Tuesday’s Tip: Dealing With Vendor Offers To Cancel Shelfware And Replace With New Licenses

Published on December 14, 2010 by R "Ray" Wang

Reduction Of Shelfware Remains A Key Pillar In Legacy Optimization Strategies

Shelfware (i.e. purchased software, not deployed, but incurring annual maintenance fees) is one of the biggest drains on operational expenses for enterprises.  In the latest Software Insider survey, 57% of global enterprises own more software licenses than deployed.  With average maintenance fees hovering above 20% per annum, customers who own shelfware pay the equivalent of a new license every 5 years without receiving any business value.   In fact, past Tuesday’s Tips have discussed three effective contract negotiation strategies to return shelfware.  As customers continue to raise ire over the shelfware issue, many vendors have responded with penalty-free opportunities to exchange shelfware for new licenses, park shelfware for usage at another point in time, or allow customers to return licenses to reduce their annual maintenance burden.

New “Cancel And Replace” Programs Muddle The Shelfware Issue

In the last three quarters, a few legacy enterprise software vendors have offered their top customers a new model known as “cancel and replace”.  As a “one-time” only opportunity to cancel shelfware without penalty, the program has a catch.  Clients must purchase new licenses at a level that will maintain or increase the annual maintenance fees.  While ridiculously, obviously, self-serving, one vendor has performed “free assessments” to let customers know the amount of shelfware eligible for cancellation and identify areas where new license spend can be increased.  The rationale – to help customers stay in “compliance”.

The Bottom Line For Customers – Focus First On Reducing Shelfware Before Engaging In New License Spend

While new license purchases often provide the leverage to discuss shelfware reduction with a vendor, clients should remain focused on reducing annual maintenance costs.  As with any software purchase, there must be a business justification in the overall apps strategy before adding new licenses.  In seeking the right approach to maintenance contract negotiations, customers should use the following tools and techniques:

  • Third party maintenance options
  • License exchanges
  • Parking licenses
  • Returning licenses
  • Avoiding the bundling of maintenance contracts

Clients should consider “Cancel and Replace” options if they truly have a need to make a significant new license spend commitment and can no longer leverage license exchange rights.  All others should attempt other techniques that drive down opex.

The Bottom Line For Vendors: Have Your Cake And Eat It

“Cancel and Replace” programs provide a win-win for the vendor because:

  • Maintenance spend remains the same or higher. Maintenance is the most profitable part of the vendor business.  Vendors must grow their annual revenue stream.  Minimum commitments on new license mirror maintenance revenue parity.
  • Sales reps bring on new license revenue.  Sales reps can leverage the replace strategy as a technique to close new license business.  Vendors improve their new license to maintenance revenue ratios.  Profit margins on “cancel and replace” deals are often higher because users focus on replace without engaging in tough negotiations.

Your POV.

Are you preparing for the 2011 maintenance contract renewal cycle? Are you in the midst of maintenance contract negotiations?  Need help with your Microsoft and Oracle licenses in Spring 2011?  Ready to put the expertise of over 1100 software contract negotiations to work?  Give us a call!  You can post or send on to rwang0 at gmail dot com or r at softwaresinsider dot org and we’ll keep your anonymity.

Please let us know if you need help with your next gen apps strategy efforts.  Here’s how we can help:

  • Providing contract negotiations and software licensing support
  • Evaluating SaaS/Cloud options
  • Assessing apps strategies (e.g. single instance, two-tier ERP, upgrade, custom dev, packaged deployments”
  • Designing end to end processes and systems
  • Comparing SaaS/Cloud integration strategies
  • Assisting with legacy ERP migration
  • Engaging in an SCRM strategy
  • Planning upgrades and migration
  • Performing vendor selection

Resources And Related Research:

20100308 Monday’s Musings: Decoupling Support From Maintenance – What Apps Vendors Can Learn From Microsoft Dynamics

20100222 Monday’s Musings: Why Users Should Preserve Their Third Party Maintenance Rights

20100104 News Analysis: SAP Revives Two-Tier Maintenance Options

20090210 Tuesday’s Tip: Software Licensing and Pricing – Do Not Give Away Your Third Party Maintenance And Access Rights

20090709 Tuesday’s Tip: Do Not Bundle Your Support and Maintenance Contracts!

20091222 Tuesday’s Tip: 10 Cloud And SaaS Apps Strategies For 2010

20091208 Tuesday’s Tip: 2010 Apps Strategies Should Start With Business Value

20091102 Best Practices: Lessons Learned In What SMB’s Want From Their ERP Provider

20091006 Tuesday’s Tip: Why Free Software Ain’t Really Free

20090504 News Analysis: Oracle Waives Fees On Extended Support Offerings

20080909 Trends: What Customers Want From Maintenance And Support

20080215 Software Licensing and Pricing: Stop the Anti-Competitive Maintenance Fee Madness

20090405 Monday’s Musings: Total Account Value, True Cost of Ownership, And Software Vendor Business Models

20090324 Tuesday’s Tips: Five Simple Steps To Reduce Your Software Maintenance Costs

20090223 Monday’s Musings: Five Programs Some Vendors Have Implemented To Help Clients In An Economic Recession

20091012 Research Report: Customer Bill of Rights – Software-as-a Service

20090910 Tuesday’s Tip: Note To Self – Start Renegotiating Your Q4 Software Maintenance Contracts Now!

20090721 Tuesday’s Tip: 3 Approaches To Return Shelfware

20090127 Tuesday’s Tip: Software Licensing and Pricing – Now’s The Time To Remove “Gag Rule” Clauses In Your Software Contracts

Reprints

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Disclosure

Although we work closely with many mega software vendors, we want you to trust us.  A full disclosure listing will be provided soon on the Constellation Research site.

Copyright © 2010 R Wang and Insider Associates, LLC. All rights reserved.

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