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
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.
provided the negotiation strategy and the team did their homework and was able to get substantial concessions from the vendor.
As a result of my experiences in dealing with software vendor contracts, I've come to several conclusions. First, I can't emphasize enough the need for competitive bids. A well-prepared bid, although costly and time-consuming to prepare, will more than pay for itself in terms of cost avoidance or invoice reduction. Another key factor is having good T's and C's. Vendors had burned us on more than one occasion from not having adequate contract protections.
There are many other items to watch as well. Scrutinize those invoices; it's remarkable how many errors occur (and most favor the vendor). Develop a standard RFP process to streamline proposal preparation. Look closely at software usage -- if it's just one user, bill them for the costs. Also, check to see if the software you're licensed for can be more cost-effectively used on another platform.
We had a situation where our license fees went from six figures a year to under $300! The road to software cost reduction is neither smooth nor easy. You need to constantly sell the concept to Executive Management and trumpet your successes. And you'll get plenty of resistance from both employees who resist change and vendors faced with losing contracts.
To succeed, you must have a long-range plan for software and a firm resolve to cut costs. Innovate E-Commerce proved to me that outside consultants can provide tremendous value. Just be sure you get consultants, as I did, with significant experience and a solid track record.
So where did we go from here? I ensured our program pressed on, as we knew we'd only seen the "tip of the iceberg." Our follow-on targets were further cost reduction or avoidance of $5 million a year in costs. That target was met by stepping up our competitive bid activity using standard RFP processes, and increasingly displacing vendors whose software products were not cost effective.
We also did more in the planning area to ensure that our contracts didn't expire concurrently. And we strengthened our T's and C's significantly. Since initiating our Software Asset Management program, I've taken the opportunity to carry over my appetite for cost improvements with a move to another technology user in the public sector as the Director of Administration and Business Ventures for UNC-TV (North Carolina's public television network). I hope you can benefit by what I've shared pertaining to software asset management. And I wish you every success in your endeavors.
Pat LaBarbera is the former CFO of North Carolina.