CFOs and CIOs Should Work Together on Licensing
August 8, 2008
Today, the role of the CIO has been elevated to that of executive management. Obviously, expectations for IT are on the rise. Unfortunately, CIOs are frequently set-up to focus on the wrong things and tackling the impossible - anywhere from building on an infrastructure that’s older than Methuselah to struggling with a shrinking budget against the needs of a growing company. What CIOs should be focusing on is governance, oversight, perception and cost control.
The role of the CIO in partnership with the CFO: Often, the CIO is balancing budget against technology priorities. In many cases, IT goals are met and completed based on the company’s business priorities. Not surprisingly, the most profitable divisions get the most attention and a larger share of the budget, creating a challenge to meet the IT needs of other groups. The insightful CIO will understand that the key to success is to become a strategic partner with the CFO and, ultimately, part of the executive management decision-making process.
Aside from the accounting and financial software being in good working order, most CFOs won’t understand the intricacies of what IT investments are needed. This should be no surprise as most people only care about the fact that technology is working. However, if you talk about budgeting, cost savings and performance metrics, you bet the CFO will pay attention.
Why should a CFO care about software licensing agreements or service-level contracts?: Companies will spend nearly $160 billion on software purchases this year with an additional $100 billion-plus spent on enterprise software maintenance costs including licensing fees. That number will grow to $137 billion by 2010, representing nearly half of software vendors’ revenue, according to IDC. Software maintenance fees are approximately 20 percent of the original software purchase price and can easily exceed the initial enterprise software purchase in a short period of time. With those numbers, how can the CFO not participate in vendor contract discussions?
By inviting the CFO to participate in the negotiation process, the CIO can essentially accomplish four goals:
- Eliminate the IT paralysis-analysis that happens when the CFO and CIO are at opposite ends of the playing field in terms of budgets, IT investments and priorities.
- Strengthen the alliance between the finance function and technology operations.
- Help drive governance, which is often managed and approved by the CFO and driven by IT assets in the background.
- Create a greater understanding of IT finance, overall, and the challenges faced by the CIO
Prepping for the negotiation process: When negotiating (or renegotiating) a software licensing agreement, it is best to walk in with a strategic plan and specific roles for both the CIO and the CFO. There’s some prep work that needs to happen before software vendor discussions begin. Much of it will be accomplished by the CIO:
- Conduct an internal audit because what you don’t know will cost you. Companies are usually over-licensed or under-licensed. Either scenario is not cost-efficient. Increasingly, software vendors are auditing companies, specifically to ferret out non-compliance issues. If you are out of compliance, there can be hefty fine - anywhere from hundreds of thousands to millions of dollars. Companies are only beginning to understand the impact of software vendor audits. Adobe, Microsoft and Oracle are three companies that audit frequently.
- Understand the business objectives and corporate priorities. By understanding the big picture, the CIO will have the ability to deploy the right applications with the correct amount of licenses over a period of time. This information can lead to cost savings during the SLA negotiation process. Failure to understand where the business is going – short- and long-term – will lead to nonessential purchases of software and licenses, resulting in thousands of dollars worth of “shelfware.”
- Understand your software license vulnerabilities. Establish a repository for software asset management. You may want to consider implementing a discovery tool to identify what software is installed on which servers and desktops. In addition an automated database and applications management program will maximize intelligence and flexibility, while feeding assets management data into the repository. On an ongoing basis, the IT organization should monitor the enterprise regularly to identify changes.
Finally, as a last preparatory step, the CIO and CFO should work together to strategically plan out the IT budget and agree to earmark specific funds for IT vendors. At this meeting, there should be a discussion on the IT planning process, metrics, and a review of vendors and contracts.
Negotiating the complex world of software licensing and maintenance: So you’re sitting at the table ready for negotiation. Here are some tips on how to negotiate the complex world of software licensing and maintenance, while mitigating the risk of software license compliance:
- Don’t be seduced by seductive discounts. Before you walk into the meeting, remind the CFO that there is more to IT contracts than a 20% discount. Though you may seemingly end up with less of a discount or even spending more, you won’t be left with excess shelfware.
- Build flexibility into your SLA. In some cases, an enterprise might not want to buy licensing for more than a six-month period as priorities change. In other cases, negotiate a long-term, multi-year contract, but make sure you have the ability and flexibility to work with the software vendor to make changes in licensing seats and modules during the length of your contract as IT needs change.
- Avoid purchasing “pre-packaged” discounted SLA’s, which will (again) give you unused licenses across the enterprise. If you look at the total cost of ownership of shelfware, those are wasted dollars. Don’t make empty threats about replacing the enterprise software. It is unlikely to happen due to the great expense and resources needed.
- Maintenance and Support Costs: The average spending on maintenance and operations is up to 80% of all IT spending, according to Forrester. Take a close look at your existing annual support costs. Many companies have support costs for products that they aren’t even using!
- Once you sign the contract, keep track of all licenses, rule changes and internal developments. The office of the CIO should review performance quarterly and continuously manage software assets.
- Working closely with the CEO and CFO, the CIO should ensure that IT has kept up with corporate changes and is still aligned with the company’s objectives. By working closely with the CFO during these changes, there will be a growing understanding of the resources – both financial as well as human – needed to accomplish projects.
Software licensing and pricing is still too complex and costly, according to the “Trends 2008: Application Licensing and Pricing” report by Forrester analysts Ray Wang and Elisse Gaynor. Like everything else, software and maintenance costs are going up. The complexity of enterprise software is keeping the price of licensing and maintenance high. In fact, maintenance costs are increasing to 30% of licensing costs (instead of the standard estimated 20%).
By working together during a vendor negotiation (or renegotiation), the CIO and CFO can take the opportunity to control costs by using sound procurement practices. After all, most multiyear software contracts will impact the bottom-line for both executives.
About Scott Rosenberg: Scott Rosenberg is responsible for creating and driving the vision of Miro Consulting, which he founded in August 2000. With more than 20 years of engineering and operations experience, Mr. Rosenberg’s leadership has fostered significant company growth. Today, Miro Consulting has over 250+ clients across North America and has overseen more than $700 million in Oracle and Microsoft transactions.
Prior to Miro Consulting, Mr. Rosenberg was a founding principal and driving force behind Cintra, a highly successful Oracle consulting company with over $20 million in revenues.
Comments
Got something to say?
Quick Takes for the Week of June 29
July 3: Last week, Timo Elliott, who runs the BI Questions Blog, offered a post last week in which he laid out the reporting requirements of the stimulus package and made the point that it essentially mandates the use of business intelligence tools. Elliott details some of the ramifications of this. He says that major vendors—he mentions SAP and IBM—have rolled out products and details some of what is available.
July 2: ZDNet blogger Sam Diaz notes that MicroStrategy is making its reports and dashboards available on the Amazon Kindle DX reader. Diaz is skeptical about the device as a business tool. The post raises a broader and interesting question: Just how useful will non-traditional mobile devices, such as MIDs and netbooks, be for business intelligence?
July 1: Zach Gemignani at Juice Analytics suggests that the next generation of business intelligence can be categorized into a small number of fresh approaches: analysts tools; dashboards; open-source and free; targeted solutions; advanced visualizations and, in Gemignani’s words, “other stuff.” The piece offers multiple screen shots and descriptions of who Gemignani thinks are the key vendors in each of the categories.
June 30: silicon.com asks a question that probably has been answered in the affirmative by anyone visiting this site, but is far from settled in many other quarters: Is BI a key investment during a recession? The Naked CIO, a columnist for the site, suggests that the answer is no if the BI platform is used solely as a financial reporting system. The value becomes greater, he suggests, if a comprehensive strategy using data of good quality is implemented. Silicon.com blogger Peter Cochrane suggests that such platforms are key: “I can't imagine running any business without good intelligence tools - they are essential to business and always a good investment,” he says.
June 29: Jorgen Heizenberg, the principal technology officer for BI at Capgemini Netherlands, offers a short but intriguing post at his blog on the differences between what he terms “operational systems” such as enterprise resource planning (ERP) and “informational systems” such as business intelligence. Perhaps, he suggests, BI would be more successful if it became more operational in nature.
--Carl Weinschenk
