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.