Inflation and the Software Cost Rises – Part 2

Camelia balan
HEAD OF PROCUREMENT & SOFTWARE COMPLIANCE

Despite global economic improvements, New Zealand is facing recession, with GDP dropping to 0.1% in late 2023, while interest rates continue to be high. Economists predict the central bank will follow others in cutting rates in the latter half of the year or sooner.

Inflation Declining, Yet Recovery Slowed Down. How to Navigate Ongoing Software Price Increases.

After last year’s recession, inflation, and high interest rates, the global economy is on the path to recovery in 2024, showing some positive signs.

While there has been progress, the battle against inflation continues. Global inflation peaked at 8.8% in 2022 and 6.8% in 2023, expected to decrease to 4.3% in 2024 but still exceeding pre-pandemic levels of about 3.5% (2017-2019).

In New Zealand, inflation eased to 4.7% in the last three months of 2023, down from 5.6% in the third quarter, marking the lowest figures since the second quarter of 2021.  In the UK, inflation reached a 41-year high at 11.1% in October 2022 before gradually easing. By January 2024, the UK’s inflation rate stood at 4.0%, surpassing rates in France (3.4%), Germany (3.1%), and the Eurozone average (2.8%). In comparison, the US recorded an inflation rate of 2.5% in December 2023.

Economists worldwide advise caution in 2024 as premature rate cuts by National Banks may lead to inflation rebound. Most vendors suggest the ongoing high inflation rates require adjustments of licensing and support fees, resulting in continuous price hikes.

During periods of high inflation, banks raise interest rates to encourage saving over spending, impacting software vendors as well. According to Vertice’s annual ‘SaaS Inflation Index’ published in November 2023, software inflation remained stubbornly high at 8.7%, double the consumer price index inflation rate in the U.S.

The report also highlights that businesses are likely to spend significantly more on software in 2024, even without new purchases. Managing software inflation requires careful consideration, a close understanding of pricing data, and an intelligent approach to purchasing.

In 2023, 73% of SaaS vendors hiked prices, pushing software spending to an all-time high, as revealed by Vertice’s annual SaaS Inflation Index. This emphasises the challenges businesses face in navigating the complex landscape of software pricing and expenditure.

How have vendors responded to the economic challenge, and what are the latest price changes?

• In July 2023, SalesForce announced list prices would increase by an average of 9% starting with August 2023, applied across Sales Cloud, Service Cloud, Marketing Cloud, Industries and Tableau. Salesforce’s justification was that their list price remained unchanged for seven years, and since then the company delivered 22 new releases, and thousands of new features, investing more than $20 billion in research and development. This announcement led to an immediate stock rise in July 2023 which continued to spike in the following months with the highest peak in February 2024.
  
  
• Continuing the trend with price increases by major software vendors, in July 2023 SAP announced they would increase the annual fees for SAP support agreements by approximately 5% starting in January 2024. This is on top of the previous increase at 3.3%, applied in January 2023.
  
  
• In December 2023, Microsoft announced price increases for its software and services, particularly impacting Asia. The aim was to align local prices with its US dollar charges. Starting with 1^st April 2024, Japanese customers will experience the highest hike at 20% for both cloud and on-prem software. For India, South Korea, and Taiwan, the price adjustments were set to take effect on the 1^st February 2024. Indian users will see a 6% increase across all Microsoft software, while Korean customers face an 8% rise for cloud services and a 10% increase for on-prem software. Microsoft plans to regularly assess pricing in local currencies twice a year, considering currency fluctuations relative to the USD. This approach aims to increase transparency and predictability for global customers, aligning with industry standards. The previous price increases for Microsoft cloud services were applied in April 2023 and then September 2023 affecting different regions differently, from 9% to 15%.
  
  
• IBM introduced a General Price Harmonisation (GPH) for Passport Advantage and Passport Advantage Express, which took effect on the 1^st January 2024. This initiative was designed to streamline global pricing across IBM’s software product range, with a 6% price hike for most eligible products, spanning automation, data and AI, customer care, security, sustainability software, transaction processing software, and storage. While certain products may see deviations in price adjustments, the majority of alterations will stay within a range of plus or minus 5%. Additionally, IBM has implemented various price increases for its cloud services starting with January 2024 – a 3% global increase for PaaS and location-dependent increases for IaaS, reaching up to 26%, based on a percentage premium from US base prices.
  
  
• While not yet officially announced, Oracle is expected to follow the current trajectory for price increases. In 2023, Oracle increased support fees by 8%. Most customers may also need to pay more for technical support if extended or sustaining support is needed for older versions of Oracle software; while the costs for Java deployments increased significantly due to considerable licensing changes.

Big tech companies are relying on customers accepting higher prices for essential software products, as indispensable business expenses. They emphasise inflation and the value-added features along with the constant innovation embedded in their software offerings. They focus on reinforcing the perception that the increased prices align with enhanced functionality and long-term benefits for the business.

Gartner’s Forecast for 2024

Gartner’s latest forecast predicts a substantial increase in IT spending, reaching 5.1 trillion USD in 2024 – an 8% rise from 2023. Software and IT services are anticipated to grow significantly by 13.8% and 10.4%, respectively, driven by increased spending on cloud services. This aligns with the global spending on public cloud services, expected to rise by 20.4%. Similarly to 2023, the source of growth is a combination of both higher prices from cloud vendors and increased usage.

Gartner’s observations indicate that CIOs are experiencing ‘change fatigue’, which manifests as a hesitation to invest in new projects and initiatives. They are delaying new IT spending, a trend expected to extend into 2025. Facing pragmatism, capital constraints, and margin concerns, most companies prioritise cost control, efficiency, and automation over longer-term IT initiatives. Gartner’s IT spending forecast highlights this shift, emphasising the importance of digital transformation programmes for maximum efficiency.

In the context of substantial investments in digital transformation programmes, clients must ensure they realise real value from their expenditures. The significant price increases of software over the past two years, both on-premise and cloud-based, have contributed to an elevated total cost of ownership.

Customers are encouraged to request a comprehensive cost breakdown from vendors and scrutinise any substantial yearly increases. Gaining insight into key financial indicators will facilitate a better understanding of the overall situation.

Our Recommendations from Last Year Remain Valid

In light of continuous price increases, we are maintaining the recommendations from the previous year, adapted to the evolving economic context:

• Request Licensing Cost Breakdown – Seek transparency by requesting a detailed breakdown of licensing costs. Organise a comprehensive cost-benefit assessment to ensure the software investment aligns with your company’s financial objectives.
  
  
• Optimise Software Utilisation – Actively monitor and ensure optimal utilisation of the software you are purchasing. Avoid falling into the trap of ‘first-year free’ deals, as these can lead to significant charges in subsequent years.
  
  
• Architectural Review and Redesign – Evaluate your current architecture and redesign your deployments. Our experience indicates that optimisation efforts can result in substantial savings, potentially up to 21% on software costs.
  
  
• Evaluate Alternative Vendors – Conduct an ‘Options Analysis’ to thoroughly assess alternative vendors. This analysis should explore platform capabilities, associated risks, deliverables, and timelines.
  
  
• Consider Third-Party Providers – Assess the feasibility of transitioning to a third-party services provider, especially if facing price increases in existing support agreements. Evaluate the potential benefits and drawbacks of such a transition.
  
  
• Negotiate Flexible Contractual Terms – Don’t overfocus on pricing. Focus on negotiating flexible licensing terms, multi-year commitments, and volume usage agreements. This approach allows for greater adaptability to changing circumstances and ensures cost-efficiency.
  
  
• Challenge Vendor Price Increases – When confronted with significant price hikes, challenge the vendor to clarify their decision with detailed financial data. Reject generic responses and insist on justifications supported by thorough data analysis.
  
  
• Leverage Economic Indicators – Utilise research studies and economic indicators to make informed decisions. Numerous resources are available to help you understand the market trends and make informed choices.
  
  
• Apply Solid Negotiation Tactics – Prioritise effective negotiation by conducting a BATNA/WATNA analysis. Thorough research and preparation will contribute to successful negotiations and optimal outcomes.

Consider New Additions

To further enhance last year’s recommendations, the following additions should be considered:

• Establish a Cross-Functional Cost Management Team – Form a dedicated cross-functional team comprised of representatives from IT, finance, SAM and procurement. This collaborative approach ensures a holistic understanding of software costs and facilitates a comprehensive evaluation of potential cost-saving measures.
  
  
• Implement Usage Analytics Tools – Invest in usage analytics tools to gain insights into how software is utilised across the organisation. This data-driven approach can identify underutilised licenses, allowing targeted optimisation and cost reductions.
  
  
• Establish Clear Key Performance Indicators (KPIs) -Define and monitor key performance indicators related to software utilisation, efficiency gains, and cost savings. Having measurable KPIs allows an ongoing assessment of the cost-control measures and provides the foundation for making informed decisions in the future.
  
  
• Investigate Cloud Cost Management Tools – If leveraging cloud-based solutions, explore dedicated cloud cost management tools. These tools help monitor and optimise cloud resource usage, preventing unexpected cost escalations and ensuring efficient utilisation of cloud services.
  
  
• Evaluate Long-Term Vendor Viability -Beyond short-term cost considerations, assess the long-term viability and stability of your software vendors. Understanding the financial health and strategic direction of vendors can mitigate risks associated with potential disruptions or unexpected changes in licensing models.
  
  
• Build Flexibility into Contracts -When entering into new agreements, build flexibility clauses that allow for adjustments in response to changing economic conditions. This flexibility ensures that your organisation can adapt to unexpected circumstances without being constrained by rigid contractual terms.
  
  
• Stay Informed about Licensing Changes – Keep informed about licensing changes that may impact your existing agreements or introduce additional costs. Proactively addressing compliance concerns and adapting to evolving terms can prevent unexpected financial liabilities.
  
  
• Conduct Periodic Vendor Audits -Implement a periodic vendor audit process to ensure that your organisation is only paying for the licenses and services it actually uses. Regular audits can uncover discrepancies and lead to further optimisation opportunities.

Partnering with IntegrationWorks

Navigating the complexities of licensing options from various vendors can be challenging, but you don’t have to tackle it alone.

Let IntegrationWorks take the lead with a thorough 360° review of your software deployments, offering a clear roadmap to reduce your costs.

When partnering with IntegrationWorks, expect to receive the value your business needs at the right price.

Our dedication lies in delivering enhanced value with less investment, equipped with the assurance and expertise essential for your specific needs.

For those interested in exploring cost-saving opportunities with your next license transaction reach out to us today. We will embark on a transformative journey through integration and licensing optimisation, tailored to your unique business needs.

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Camelia balan
HEAD OF PROCUREMENT & SOFTWARE COMPLIANCE

Inflation and the Software Cost Rises Part 1