TRENDS, CHANGES, AND CHALLENGES TO WATCH FOR IN YOUR 2024 RENEWALS
Craig Johansen
Sourcing and Vendor Management Consultant
Have you ever had your budget blown up by an unexpected price increase imposed on a “routine” renewal? It’s like in The Lord of the Rings when Frodo finds Bilbo’s ring (the One Ring) and starts a chain of events that will put Middle Earth on the cusp of annihilation at the hands of Sauron and his armies. How could one ring start a war? We will get back to LOTR later, but for now, here is an interesting and relevant dilemma that many IT organizations are facing.
Over the past couple of years, while working with our Clients on renewals, we have been witnessing significant changes in how vendors are handling software and maintenance renewals. This started about 2-3 years ago, but became more prevalent in 2023, and even more so now in 2024. Some of this seems to be attributable to the impact of inflation and a certain level of economic uncertainty, which for some vendors seems to have offered them the opportunity for an “excuse” to enhance their revenues; so, year-over-year price increases have escalated (much like the growing darkness that sought to consume Middle-Earth). However, some changes can also be attributable to some key software vendor consolidations where the acquiring organization completely changes the existing licensing model and tells the licensees that they will be going to a new (and pretty much always more expensive) model. Finally, many technology vendors are suggesting that, as part of seeking more “revenue predictability”, they need to avail themselves of higher and higher year-over-year price increases (although I struggle with understanding how this is about ‘predictability’, unless they merely want to predict that they’ll make more money). This can lead to real struggles for companies renewing their IT software and other technology solutions, only to find out the amount they budgeted isn’t enough.
As mentioned above, 2024 seems to be continuing, or even increasing, this trend of seeing renewals be more challenging than they’ve typically been in the past. The following are some financially impactful experiences that our Clients have already experienced in the past few months alone:
Several Clients have had software vendors inform them that, at this renewal, the vendor would no longer be selling annual maintenance on existing perpetual licenses and, instead, would require the Client to move to a subscription model instead. The subscription model can be beneficial to a Client, but not in a situation where they are suddenly and unexpectedly being forced to migrate away from just paying annual maintenance for upgrades and technical support on their perpetually licensed software. While it can be difficult, although not impossible, to negotiate the right to retain the perpetual license/annual support model, at least for a while, if that is not an option, you must ensure you’re getting credit for the value of those perpetual licenses. Our Clients were, fortunately, able to do one of those two things in each case.
Another Client was similarly told by a vendor that their perpetual licenses would need to be moved to a subscription model with, fortunately, a not entirely different, or higher, fee structure. Unfortunately, however, what the Client didn’t realize was that this change wasn’t limited to the license model…it also required them to move from the onprem software they’d been using for years to the vendor’s new hosted SaaS which required a costly, and completely unbudgeted, migration and data conversion project (due, in fairness, to the Client running a relatively old version of the onprem software) as well as higher, extended support fees until the migration was complete. By leveraging their long-term relationship, as well as a multi-year commitment, our Client was able to motivate the vendor to not only secure the time needed to budget for and conduct the migration in a cost effective manner, but also avoid the extended support fees entirely.
A well-known software company was acquired recently, with the acquiring company electing to make major changes to the acquired company’s licensing model, including ending perpetual licenses and forcing Clients to the subscription model, as well often forcing Clients to purchase new, and more expensive, ‘bundles’ being imposed in renewals. The result was significant cost increases, including one of our Clients seeing a 90% increase from 2023 pricing. (This sudden shift in the landscape felt akin to the Fellowship facing the unexpected betrayal of the great wizard Saruman, who was once an ally, but now a formidable foe.) Negotiations remain ongoing in this situation, but as they’ve progressed, we’ve seen this situation repeat itself with other of our Clients.
Another Client was told by a long-term software vendor that their “user-based” licenses would become “usage-based” licenses, resulting in an increase to annual fees of 300%. The Client was able to convince this vendor to apply significant discounts for their 3-year renewal term, but the fees continue to track on an upward trajectory that will still be an issue (although at least an expected one) at the end of this term.
These are a few examples of what your peers have been experiencing recently. There is no reason to believe this will end any time soon and it is critical that IT organizations find ways to limit these vendors’ ability to make these unilateral changes. How, you ask? Through a formal renewal process…something each of the Clients above have and the primary reason that most of these situations will end positively for the Clients, even if things seem dark and difficult now.
The next (2) articles in this series will dive deeper in examining some of the challenges facing IT organizations like yours and the final will outline all the ways to navigate these challenges, which will have a positive impact on your budget, and ultimately your bottom line.
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