North Carolina operates a central data center in Raleigh, which is one of the largest of any state at a single location and situated near a high-tech industrial center -- Research Triangle Park. Until recently the state experienced strong growth and low unemployment, but in 2000-2001, while I was serving as CFO for the North Carolina Office of Information Technology Services, due to a series of unfortunate events -- hurricane damages, tobacco litigation and the slowdown in high tech -- we were faced with budget challenges. These necessitated the first reduction in force in 10 to 15 years.
Nevertheless, our annual budget for mainframe software was approximately $25 million and was steadily increasing.
As CFO, I was faced with a host of challenges. First, mainframe software costs had doubled every three to five years, and there seemed no end in sight. It was not unusual for software vendors to obtain upgrade fees at the time of hardware changes, or an increase in CPUs that were higher than the cost of the software itself. This occurred often, although in many cases we received no more benefit from their software product.
Further, we accumulated many software products over the years. Some were not being used or were not useable, and others overlapped in functionality. Many of our contracts expired at the same time, making it difficult to manage multiple negotiations and weakening our bargaining position, as we could have been faced with multiple, simultaneous conversions. Also, due to staffing constraints, we did not put as many software products out for bid as I would have liked.
In late 2000, two large software contracts were signed, each resulting in very different yet interesting events.
In the first contract, we insisted upon -- and received -- caps on the amount of maintenance-charge increases we would face at contract expiration. After we negotiated the contract price, we asked the vendor to include a number of "freebies" -- software products we had the right to use but were not committed to use, and they did so.
The second contract negotiation was contentious. The vendor took advantage of every edge they had; we had to sign a contract that was not advantageous to us, as there was no time to consider another vendor. This steeled my resolve to bid their products out as soon as possible and replace them.
Shortly afterward, a third vendor nearly prevented us from going forward with a hardware upgrade, which we needed.
The price to upgrade the software license increased 20-fold from their original price, and amounted to 150 percent of the hardware cost upgrade. A competitive vendor had just given us a "freebie" license for their product, so I immediately hired Innovate E-Commerce's Software Asset Management (SAM) team to complete a competitive assessment that would determine the feasibility of replacement of the other vendor's software The incumbent vendor wouldn't budge on their price, doubting that we would ever replace their product. I enlisted and received support from the senior business executives, and the vendor's product was replaced with little fanfare.
We then started looking closely at our standard T's and C's [terms and conditions], especially in light of recent events with software vendors. We were encouraged at our ability to get a large software vendor to agree to prices for both increases and decreases in the use of their product. I put together a negotiating team composed of staff from fiscal, legal, procurement and IT to negotiate this contract.
Innovate E-Commerce provided the negotiation strategy and the team did their homework and was able to get substantial concessions from the vendor.
As a result of