7 Steps to a Better Bargain
Patrick Collins saved more than $1 million in his Microsoft negotiations. Learn how he did it and how to hammer out your own sweet Microsoft deal.
In 2002, UCLA CIO Jim Davis reached his limit. The university was paying too
much for software, he decided; there had to be a way to lower the tab.
Davis reached out to groups within UCLA that were buying Microsoft software
in dribs and drabs, each gaining a modest discount, and got them to pool their
purchases. The resulting savings were so enticing that the Office of the President
for the entire 10-campus University of California (UC) system caught wind.
Enter Patrick Collins, Director, Information and Communication Services for
the UC Office of the President. Collins, an IT pro and professional negotiator,
took 80 separate contracts and moved them into one: The Microsoft Consolidated
By centralizing buying, all UC schools earned far higher discounts—Collins
estimates his collective savings on Microsoft software at more than $1 million
per year. And that's black and white hard costs, not fuzzy soft dollars.
Similar to an Enterprise Subscription Agreement, the university's Campus Agreement
is subscription-based, giving departments the right to upgrade to any new versions
for two years, whereas the normal Microsoft Campus Agreement is a one-year deal.
(See "Microsoft Licensing—the Short Version," for descriptions of subscription
So far, University groups are quite happy. "As long as we're actively enrolled,
we have ongoing access to new releases. We can upgrade whenever we are ready,
versus whenever we can allocate the funds," says Joyce Tang, IT Manager for
the Department of Human Genetics at the UCLA David Geffen School of Medicine.
"It's easy to budget for the fiscal year and unless there's a great surge of
new employees, the subscription cost is nearly the same."
Licensing—the Short Version
Open License Programs: A
series of programs aimed mostly at smaller companies that
allows you to acquire software from a variety of resellers
without reducing discount levels.
Enterprise Agreement (EA): Aimed at companies
that standardize on core Microsoft products, EA requires at
least 250 PCs and/or laptops and must apply to your entire
organization. The EA bundle includes Office Professional and
a CAL that covers the Windows OS, Exchange, SharePoint Portal
Server and SMS. EA includes Software Assurance, which covers
upgrades for three years. Pricing is at least 35 percent less
than Select option.
Enterprise Subscription Agreement: This
plan requires at least 250 Windows devices. Software is leased,
so usage rights expire at the end of the three-year term.
Licenses cost about 15 percent less than a standard EA.
Select Program: Select is aimed at mid-
to large-size organizations that don't have the narrow set
of needs satisfied by EA bundles. Select allows you to choose
the packages you need. You earn points based on projected
product purchases, with discounts adjusted based on an annual
review of actual purchases. Discounts start at 20 percent
for 1,500 points and go up to 35 percent for 75,000 points.
It clearly pays to centralize purchasing.
Software Assurance (SA): By far the most
controversial Microsoft licensing program ever, SA replaces
the Upgrade Advantage Program. Under SA, customers pay a maintenance
fee that covers upgrades for the life of the 3-year contract.
According to licensing guru Scott Braden, the annual cost
is 25 percent of the full retail license cost for server software
and 29 percent for desktop software. SA requires a benefits
administrator to take care of all the SA extras.
Campus Agreement: A one-year subscription-based
licensing program (with a three-year option). Software discounts
are based on the number of Full Time Equivalent Employees.
As with SA, upgrades are provided at no additional cost.
— Doug Barney
Tang would never be so delighted if folks like Davis and Collins weren't looking
after the school's interests. After all, when it comes to wheeling and dealing,
Microsoft and its customers are at opposite ends of the spectrum: Redmond wants
to bring in as much money as possible each and every quarter while customers
want the best possible deal on software.
Meeting in the middle requires a little thing called negotiating. Negotiate
poorly, or fail to even try, and you may be stuck with software you don't need
at a price higher than your rivals paid.
And if you think troubleshooting a routing table is complicated, try diving
into Microsoft's many—and we do mean many—licensing and sales plans. "Microsoft's
licensing terms are too complex and give the overall impression of being purposefully
confusing. To date I have not had dealings with any other vendor that had a
more complex licensing scheme," says Brian Cady, systems administrator for Austin
Mohawk and Company Inc., a steel building manufacturer.
It is just that complexity that compels many customers to turn to resellers
or Microsoft reps for advice. This is a big mistake. With so much at stake,
it pays to be an expert. Here's what you need to know.
Know What You Own
Saving on software starts with making sure you don't buy what you don't need.
That entails knowing what software you have installed, how many users use each
package, and how often. A good asset management tool can help you automate that
data collection process.
The tool may reveal some pleasant surprises. If the economy has been unkind,
forcing a downsizing, you may have more software than you need. And if you discover
unlicensed software, you can get in compliance before the software fuzz come
knocking. Check versions to find out what needs upgrading. That can also clue
you in to software that's not being used, and therefore doesn't need to be upgraded.
If your company has multiple divisions and affiliates, you'll need to coordinate
efforts with colleagues in other groups. Remember, more volume always equals
All the software you can prove you own is part of your overall pool. Never
let Microsoft reps define your pool for you; define your pool for them.
Once you know what you own, figure out what each license offers. Understand
whether software can be transferred from one machine to another, and build that
into your plan. Office, for instance, can be moved from machine to machine while
Windows licenses purchased with new systems through OEMs generally can't.
Know What You Need
Once you have a handle on what's installed, you can start building a strategic
IT plan that outlines what you need. This involves nailing down the strategic
benefits of a software upgrade, with precise facts and figures. Use your plan
to keep the sales discussion focused on your requirements, as opposed to what
Microsoft wants to sell.
Your strategic plan doesn't necessarily require Microsoft software. Databases,
Web servers, identity management software—pretty much everything Microsoft builds
is available in some fashion from someone else. Don't be shy about these alternatives.
There's No "I" in Team
You may be the smartest IT cookie in the jar, but negotiating complex software
contracts is far different from adding users to Active Directory. With so much
at stake, these contracts are far too important to trust to any one person.
Negotiating involves many skills and requires a close alliance between IT
and key business units. Legal advice is critical, to ferret through the complex
contract terms. And given it's inherently a financial deal, a numbers whiz is
mandatory. Talk to your CFO's secretary and schedule as many meetings as necessary.
say that Microsoft hates Linux is like saying George W. has
a mild disregard for Saddam Hussein. That's because for many
applications Linux is a reasonable alternative to Windows;
it has fundamentally changed Microsoft's willingness to negotiate.
Be sure to pepper your strategic IT plan with lots of references
to Red Hat, Oracle, IBM, Apache, and Novell. Make Redmond
fight to keep alternatives out of your shop.
The CFO, or other ranking exec, may not lead the team, but he is possibly the
most important member. As the person signing the checks, he needs to be involved
in the planning, and to take a lead role in the face-to-face negotiations. This
person, or a close representative, should also be intimately involved in building
the strategic IT plan, so he's aware of the strategic objectives.
Involving top-level execs can also head-off the possibility of Microsoft attempting
to sell over IT's head by offering special meetings in Redmond, or invitations
to golf, sporting events and the like.
"We have a pretty good relationship with our Microsoft reps. They know at
what level the budget decisions for IT are made and that going above that can
only be detrimental to their success," says Chris Johnston, an IT pro with engineering
firm Loiederman Soltesz Associates Inc.
Scott Braden, author of Microsoft License Secrets and self-professed "Licensing
Geek," suggests choosing a project leader who has the time as well as the IT
and business smarts to get the job done. This person will study up on all the
relevant Microsoft licensing programs, work with other groups within the company
to gather as much volume as possible, and drive the relationship with the sales
If no such person exists in your organization, it can pay (handsomely) to
get a hired gun. Braden says he helped save a 4,000-employee hospital chain
$923,000 in Microsoft software costs by combining its buying power and crafting
a money-saving mix of Select and Enterprise agreements. Large research and consulting
firms can also help you negotiate with Microsoft.
Going to Battle
When it comes time for the actual negotiation, think of Microsoft as a car dealer.
Prices and discounts aren't etched in stone. If you know what you're doing,
everything is negotiable.
First, understand what your business means to your sales rep. If your account
is large enough, huge commissions, bonuses and the ability to meet a sales plan
could be at stake. Use this as leverage. Braden even advises against trying
to land a bigger discount by moving up the chain of command, although others
disagree, noting that moving up the chain tends to work for large accounts.
days homeowners refinance as often as Madonna changes hair
and religions. While you probably want to be more prudent
with software deals, certain circumstances demand renegotiation.
A major change in technology plans, downsizing, acquisitions,
and software that simply isn't up to snuff are all valid reasons
In either case, don't let the Microsoft rep take the lead in the negotiations,
Braden says, because they don't always have a full understanding of sales programs.
Often, fast-talking sales people are counting on your ignorance of licensing
schemes and reseller discounts to extract higher prices, Cady warns. "Small
and medium businesses end up paying more because they don't have the skilled
staff or leverage from license volume to negotiate and get the best deals,"
he says. The bottom line: You need to be the expert.
International Computer Negotiations Inc., as part of its negotiation methodology,
advises setting three levels of objectives with respect to the products and
features you want: the nice to have, those worth compromising on, and non-negotiable
deal breakers. It also pays to determine the least amount of new software you
can get away with, and what Redmond is pushing that you simply don't need.
Do some research before getting even close to negotiating. Start with the
worst case by looking up full retail prices. Once you stop gagging, talk to
a reseller about its discounts. In the end, though, Braden suggests basing your
bid on what it makes economic sense for you to pay, not what others pay. Look
to extract all the extras you can, such as training, support and financing terms,
which sales folks can often throw in at their discretion.
Timing your deal right can also save you big bucks. Microsoft quotas come
due in the summer (June 30) and at year-end (Dec. 31). It pays to stretch out
the negotiations and drive your hardest bargain as close to those dates as possible.
Often the sales rep has already put your deal into his revenue projections,
even though it isn't closed. His boss is expecting that money. Make him discount
extra hard to get it.
Finally, simply saying "no" can be an effective strategy, so long as you have
a viable alternative (Linux, an in-house developed solution, or simply continuing
to use what you have).
And don't forget to consider resellers, who may have a better handle on pricing
than the Microsoft rep. "Frequently our reseller will be able to help us save
money by exposing the best alternative for our enterprise, while the Microsoft
approach seems to be more broad and less specific to the needs of our operation,"
& Match Savings
simplicity, organizations often buy most licenses under one
plan. Many reps like this because the accounting is easier,
and the prices generally higher. In general, EA prices tend
to run some 15 percent less than Select, but there are cases
where Select costs the same or less, according to licensing
guru Scott Braden. It's also possible to combine the two,
which is how Braden saved a hospital client nearly $1 million.
Be Picky About Resellers
Resellers can also be helpful if your organization isn't mammoth enough to deal
directly with Microsoft, but picking a good one is critical. Some may not fully
understand technology and Microsoft's various sales programs, or may be interested
more in their own interests than yours. Similarly, resellers that are too close
to Redmond can't be trusted to get you the best deal.
Keep in mind that, like a real estate agent, resellers technically work for
the seller, which is Microsoft. But there are degrees to which resellers lean
in the Microsoft direction. In your first meeting, what did the reseller talk
about? Was he particularly "salesy"? Was he busy bragging about his Microsoft
contacts, or did he ask questions to try to understand your requirements?
Another hint from licensing guru Braden—consider how you came to know this
reseller. Did Microsoft fall all over itself recommending the firm, or did an
IT peer give a good recommendation?
Like getting a dealer cost report when buying a new Audi, it pays to know
exactly what kind of discounts resellers get—because that's where your negotiation
room is. For Select deals, resellers get between 17.7 percent (the standard
discount) and 21.7 percent (which includes a 4 percent bonus discount for the
reseller meeting quota) off retail prices.
It's best to choose several resellers, so you can play one against the other,
and use each for its specific strengths. If you're buying hardware and software
together, you might consider a Large Account Reseller such as Dell that can
offer deep savings on PCs and servers, Braden suggests.
"Always get more than one bid and get more than one reseller involved in the
bidding," says Austin Mohawk's Cady. "Ask a lot of questions and try to make
the bids apples to apples."
Tips & Tricks
car dealers and furniture stores, Microsoft will cut lots
of financing deals. It likes the reliable, annuity-style revenue,
even if it means letting you go a full year, interest free,
without making a payment. Ask about low-interest terms and
multi-year payment plans.
To SA, or not to SA
Microsoft wants all of its major customers to move to its Software Assurance
(SA) plan. Not only does this lock you into a long-term Microsoft solution,
it guarantees Microsoft three years of revenue.
Deciding whether to go with SA is tricky business. Rather than rely on Microsoft
ROI templates, Braden suggests analyzing your own situation. How old is your
software and what is your upgrade plan? What plan are you currently on? How
long does Microsoft plan to support your applications? What support options
exist from other vendors?
Some of the SA benefits, also available through other programs such as Campus
Agreements, have value. UCLA's Tang points to the ability to install software
on multiple machines for the same user—say a desktop and a laptop. "In terms
of inventory or help desk operation, we know that the licenses are based on
the number of employees on the payroll rather than machines," she says.
But to realize all the benefits of SA, Microsoft must ship compelling upgrades—and
IT has to successfully install them within the specified three-year window.
In recent years upgrades have been late and not terribly groundbreaking.
"We purchase product assurance as part of our licensing model, but do we rush
an untested version to production because we've already ‘paid' for the upgrade
or do we keep using a previous incarnation, yet pay for support on the now current
version?" asks Johnston. "When we deploy a software package that isn't ready
for prime time, our costs go up in resolving issues created by the ‘updated'
More Tricks and Tips
Ever wonder where all those case studies and
glowing reference accounts come from? Do you suppose Joe IT
just decided to endorse Microsoft products out of the goodness
of his heart? Not likely. Chances are Joe got a deep discount
or a bunch of freebies in return for going public. Here are
some ways you can save:
1. Be a beta tester or early adopter.
2. Ask for extras, including support, consulting
3. Attitude is everything. Don't get too friendly.
Your sales rep is not your buddy.
4. Don't ever say you need something.
5. Make sure all terms are in your contract. If it
isn't in writing, it's not worth the paper it's not written
6. If your Microsoft rep tells you the business terms
of your contract aren't negotiable, go directly to his general
manager—because in most cases they are.
7. Beware of signing letters of intent. Sometimes
the rep will ask for such a letter before bringing in higher-level
execs to speak with you. Avoid signing, but if you must, look
for catches beforehand.
8. Write a position paper defining technological
and business objectives.
9. Don't let Microsoft think it is the only option,
even if that's the case. Send out RFPs and use the results.
10. Never act impressed.
11. Many Microsoft apps require a SQL Server back-end.
But if you have enough SQL Server firepower already installed,
don't be talked into a new license to support something like
BizTalk. It may make sense to overbuild your SQL Server now,
to save later.
12. Review past contracts. Did you get a good deal
then? Don't repeat your mistakes.
13. By standardizing on software you can save on
price and support.
14. Discover which devices don't need an EA CAL.
These include dedicated devices for order entry and point
of sale, as well as kiosks and consoles. Don't pay for CALs
you don't need.
15. When making Select forecasts, estimate a little
high. You'll get a deeper discount, and there are no repercussions
if you don't buy all that software. If you buy more than you
forecast, you'll still be stuck with the lower-volume discount.
— Doug Barney
After the Sale: Due Diligence
Have you ever bought a new car but neglected the periodic dealer checkups, only
to eventually find your warranty is worth about as much as a share of Enron
stock? The same is true for software—you can lose your rights to upgrades and
discounts if you fail to be diligent after the sale.
First, make sure you know who does what. The best way to assign responsibility
is to pick a contract administrator to:
- Track all licenses
- Make and record payments
- Keep an up-to-date Microsoft and reseller contact list
- Maintain a list of internal team contacts
- Be aware of all customer rights and how to take advantage of them
- Track all dates, such as when licenses expire
- Ensure that all contracts from all parties are proper with no mistakes
Finally, learn from your mistakes and take your time. "We should have started
sooner and spent more time on the project," says Austin Mohawk's Cady. "Purchasing
Microsoft licensing is no small task."
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