of the software as long as it pays for it. If it stops paying for the software, the company can still use it but will receive no additional maintenance updates—and will have to find a new way to get the maintenance completed.
Knowing the Organization's Software Requirements
A typical software vendor offers hundreds of product variations that are essentially the same software but with different usage and license rights. To prevent purchasing unwanted or unneeded features, successful companies spend time to determine their software requirements. They know that making the correct purchase can save millions of dollars each year.
When considering the purchase of Microsoft Server, for example, they know it is the same piece of software with identical features, no matter how it is purchased or rented. And they must choose from multiple license rights—at a wide range of costs—to be able to accomplish with it what they want.
One of those rights covers virtualization. Depending on the rights purchased, the organization may not be able to virtualize the software; instead it will be required to use it only on "the bare metal." At a much greater expense, however, it can purchase the right to virtualize the software on a specific number, or even on an unlimited number, of devices.
Companies that know their software requirements do not allow a specific feature or a specific vendor request from a group or business unit—say, Hyperion vs. SAP for financial reporting—to confuse their decision making. They do not buy expensive licenses only to discover that their IT department or the business organization has little or no use for them. And they don't later find out that they have needlessly spent millions of dollars a year because someone had not matched the license rights to their requirements.
When reviewing the software license requirements and associated costs, successful companies make sure they purchase only what they need, regardless of what the vendor offers, by applying these six best practices:
- Eliminate unused or redundant licenses to retain only those for appropriately provisioned users;
- Eliminate obsolete licenses to retain only those for active systems that are not end-of-life;
- Change or eliminate support and maintenance functions so that support and maintenance not covered by in-house support are minimized;
- Change license types to make sure they fit the type and frequency of use;
- Use competitive bidding to make sure the vendors compete to offer the lowest price;
- Negotiate with vendors to request the best pricing they can provide.
Rationalizing Software and Managing Demand
While the Software Requirement concept deals with unwanted or unneeded features of a specific software, this concept deals with different vendors' software that have the same, redundant features.
Companies successful at software sourcing prevent a common mistake often found in large organizations throughout both the commercial and public sectors: multiple software applications with basically redundant features are found in different divisions or business units. Some groups, for example, might use SAP for financial reporting, while other groups use Hyperion to accomplish the same tasks, and still others use something else. As a result, the organization pays licensing fees to three different vendors for three different software applications, as well as three different maintenance fees.
Successful companies eliminate these unnecessary expenditures by using software rationalization to reduce the total number of applications that operate across an organization's network. They also accelerate retirement of applications and consolidate instances and standardize versions of the same application. Achieving these goals significantly reduces software costs for large organizations whether they use hundreds or thousands of software applications.
Another method they employ to reduce costs include leveraging a common set of software sourcing guiding principles that include understanding spend and consumption, identifying true business needs, reducing or eliminating non-essential consumption, managing change, and driving results to the bottom line. By applying these guiding principles in conjunction with an aggressive use of demand management levers, companies that monitor usage as well as continually evaluate their software needs can optimize software license and maintenance expenditures over the long run.
These four concepts provide some guidelines that will help the DoD—like its commercial counterparts—purchase needed software more cost effectively.
The next post in this IT sourcing series will cover "SmartIT", a holistic approach to analyzing the cost of IT transformations
