Tough Economic Times Drive Budget Cuts- So Don’t Overlook IT Software Savings

09 November 2009
7 minute read
Best practice

Tough Economic Times Drive Budget Cuts- So Don’t Overlook IT Software Savings

09 November 2009
7 minute read

Software-Cost-SavingsThis article has been contributed by Rolfe Jaremus, Managing Partner at Jaremus Associates.

During these difficult economic times, C-level executives are looking at ways to reduce business costs.  For some companies, cost saving is not just a way of squeezing out excesses; it’s a matter of survival.  Many retailers have lowered the prices they charge to consumers.  The retailers in turn have put pricing pressure upon the entire supply chain causing profit margins to shrink or disappear.  Business executives in turn are scouring their infrastructures to wring out waste and excess in their operations.

Many IT leaders are lowering costs by virtualizing and consolidating servers, cutting back on projects that do not have strong ROI, outsourcing functions, cutting salaries and reducing staff. In the quest for cost savings, one area that should not be overlooked is software maintenance and support fees.

“A growing percentage of the IT budget is going to operations, leaving a smaller percentage available for innovation and development.” IBM 2008 IT Governance Study

These costs usually represent the second or third largest expense category in the IT budget.  For reasons which we will explore, significant cost savings can be obtained with little impact to an IT organizations operations.

Commercial software is highly complex and configurable.  This makes it difficult and expensive to change.  So the focus of cost savings efforts should not be to rewrite or redesign systems.  Those efforts are usually justified for other reasons.  Software cost savings should be focused on changes that can easily be made, or better yet, changes that require no software changes at all.

Let’s take a look at a few methods:

  1. One area for costs savings is to look for software that is not being used.  It is not uncommon for software to fall into disuse.  This erosion in usage usually happens over a long period of time, so it is not obvious to anyone.  This is more likely to occur with software that is used for monitoring or managing other software.  With staff turnover, newer technicians may not know how to use the tools.  Line management may not understand the purpose of a tool or have a commitment to using it.  Or there may be better tools that a team is now using.
  2. Along the same lines, it is not uncommon for a component of an ERP package to be unused.  When a common product was bought years ago, 5 components were purchased.  Plans and priorities changed and years later, only 4 of the components were being used and there were no plans to implement or use the fifth component.  Performing a software usage review can help to identify lightly used or unused software that can then be downsized or eliminated.
  3. Because of the pervasiveness of database and middleware software, this is often fertile ground for cost savings. The licensing for these products is notoriously complex, so reviewing this is generally not easy.  The licensing parameters for the two most popular databases, Oracle and SQL Server are similar, but different. These databases can be licensed by CPU or by user. User licensing in turn has several variations between and within the products and then there are legacy licensing methods that add even more complexity. Adding to the difficulty in database licensing is the fact that the licensing is often tied to usage of the front-end applications.  An Oracle Named User License for example requires that the customer count the number of individuals in the company that use the applications that access the underlying database.  And usage, in this case is not just at a point in time, but over a period of time.  A user can be a job scheduling system, another computer, or person.  Some applications reduce the number of connections that are made to the database.  This is done for resource efficiencies, but this makes usage tracking more difficult.

An Example

One company was running a large SAP-BW application on Oracle Enterprise Edition with CPU based licenses.  These licenses allow an unlimited number of users.  After counting the number of users, it was realized that the number of users was far below the minimums required for the same software, licensed by Named User, a much less expensive option.  Because it would be prohibitively expensive to repurchase these licenses, a strategy was put in place to replace the CPU licenses over time.   When there was a need to obtain Oracle CPU licenses for other systems, the less expensive Named User licenses could be purchased, exchanging the CPU licenses with those in the SAP-BW system.  This is not a quick solution, but because of the size of the system, it represented over $300,000 in future cost savings, and an eventual 50% reduction in maintenance and support fees for the SAP-BW Oracle licenses.  This cost savings did not require any software changes, only changes in licensing.

Consolidation of Systems

Rolfe Jaremus, Jaremus & Associates, Inc.

Rolfe Jaremus, Jaremus & Associates, Inc.

CPU’s continue to become more powerful.  Todays mid range servers have CPU’s that are 3-4 times more powerful than those available 4-5 years ago.  So several compatible systems can be consolidated to run on todays more powerful servers.  By consolidating systems, the underlying operating system, database, and monitoring software licenses can be eliminated or available for redeployment.   While system consolidations require planning and some systems level changes, it is generally not that complex, and is usually cost justified.  An added benefit is the newer machines are more energy efficient, so they will lower the costs of air conditioning and power.

Repurchasing Software

Sometimes software licenses that were purchased years ago, have a high maintenance cost relative to new licenses for the same product.   The software may have been purchased at a time when the technology was hot and competitive products were few.  Or at the time of purchase, because of the small amount that was being purchased, the buyer may not have gotten a good deal.  In one case, the annual maintenance and support fees for a product was 75% of the current (negotiated) purchase cost of the product.  By repurchasing the product, for a bit more than the cost of maintenance, subsequent maintenance fees were dramatically lowered.  Significant 3 to 5-year cost savings were once again obtained with no changes to the software.

Software vendors are often willing to strike good deals for repurchases, especially if you have a number of products that can be grouped into an order.  Vendors may not like the lower revenue stream, but it can be favorable to them if it makes product replacement less likely.  It also doesn’t hurt to negotiate these kinds of deals prior to the vendor’s year-end when software sales teams are highly motivated.

In a company’s quest to reduce expenses, software maintenance and support costs is one area where significant savings can be obtained.  If a company is serious about reducing costs, it helps to put together a cross functional team whose members have experience with purchasing, negotiating, product licensing and knowledge of the software and systems.  Because of the relatively high costs for software maintenance and support, cost reduction efforts can pay significant dividends for many years to come.

This article has been contributed by Rolfe Jaremus, Managing Partner at Jaremus Associates.

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