An IMF member indicated that their mainframe software vendor was pitching a new licensing model based on users or tasks instead of the traditional MIPS model and wanted to know if other organizations had been impacted by this same type of approach. Their organization also wanted to know how they should approach negotiations with the vendor for upcoming license renewals. This situation illustrates the potential for a number of changes throughout the IT landscape that may be responses to the current economic climate in which vendors may try to change the billing process in order to create more favorable situations for themselves. As a result, it is necessary for IT organizations to be cautious and take an active role in the negotiations process. Though new billing models may appear beneficial at first glance, there can be significant costs impacts in the long run.

The new licensing model would deter 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 strong, these issues should be more of a dialogue, from which an amicable and mutually beneficial solution can be reached:

· 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).

· 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.

· 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 is 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.

This summary can be found in the IMF 2009 Annual Connect Report. Click here to download a copy. (Members must be logged in)

Follow the discussion on Twitter @ITInfoForum