Trying to Cut Software and Cloud Costs? Here's How.

With organizations facing economic headwinds, CFOs are likely eyeing costly multiyear contracts like those for software and cloud. Use these tactics to retain the benefits while reducing the burden of such contracts.

“IT sourcing, procurement and vendor management (SPVM) leaders must take immediate action to alleviate financial pressure for a six- to 24-month period,” says Gartner Senior Director Analyst Stephen White. “Leaders need to protect their organizations from financial disruption and build resilience for what may yet be to come.” 

If your organization is under pressure to cut costs, consider these three actions to contribute savings or restructure payments in your software and cloud agreements.

Download now: The CIO Roadmap to Strategic Cost Optimization

To initiate negotiations, set expectations by writing to all of your major vendors indicating that you are taking action to address financial constraints as a result of the economic climate, but that you value your relationship with them. 

As you notify vendors, prioritize the potential concessions in relation to contract terms. Modifications could be: 

• Transition to payment by installments, payment on a quarterly or six-monthly basis for instance in lieu of annually.

• Change your standard payment terms.

• Apply price ceilings or price caps.

• Make temporary contract extensions.

• Extend periods or additional services to utilize cloud infrastructure and platform services contracts.

Refer to your vendors’ finances and public statements when entering these negotiations, and be ready to quote their statements on the crisis in order to convince them to negotiate.

To achieve long-term, sustainable IT cost optimization, try to reduce upcoming payments (obtaining refunds or credits related to payments already transacted will be extremely difficult).

• Review SaaS contracts for possible downward flexibility. 

• Move to flexible pricing metrics.

• Ask for free or usage-based licenses for peaks.

• Leverage cloud FinOps to eliminate toxic consumption of infrastructure and platform services.

• Migrate to a version of the product with fewer features aligned to usage.

• Park support and maintenance.

• Discontinue support and maintenance on shelfware.

• Terminate support and maintenance.

• Move to third-party support.

• Reduce your support level.

• Demand that vendors postpone audits.

SPVM leaders must remain realistic when negotiating with vendors, who will not concede to demands unless they identify a context that benefits themselves. Be prepared to articulate reasons why vendors should concede to demands, and persuade them that cooperation is in their best interest.

• Avoid antagonizing the vendor.

• Explore vendor interests beyond immediate revenue.

• Exploit increasing volumes and strategic alignment of priorities.

• Challenge the vendor to enable productivity.

• Evaluate competitors, alternatives and options.

• Conduct competitive vendor rationalization.

In short:

• Executive leaders must significantly cut costs and improve cash flow during a time of crisis.

• To do this, SPVM leaders must consider restructuring software and cloud contracts.

• Consider three techniques to successfully negotiate these changes.

Stephen White is a Senior Director Analyst at Gartner, and primarily focuses on the software industry, strategic software reseller relationships and selection, software asset management managed services and licensing models.