How many employees will require access to software and data storage in the next three months? How about in the next year? This is a question IT has always grappled with; no one wants to buy shelfware. And in 2020, it has become an even more difficult question to answer. CIOs and IT managers have always had to build contingency plans in case of a sudden need to reduce their budgets; lately, those plans have started to look much more realistic. Succeeding in an uncertain economy depends in part on flexibility, and the right approach now can help to avoid painful choices later.
IT departments can set themselves up to be more nimble when finances get tight by taking a hard look at the contracts they sign. Large contracts with long terms reduce the flexibility of IT budgets, resulting in rigidity, which can make cost-cutting opportunities difficult to find. So when times get tough, a tool that can scale down may be better than one that can only scale up.
There are three primary areas to consider when seeking contract flexibility: pricing structure, deployment type, and contract length. And while the availability of the options below will vary based on the vendor, all are worthy of consideration when assessing contracts available for your organization’s IT needs.
Pricing structure: seat, license, or consumption?
The payment options available to technology buyers often fall into one of three major categories: Pay-by-seat, pay-by-license, and pay-by-consumption. “By seat” means you pay for each user account. “By license” means you pay for use up to a certain threshold – think jumps in volume without gradual steps in between. “By consumption” means the price is unrelated to how many users engage with a tool, but rather is based on the sheer volume of use of the tool, whether it be storage, processing, or transactions.
All these pricing types have their own benefits and drawbacks. And though it is rare that one vendor will offer all of these pricing options for the same product, it’s possible that one of their competitors offers a different structure. Getting the most bang for your buck will depend on getting as detailed an idea as possible of who needs access to a tool and how much they will use it.
- Paying by seat gives you more direct control over exactly how much you spend on a product by allowing you to purchase exactly the number of seats you need. Certain contract terms can enhance the flexibility of pay-by-seat pricing. A vendor may offer significant flexibility in a per-user contract, with some going as far as to allow monthly updates to seat count. But cost per user may be higher for pay-by-seat plans compared to pay-by-license. This can be a problem for larger companies, or companies that come to depend heavily on the tool in question.
- Paying by license can mean a lower price per user or lower total cost of the capability. Where it can be troublesome is in the reduced flexibility of a license. If you give up flexibility and then see a sudden drop in demand for the tool within your company, you’ll have to find cost savings elsewhere.
- Paying by consumption ties your cost directly to your use of a tool, but if the use of that tool is hard to predict, this can lead to unexpected cost overruns.
Your company’s number of employees, growth expectations, and industry all factor into its current and future software needs and how to structure your spend. Companies smaller in size or those looking to experiment with a small deployment to test a capability may benefit more from pay-by-seat packages, while companies experiencing rapid growth (or slowing down) should think about how their needs could change within the next year.
Cloud vs. on-prem
Legacy IT departments within older companies typically maintain a lot more on-premises software and hardware than younger companies. This comes with fixed costs that are hard to change. When the demand for an on-prem solution drops dramatically, you usually still have to maintain the solution at full capacity, including the staff or professional services that requires.
One aspect of cloud-based SaaS solutions that makes them particularly appealing during a time of volatility is that they shift the cost of maintenance and software updates to the vendor. Cloud pricing structures also make it easier to reduce costs when you lose headcount, making them the more flexible option from a budgetary perspective compared to on-prem. Cloud solutions tend to cost more per seat than on-prem, but that difference typically does not account for on-prem overhead. Transitioning to cloud can also be complicated, especially for more established companies that may have tools and data stored locally in a complicated and interdependent manner.
The fine print of some SaaS contracts can result in startling expenses. As with any vendor contract, you’ll want to watch out for penalties. Some providers will charge you to retrieve your own data after the end of a contract with them, or simply not allow for data retrieval at all. Contracts may also include audits to make sure your usage is within the limits of your purchasing agreement, and you could face penalty overage fees for excess usage. Pay-by-consumption contracts may price outlier consumption differently than typical consumption – for instance, if you need to use a huge amount of computing power in a very short time. You can try to negotiate with your vendor to omit or soften any such terms, and should at least be aware of them if you choose to sign a contract.
Short vs. long contract
The Goldilocks contract duration for any technology service depends on what you need from that service. Short contracts (about one year) offer more frequent opportunities to renegotiate deals or find a better deal elsewhere. Longer contracts (three years or more) offer greater stability and leverage for negotiating better terms. As a rule of thumb, short contracts better suit experimental capabilities that your company may discontinue, while longer contracts better suit core capabilities. Under some circumstances, you may consider shorter contracts even for core services if you anticipate losing headcount and needing to negotiate for lower usage to save on costs. You may also want to request termination rights for SLA failures or other material breaches in longer term contracts in order to find the true Goldilocks zone, although there’s no guarantee the vendor will accept these terms.
Economic uncertainty complicates all of these contract dynamics. You should give consideration to the future continuity of your vendor. Are they a startup or an established company? If they’re publicly traded, how are they performing? If they’re venture-backed, when did they last raise money? Have they had security breaches in the past? Do they have pending litigation? Do they have competitors you should examine instead? No single indicator will tell you everything you need to know about a potential vendor, and you should consider this a holistic analysis. For example, startups may have less capital and fewer clients, but may also have less overhead and be more nimble. And if you’re one of their larger customers, you may get more hands-on attention from their support team. Established companies may have more revenue and longer histories of success, but could also have structural issues, like poorly integrated acquisitions or toxic debt that pulls them under in hard times.
Adapting to fiscal constraints comes down to awareness of potential scenarios for your company, understanding your company’s core needs, and negotiating with your vendor. Giving yourself wiggle room wherever you can find it will make it easier to meet your company’s goals, even when resources run tight. You might need to break out of your comfort zone to ask vendors for flexibility, and you must be thoughtful about what commitments you make.
The most important things to avoid are having to suddenly cut your company off from a resource it depends upon, or having such high obligations to vendors that the only way to cut costs is to reduce IT staff. Interruptions like these cause hardship and throw off operations, especially within the types of interdependent systems overseen by IT professionals. If you do things right, you’ll be better able to spend on what you need, in the amount that you actually need it, to keep things running smoothly.