CIOs experiencing sticker shock from recent software bills should be questioning how they got there.
That’s because IT leaders at large enterprises are paying a huge so-called software tax for vendor-driven upgrades, migrations, and licensing changes they would not have chosen for their organizations.
About 28% of software budgets at large organizations — an average of nearly $12.9 million per year — are being eaten up by vendor-pushed initiatives, according to a survey commissioned by independent software maintenance partner Origina.
Ninety-five percent of IT leaders surveyed said their organizations have paid for a vendor-driven upgrade in the past three years that they believed would actually reduce performance, according to the survey, which covered US and UK organizations with annual revenues higher than $1 billion or with more than 10,000 employees.
The sheer size of this “software tax” surprised Tomás O’Leary, Origina’s CEO, even though the company expected to see substantial costs for vendor-driven upgrades.
“Software was supposed to make businesses better, and it does,” he says. “But it’s also imposing a hidden cost on companies, quite a significant one. I’m quite taken aback because we know this exists, but we never quantified it before.”
When vendors control your IT spend
Big vendors have several major advantages over software customers, with the cost of switching or refusing to upgrade topping the list, O’Leary notes. In many cases, CIOs are faced with a loss of support if they turn down vendor-driven upgrades, leaving them with little room to refuse, he says. CIOs dependent on VMware are familiar with this squeeze play, as are those facing SAP deadlines.
“CIOs are left in a situation where the alternative may be worse, so upgrading is the lesser of two evils,” O’Leary adds. “When people buy technology, they don’t realize how long this stuff is going to hang around. Nobody realized this thing was going to be embedded, and the dependency was going to be greater and greater with time.”
In addition, software vendors have an experience advantage when negotiating contracts, O’Leary says. CIOs and procurement officers may try to negotiate favorable terms for upgrades, but big software vendors are expert at writing contracts that give them an edge, he notes, adding that the survey results suggest IT leaders’ current approach to negotiating better contracts is a failed tactic.
“If you keep trying the same thing over and over again, and it doesn’t work, you’ve got to try something different,” O’Leary says. “There’s a relief on the buyer side when the negotiations are over, and on the seller side for sure. But the seller side has to get back up again and do it again the next morning with somebody else, and the buyers don’t.”
Omar Amassine, founder and technical director at TripleW Digital, says between 20% and 30% of the IT services firm’s software and maintenance budget goes to vendor-driven migrations he didn’t request.
The biggest culprits? CRM, marketing automation suites, and cloud infrastructure, he says.
“Vendors frequently bundle mandatory AI features or restructure seat-based pricing into usage tiers, driving effective 20% to 35% price jumps with zero incremental utility for the core workflow,” he says.
IT leaders can fight back, however, by using modular, open standards and headless architecture, he adds. “The less proprietary logic locked inside a vendor’s walled garden, the higher your leverage when they mandate expensive upgrades,” Amassine says.
TripleW Digital also runs migration feasibility studies six months before software contract renewals. Having a migration roadmap can bring the vendor back to the negotiating table offering multi-year price freezes, he notes.
Emphasize partnership — and a credible threat of defection
Zachary Lewis, CIO of University of Health Sciences and Pharmacy in St. Louis, hasn’t seen the same software spending mandates as the organizations reflected in the survey.
The university has negotiated many of its software contracts to ensure upgrades and security patches are handled by the vendor, either with Lewis’ approval or during an agreed-on maintenance window, he says.
Even without costly upgrades, there’s still a time tax, he adds.
“With the sheer volume of new vulnerabilities being discovered, we’re spending more time following up with vendors to make sure they’re applying patches in a timely manner,” Lewis says. “My team simply isn’t large enough to manually manage patching across every application and software component we use.”
Here, establishing a vendor management strategy that emphasizes partnership over provisioning can help. And if vendors still drive costly upgrades, IT leaders can always switch providers.
But Lewis cautions that, as tempting as that is, it’s often a complicated process.
“Switching vendors is always an option, but it’s rarely simple,” he says. “Depending on the application, you may have years of integrations, processes, and institutional knowledge built around it. Sometimes the cost of moving away from a vendor is significantly higher than the cost you’re trying to avoid.”
Customers of large ERP solutions in particular are facing a significant reckoning on decades of customizations.
Collective bargaining power comes with communication
To regain their purchasing power, Origina’s O’Leary advises CIOs and procurement officers to negotiate shorter contracts, which would enable them to renegotiate terms more often and exit more quickly if their vendor jacks up prices.
“You have to get to a point where you can have a more frequent engagement with the vendor,” he says. “Negotiate your exit, and negotiate more frequently.”
While short-term contracts may impose more up-front costs on customers, they can pay off with the additional flexibility they provide, he says.
CIOs can also turn to third-party software management firms or consider internal support of their software packages if they have the resources, O’Leary advises.
CIOs should also share their software purchasing success stories and nightmares with each other more than they do now, he says.
“We all benefit from having a little bit more collective bargaining power,” he adds. “CIOs just need to take that leap of faith that others have the same problems, and maybe we can have some sort of collective pushback on this.”