In today's changing economic climate, technology suppliers
should be re-assessing their commercial thinking, writes Colin
Tyler, partner
at OC&C Strategy
Consultants.
The use of IT systems has become totally pervasive. Back in 1997
there were 640 discrete IT systems installed in local authorities
across the UK by 2007 this number had increased to more than two
thousand. Almost all European mid-sized companies now have
accounting packages installed, and 72% have some form of broader
enterprise resource planning software to support key business
processes.
For most organisations the concept of removing software from
supporting a key process or function is nearly inconceivable.
Indeed contemplating the replacement of such systems fills even the
most dynamic enterprises with a major sense of foreboding. It is
not unusual to find IT areas where switching systems happens on
average only once every five to 10 years.
Yet many technology suppliers are not capturing the full value
that their products should generate, given their association with
this extremely entrenched position. Conversely, today's purchasers
of software products are facing pressure to reduce upfront fees
(frequently cited as the major barrier to purchase). Additionally
contracts are often signed that contain very limited year-on-year
opportunities for price increases within the ongoing maintenance
payments.
Does this signify how IT contracts will evolve in the
future?
Commoditised purchases that customer organisations will do
anything to drive down prices against? Not if technology suppliers
become more pro-active in the ways in which they think through, and
structure the commercial approach they adopt to their market. If
they do, they could soon capture more value from the underlying
technology they provide.
At present, the short term pressures on filling quarterly
revenue targets often result in technology suppliers prioritising
their engineering team's capacity towards fulfilling
"project-based" services in the form of implementation projects.
These are based on agreed, low margin man-day rates - often
referred to as the "Project services versus Product fees"
conundrum.
The indirect implication of this is to educate technology
purchasers to structure their annual IT budget between two broad
categories - firstly one-off projects (at typically lower margins)
and secondly recurring annual product licences or maintenance
charges (which carry higher margins). This contradicts the long
term interest of a technology supplier who wants to ensure their
products are continually developed to maintain a best-in-class
rating. The existing customer pricing approach will always tend to
divert a technology suppliers' own internal development teams
towards bespoke customer-driven requirements, which do not reflect
the suppliers' own product priorities.
Deeper implications of this may arise as the economy starts
tightening. Technology suppliers will become increasingly
vulnerable to their customers deciding to cut-back their annual IT
expenditure. The easiest way to do this will be to trim their
one-off projects, causing technology suppliers real short-term
pain.
Getting the commercial thinking right and structuring initial
contracts in the favour of their own interests could save many
technology suppliers from some tougher times ahead.