As we continue to fall into recession, inflation, and high-interest rates; most large software vendors have announced significant price increases for 2023, of up to 25%. While some price increases are justifiable, Gartner believes the announced price hikes are a sales tactic, and CIOs must utilise solid negotiation strategies to analyse the fairness of vendor proposals.
To look into the historical data for the past two years and the future outlook; 2022 registered an 8.75% rate of global inflation, a significant increase from 4.7% in 2021, while 2023 started with a 6.52% global inflation rate showing some positive signs for the future. The slowing worldwide economy will likely bring the yearly global inflation rate down to roughly 4% in 2024.
When inflation increases, banks raise interest rates to encourage everyone to spend less and save more. Theoretically, this should reduce demand for goods and services to help contain inflation. The downside is that most software vendors will be impacted. Low revenue will inevitably lead to significant pressure and price increases.
How have the vendors responded to the economic challenge, and what are the latest price changes?
- Microsoft increased prices on their main Business and Enterprise plans from 9% to 25% in Mar 2022 and again by 9% on the 1st of April 2023.
- After almost ten years without a price increase, starting with 2023, SAP increased the cost for existing support agreements by 3.3%.
- Oracle increased the cost of support agreements by 8% in the USA at the end of last year, and scheduled increases around the world for countries where inflation reached record levels. They have also recently changed the licensing model for Java entitlements leading to a significant price increase.
- IBM announced price increases of 5-24% for new license transactions starting with Jan 2023. They were aligned to different currencies and unique local market dynamics for select countries.
- And the list continues.
Knowledge is Power
Understanding how these price increases affect you as a client is essential. Typically, if the increase is applied to your existing support agreements, it will significantly impact your business. However, if the increase is applied to new license purchases, you will see the impact only when purchasing additional entitlements.
Despite being affected by significant financial challenges and going through major restructures and layoffs, most organisations continue to increase their spending on digital transformation projects. However, economic instability is reshaping the technology investments increasing and reducing the expenditure in various areas of the business.
Gartner’s Latest Forecast
According to Gartner’s latest forecast, worldwide IT spending is projected to total $4.6 trillion in 2023, an increase of 5.1% from 2022.
New spending continues to shift to cloud options, with an expected growth of 11.3% in 2023.
When faced with significant investments in digital transformation programs, clients must ensure they get real value for their investment. The massive price increases of the software will lead to an increased total cost of ownership. Clients must ask the vendor to provide a cost breakdown and leverage the data from economic indicators to question any significant yearly increases. Information about inflation, interest rates, and wage trends will help better understand the situation.
Our Recommendations
Always assess alternative vendors
Organise an ‘Options Analysis’ paper to include a review of
- Platform capabilities
- Risks
- Deliverables
- Timelines
Request the licensing cost breakdown and organise a cost-benefit assessment
- Ensure you are utilising the software you are purchasing.
- Do not accept ‘first-year free’ buys. This software will be chargeable in the following years – and sometimes the charges are significant.
Review your architecture and optimise your deployments
Our experience has shown that you can save up to 21% on software costs by optimising your deployments.
Assess the possibility of moving to a third-party provider
If the increase is applied to your existing support agreements.
Negotiate flexible contractual terms
Focus on licensing terms, multi-year commitment, and volume usage.
Challenge the vendor
When significant price increases are applied, challenge the vendor.
They must back up their decision with financial data.
Don’t accept generic responses. Any price increase must be justifiable with detailed data.
Leverage research studies with economic indicators
There are plenty of good resources.
Focus on solid negotiation tactics
Do the research: organise a BATNA/WATNA analysis.
When you partner with IntegrationWorks, we ensure you get the value you need for the price that is right for your business. More value and less investment, the reassurance and skills you need at the right level.
If you are interested in having an in-depth conversation about how to save costs with your next license transaction, and transform your business through integration, get in touch with us today.