Recessionary Impacts on Vendor Relations: Proceed with Caution When New Billing Models are Proposed

A member recently came to me with an interesting situation – their mainframe software vendor was pitching a new licensing model based on users or tasks instead of the traditional MIPS model.  They were wondering how other companies had been impacted by this approach (if at all), and how their company should approach negotiations with the vendor for upcoming license renewals.  Many companies are in precisely the same situation regarding their mainframe licenses.  This situation also illustrates the potential for a number of other changes throughout the IT landscape that may be a response to the current economic climate, through which vendors may try to change the “billing playing field” to create more favorable arrangements for themselves.  IT organizations need to be particularly cautious and play an active role in the negotiation process, as new billing models may appear beneficial at first glance, but could have significant cost impacts down the road.

Using the mainframe software licenses as an example, consider how this could drastically change an organization for the worse.  The new licensing model would dis-incent any previous company development or integration practices that focused on creating functionality (tasks) for a large population (users) at a minimum MIPS usage.  If the licensing model suddenly changed, not only could the cost increase immediately and over time, but the organization would have to be reengineered from the inside out to deliver services within the necessary license requirements.  This could carry with it a significant impact to the bottom line of the IT organization, most likely for the worse.

In any case, when a vendor proposes a significant change in course from a billing perspective, companies need to focus on several key factors.  If the vendor-client relationship is truly strong, these issues should be more of a dialogue, from which an amicable and mutually beneficial solution can be reached:

  1. The vendor should be willing to provide case study information, if available, that illustrates how the billing methodology change has impacted other (preferably similar volumetrically) clients.  If the vendor is wholly unwilling to provide information of this sort, this should be a major red flag that they are expecting a significant cost increase to the client.  If this information is not available in case study form, the vendor should be willing to provide an expectation/scenario of billing under the new model (and be willing to stand behind the expected numbers down the road).
  2. The vendor should be willing to engage in conversations with development and delivery teams within the client organization to assess how the new billing methodology will impact commercial assumptions about internal processes.  If the vendor is unwilling to participate in these discussions, both IT and business leaders within the client organization should carefully assess how the billing change will impact their assumptions about development and delivery.
  3. The vendor should have compelling reasons for the billing methodology change, which should focus on benefits to both the vendor and client organizations.  This should go beyond a statement that the vendor wasn’t making enough money under the old model, unless a lack of change will cause the vendor company to fold entirely.

In any case, the ability to understand the commercial and technological impacts of any billing change are central to success.  Organizations that are able to focus on the right issues can come out of these changes with a stronger relationship with their vendor, potentials for cost savings, and a better understanding of the impact of vendor products on their internal processes.

Related references: Type “Vendor Management” into search @ www.theIMF.com.