In-Depth

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.

• By Doug Barney
• 11/01/2004

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 Campus Agreement.

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 options.)

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."

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 larger discounts.

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.

Linux Leverage To 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 folks.

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.

Time to Renegotiate? These 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 to renegotiate.

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," Johnston says.

Mix & Match Savings For 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."

Financing Tips & Tricks Like 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' software."

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."