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Fs rsh, i., 60 a Pk dv, cmb, Ma 02140 uSat: +1 617.613.6000 | Fx: +1 617.613.5000 | www.s.m
Get Better Software Deals By AligningYour Sourcing Strategy And CommercialApproach
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proessionals colleagues bypass them in the sourcing process, while powerul
technology vendors expect more revenue rom them than they can aord to provide.
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Sourcing proessionals need a more strategic approach that aligns the commercial
model or each supplier with its place in the enterprises soware sourcing strategy.
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with key suppliers while redressing the leverage imbalance with overly powerulincumbents.
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Forresters soware sourcing model helps rms implement and rene such a
strategic approach. It involves our important stages: 1) Discover the transormation
opportunity; 2) plan your creation o a soware sourcing strategy; 3) act wisely to get
the appropriate agreements; and 4) optimize ongoing soware costs.
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2013, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Inormation is based on best available
resources. Opinions refect judgment at the time and are subject to change. Forrester , Technographics, Forrester Wave, RoleView, TechRadar,
and Total Economic Impact are trademarks o Forrester Research, Inc. All other trademarks are the property o their respective companies. To
purchase reprints o this document, please email [email protected]. For additional inormation, go to www.orrester.com.
For Sourcing & Vendor ManageMent ProFeSSionalS
Why Read This RepoRT
Tis report outlines howsourcing and vendor management (SVM) executives can implementForresters strategic soware sourcing model. Our research has shown us that transactionalprocurement is ineective in todays soware market, with major technology trends such as bigdata, cloud, and mobile changing the way we choose and use soware. I colleagues and businessusers exclude sourcing proessionals rom their decision processes and ignore commercial criteriawhen picking suppliers. Yet they expect you to negotiate great deals, despite having little leveragewith powerul technology giants, who expect more revenue than enterprises can aord to provide.
Forresters strategic soware sourcing playbook explains how to reduce reactive transactionalbattles using a more strategic approach that will help you improve supplier relationships and getmore value or your soware expenditure. It will also help procurement proessionals who arealready using a strategic approach to rene and optimize their soware sourcing.
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g B Sfw ds By a Y S Sy a cmm apph 2
2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
ReaCTive pRoCuReMeNT does NoT WoRk iN Todays soFTWaRe WoRLd
Te soware market continues to change rapidly, but many rms are still procuring soware
through the same transactional method theyve been using or years, and it isnt working. Major
business technology trends such as the big data explosion and the move to mobile applications
using cloud-based servers are changing the way people acquire and use soware, and sourcing
proessionals need to change too or remain caught between:
IT colleagues making key sourcing decisions on incomplete and inappropriate criteria. Forexample, they may pick what they believe to be the best technology with more consideration
o their own job prospects than the cost/benet tradeo. Alternatively they will avor
standardization and alignment with their existing teams skills rather than the need to maintain
a balanced stable o alternative suppliers. Ten they throw their project over the wall to
procurement, expecting it to negotiate a great deal with little or no leverage.
Business users sel-provisioning soware-as-a-service (SaaS) and mobile apps. Sourcingproessionals eel unable to stem the tide o departmental shadow I accepting standard service
agreements without any due diligence review by purchasing and individuals clicking I agree
when they download apps.
Tech giants wanting more revenue than enterprises can aord to provide. Te majortechnology companies need to grow their revenue at around 10% per year to maintain their
current stock prices.1 However, only 5% o enterprises with 20,000 or more employees expect
their soware expenditure to grow at that rate, while 21% actually want to reduce it (see Figure
1). Forrester orecasts global soware spending to grow by just 6% rom 2012 to 2013.2 Moreover,
CIOs want to spend less on maintenance o ongoing operations, systems, and equipment(MOOSE) activities such as soware maintenance and processor capacity expansion, which orm
more than 80% o soware companies revenues, in order to ree up budget to spend on vital new
projects (see Figure 2).3 Sourcing proessionals are expected to deliver these savings without being
given sucient bargaining chips to redress the leverage imbalance.
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g B Sfw ds By a Y S Sy a cmm apph 3
2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
Figure 1 Only 5% O Large Enterprises Expect Teir Soware Expenditure o Grow 10% In 2012
Source: Forrester Research, Inc.89241
Source: Forrsights Budgets And Priorities Tracker Survey, Q2 2012
Base: international IT executives from companies with 5,000 or more employees(percentages may not total 100 because of rounding)
Decrease morethan 10%
Decrease5% to 10%
Aboutthe same
Increase5% to 10%
Increase morethan 10%
Dont know/dont use
How do you expect your software spending to change in 2012 compared with 2011?
4%
5%
13%
16%
47%
45%
27%
26%
8%
5%
1%
2%
5,000to 19,999
N = 577
20,000or moreN = 491
Figure 2 Over 70% O Enterprise CIOs Want o Shi Budget From MOOSE o New Initiatives
Source: Forrester Research, Inc.89241
Source: Forrsights Budgets And Priorities Tracker Survey, Q2 2012
Base: international IT executives from companies with 5,000 or more employees(percentages may not total 100 because of rounding)
5,000 to19,999
N = 577
20,000or moreN = 491
Are you prioritizing lowering ITs operational costs to free up money for new initiativesin the next 12 months?
Not on our agenda Low priority High priority Critical priority
6%
4%
27%
20%
47%
47%
20%
28%
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2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
T Mn entrr prt Wt Flng arc
Soware companies highest cost category, representing around 75% o license revenue, is selling
and marketing. So, more than in almost any other industry, their protability depends on them
ocusing their marketing and sales dollars in the right areas.4 Te amount they spend goes above
100% i they have to ght or their revenue in multiple competitive deals around the enterprise,
which increases their selling cost severalold and reduces their win rates. Tats why they oer the
highest discounts to get a large irrevocable commitment or be made a sole source instead o
being merely one o many approved suppliers. Its also why they drive their sales teams hard, with
huge commissions or people who meet their challenging sales targets.
In this context, negotiation skills alone are insucient without solid leverage and a sound strategy.
Forrester encounters many experienced procurement proessionals who are losing a battle with a
soware company because they have little power and a meager plan or the uture. In most cases,
theyve relied on:
Inventing competition, which merely undermines their credibility. Generalist procurementproessionals who lack soware specialization oen try to buy soware like they buy
commodities, such as oce supplies or metal ore, and or that they need alternative sources.
Soware sales teams know the prospects intentions and see right through a buyers empty threat
to, or example, replace Microso Oce with Google Applications, or convert applications rom
Oracles database technology to IBMs or vice versa.
Benchmarking, without a sound negotiation plan. Firstly, soware deals vary too greatlyor air comparison to be possible, in most cases. Even i you ound a similar sale by the same
supplier, it might involve dierent products, commitment level, timing, strategic importance,etc., all o which would aect the discount level. Secondly, without clear incentives and threats,
a buyer whose only tactic is to complain that his price is worse than his benchmark is likely to
nd the salesperson replying, So what? Tats the deal take it or leave it.
Bulking up the transaction to secure a great price but a lousy deal. Soware companiesare skilled at expanding a purchase by throwing in additional products and capacity that the
customer doesnt need. It saves them a lot o money i they can sell those products now rather
than having to go through a separate sales process at a later date. Forrester sees many clients
who have wasted money by buying products that dont work and products they dont need and
cant implement all to beat the benchmark headline discount. Tey end up with millions o
dollars o shelware, on which they still have to pay maintenance ees.5
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2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
sTRaTeGiC soFTWaRe souRCiNG MaxiMizes aNd FoCuses youR LeveRaGe
Forresters approach to soware negotiation aligns each suppliers commercial model with its
role in your sourcing strategy. It combines supplier relationship management, product selection
decision-making, and commercial negotiation into one integrated process (see Figure 3). Te three
oundations o strategic soware sourcing are:
1. Supplier tiering that identifes preerred and prohibited sources o new technology. A ormal
process that measures a soware companys qualities such as trustworthiness, innovativeness,
and cultural t enables the sourcing executive to infuence colleagues product choices. He
can use the results to ensure that uture sourcing decisions reduce the rms dependence on
overpowerul incumbent suppliers and avoid those that habitually overcharge and underdeliver.
2. Soware category sourcing strategies that take account o all relevant criteria. Tis strategy
adds the supplier tiering described above to traditional unctionality assessment in order todene whether the organization will sole- or multisource in a specic product area, and rom
whom. Including objective supplier categorization reduces individual stakeholders ability to
pick products or selsh reasons, such as to bolster their own job security or to secure corporate
hospitality at major events. A good category strategy also balances the need or enterprisewide
technology and architectural standardization with the need or local autonomy across
heterogeneous business units.
3. Commercial agreements that ft the suppliers place in this sourcing strategy. Te overall
sourcing strategy enables buyers to decide when they can saely commit to multiyear
enterprisewide deals, and thereby get the best possible prices and contract terms, and when to
target fexibility over price. It also increases the buyers negotiation power by using the suppliersstrategic role as leverage rather than the individual transaction on the table at the time.
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g B Sfw ds By a Y S Sy a cmm apph 6
2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
Figure 3 Align Your Commercial Approach With Te Suppliers Place In Your Sourcing Strategy
CRMTop priority
Keepexisting
solesource
DatabaseMulti-source
Middle-wareMulti-source
FinancePhase 2
Software category sourcing strategiesthat take account of all relevant criteria
Evaluate suppliers productsCombining tiering with functional criteria
Supplier tieringthat identies preferred andprohibited sources of newtechnology
Supplier ABCs role in thesoftware sourcing strategy
Alignedcommercialagreements
Multiyearagreements
Fixes prices Somecommitment
Cumulativeframeworks
Business unit
Partnerships
Trust
Innovation
Shared goals
Bronze
Silver
Gold
Short-list
Solesource
Approved
Longlist
strtgcll algn dl dlr Bttr Bn otcm
Forresters strategic soware sourcing approach empowers the sourcing executive by giving him
accountability or supplier categorization and hence increasing his infuence on colleagues choices
between technology providers. It enables sourcing leaders to persuade their main soware suppliers
to reward them or their loyalty and strategic allegiance and nancial commitment whilerestricting adversarial haggling to lower-tier suppliers and tactical soware purchases.
Matching commercial models with ormal category strategies will enable you to:
Improve the business relationship with your important suppliers. Misalignment causesriction on both sides. Your best suppliers deserve a more fexible commercial ramework
ounded on mutual trust and shared goals, and this will be the oundation o better service,
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g B Sfw ds By a Y S Sy a cmm apph 7
2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
innovation, and business value.6 Conversely, i you eel the need to tie a supplier down
contractually, haggle over every purchase, and continually protect yoursel against mistreatment,
then it probably shouldnt be a top-tier supplier in the rst place.
Get lower prices and more avorable, manageable contracts. Large soware companies like tokeep their contracts as close to the standard template as they can. A strategic sourcing approach
helps buyers assemble as many bargaining chips as possible and target them at the most
important clauses and where there is most fexibility. Tey need to execute those strategies with
supplier-specic tactics and up-to-date intelligence to know what deals are available and how to
get them.
Avoid unnecessary and unexpected costs. Te buyers good work can be undone by laxcontrols and undisciplined soware usage and deployment, so sourcing proessionals should
take governance responsibility or managing and complying with existing soware agreements.
Tis reduces the risk o nasty surprises rom compliance audits and also cuts waste, such as one
department procuring additional licenses or products when there are spare ones elsewhere.
TRaNsFoRM youR soFTWaRe souRCiNG FRoM ReaCTive To sTRaTeGiC
Forresters strategic soware sourcing playbook explains to sourcing executives how to change their
organization rom one mired in transactional negotiation, in reaction to business unit needs, to one
that proactively helps the organization set and execute optimized category strategies. We use a our-
phase process to help you drive this transormation (see Figure 4).7 o maximize their chance o
success, soware sourcing proessionals should:
1. Discover the business opportunity or strategic soware sourcing. Ask yoursel i you have
the prerequisites in place, such as ormal supplier tiering that can drive uture choices, not
merely manage existing contracts. Find out and list how you currently source each soware
category so you can better identiy opportunities to centralize and standardize and where to
retain business unit autonomy. Ten commission an honest audit o your current procurement
perormance to evaluate where youve paid too much or your soware, how much shelware
youve bought, and which decient contracts represent uture risks that you should mitigate.
2. Plan a transormation road map and the priorities or urgent action. Start by assessing your
organizations current sourcing maturity and its willingness to change, because youll have to be
more cautious in a decentralized organization thanin one that allows only limited autonomy.
Perorm an opportunity assessment on each soware category. Plan to tackle rst those or which
you already have a category strategy but have not aligned the commercial agreements with. Leave
the most controversial until later, where there is internal disagreement about the enterprises uture
direction or the supplier is too powerul or you to be able to eect signicant change.
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2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
3. Act by creating and executing sound negotiation plans. Strategic soware sourcing has
empowered you, so now you can start to apply that negotiation strength to secure better, more
aligned contracts. Obtain your colleagues support or your plan, including what you will do i
you dont get an acceptable oer and what else you can oer to persuade the salesperson to giveground. ailor your plan using up-to-date supplier intelligence, including the biggest faws in its
standard agreements, any special deals that might be available, and which incentives and threats
will currently be most powerul.
4. Optimize current perormance, uture deals, and ongoing license management. Forresters
approach helps procurement escape its historical obsession with negotiated savings and
instead deliver improved business outcomes, lower total cost o ownership (CO), and closer
supplier relationships. Sourcing executives should use multiple deal metrics to look beyond
the headline discount percentage and instead balance CO, fexibility, and risk as you manage
your teams perormance and compare alternative proposals. Te soware sourcing unction
should also take charge o soware license optimization (SLO). SLO supersedes obsolete, ailing
soware asset management (SAM) by managing licenses as potential liabilities, not assets, using
comprehensive needs assessment, demand management, and usage monitoring.8
Figure 4 Te Strategic Soware Sourcing Playbook
Source: Forrester Research, Inc.89241
DISCOVER PLAN ACT OPTIMIZE
Assessment
Strategic Plan
Road Map
Supplier
Intelligence
Processes
Tools
Performance
Management
Metrics
ContinuousImprovement
Vision
Landscape
Business Case
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2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
W h a t I t M e a n s
sTRaTeGiC soFTWaRe souRCiNG WiLL CuT soMe suppLieRs poWeR
Te more enterprises adopt Forresters recommended approach, the greater will be the pressure onthe technology giants to change the way they do business. A solid sourcing strategy will reduce the
power o the suppliers internal champions the people whose careers are tied too closely to that
supplier to direct key decisions in its avor. Soware companies that continue to care more about
their own revenue recognition than their customers success will see their role in those customers
sourcing strategies rapidly diminish. Teyll lose out to companies that:
Sell more subscription products than they sell perpetual licenses. Models such as SaaS,term licenses, and pay as you go (PAYG) encourage suppliers to keep customers happy to
make contract renewals easier. Te traditional players will have to stop selling shelware and
leaving it unimplemented i they transition to subscription businesses.
Strengthen the partnership by how they react to unoreseen circumstances. Partnershelp each other when stu happens; they dont take advantage o the opportunity to make
a quick buck. For example, many enterprises need to fex their agreements when they make
acquisitions and disposals. Sourcing leaders will avor companies that accommodate such
events over those that charge one-o ees to let customers split or merge agreements or
share systems aer disposal.
suppLeMeNTaL MaTeRiaL
Mtlg
Forresters Forrsights Budgets And Priorities racker Survey, Q2 2012 was elded to 3,659 I
executives and technology decision-makers located in Australia, Brazil, Canada, China, France,
Germany, India, Indonesia, Japan, Malaysia, Mexico, the Philippines, New Zealand, Russia,
Singapore, the UK, and the US rom small and medium-size business (SMB) and enterprise
companies with 100 or more employees. Tis survey is part o Forresters Forrsights For Business
echnology and was elded rom February 2012 to April 2012. LinkedIn Research Network elded
this survey online on behal o Forrester. Survey respondent incentives include gi certicates and
research reports. We have provided exact sample sizes in this report on a question-by-question basis.
Each calendar year, Forresters Forrsights For Business echnology elds business-to-business
technology studies in more than 17 countries spanning North America, Latin America, Europe,
and developed and emerging Asia. For quality control, we careully screen respondents according
to job title and unction. Forresters Forrsights For Business echnology ensures that the nal
survey population contains only those with signicant involvement in the planning, unding, and
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2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
purchasing o I products and services. Additionally, we set quotas or company size (number o
employees) and industry as a means o controlling the data distribution and establishing alignment
with I spend calculated by Forrester analysts. Forrsights uses only superior data sources and
advanced data-cleaning techniques to ensure the highest data quality.
We have illustrated only a portion o survey results in this document. o inquire about receiving ull
data results or an additional ee, please contact [email protected] or your Forrester account
manager.
eNdNoTes
1 For example, SAPs co-CEO Jim Hagemann Snabe said at SAPs annual general meeting that SAP planned
to grow its revenue rom 14.2 billion in 2011 to more than 20 billion in 2015. Te markets expect similar
growth rom Oracle and IBM, as evidenced by their very similar price/earnings multiples to SAP. Source:Jim Hagemann Snabe, SAP 2012 Annual General Meeting o Shareholders, May 23, 2012 (http://www.sap.
com/corporate-en/investors/governance/meetings/pd/SAP-2012-Shareholder-Meeting-Speech-Snabe.pd).
2 By 2013, we are expecting Europes mild recession to end, growth in the US and the rest o the world to
improve, and the US dollar to hold most o its 2012 gains against other currencies. As a result, tech market
growth measured in US dollars will accelerate to 4.3% in 2013, led by soware (6.1%). See the September 10,
2012, Global ech Market Outlook 2012 o 2013 report.
3 Forrester asked international I executives rom companies with 5,000 or more employees, Are you
prioritizing lowering Is operational costs to ree up money or new initiatives in the next 12 months?
Seventy-ve percent o companies with 20,000 or more employees considered lowering I operational
costs as a high or critical priority. Sixty-seven percent o companies with 5,000 to 19,999 employeesconsidered lowering I operational costs a high or critical priority. Source: Forrsights Budgets And
Priorities racker Survey, Q2 2012
For more inormation on I budget planning or CIOs in 2013, please see Forresters December 21, 2012,
2013 I Budget Planning Guide For CIOs [86241] report.
4 For Oracles year ended May 31, 2012, sales and marketing represented 19% o total revenue and 72% o
license revenue. As a comparison, the 2011 proportions or BMC Soware, which is 20 times smaller than
Oracles, were 29% and 72%. Source: Oracle Reports Q4 GAAP EPS Up 11% o 69 cents; Q4 Non-GAAP
EPS Up 10% o 82 cents, Oracle press release, June 18, 2012 (http://www.oracle.com/us/corporate/investor-
relations/nancials/q4y12-1666263.pd) and BMC Soware (http://investors.bmc.com/results.cm).
5 I youre a soware sourcing proessional, your main perormance metric is probably pushing you in the
wrong direction. You want to get an all-around good deal that includes vital long-term protection or your
company, but your executives only care about measurable, short-term savings. But too oen getting the
best price involves paying too much money too early in the project. Tere are good reasons why soware
publishers want upront payment, such as the nancial markets insatiable demand or recognizable revenue,
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2013, Forrester Research, Inc. Reproduction Prohibited January 4, 2013 | Updated: January 10, 2013
but thats their problem, not yours. Its more important to retain leverage later, or when you need to
persuade the vendor to get a project back on track, cut your maintenance, or accept your interpretation o
a licensing policy. Increasingly, savvy soware buyers are rejecting this outdated approach and demanding
fexible, phased commercial arrangements similar to those that they already get rom their SaaS andservices providers. You may lose some headline discount by reusing to give in to your sales reps demands
or money down, but its worth paying that price, in return or a more balanced deal. See the October 25,
2010, Great Price, Shame About he Deal report.
6 Te three keys to a successul partnership are trust, co-innovation, and shared goals. Forrester ound
examples o successul partnerships between enterprises and their technology providers. Such partnerships
require mutual trust rather than contract clauses, co-innovation to deliver more than either party could
create on its own, and shared goals, risk, and rewards. See the January 18, 2012, ransorm Your Strategic
Supplier Relationships From Duels Into Duets report.
7 Please reer back to the online document to see the associated reports in the playbook. See the xx, 2013,
Get Better Sotware Deals By Aligning Your Sourcing Strategy And Commercial Approach report.
8 Soware asset management (SAM), as organizations such as IIL and ISO dene it, is obsolete. Its base
processes come rom a bygone era o foppy disks and unique license keys, whereas todays soware
licensing challenges include virtualized systems, a ocus on usage instead o installation, and a prolieration
o pricing metrics to track and control. Forrester has seen a ew visionary enterprises, helped by innovative
product and service providers, implement a more proactive, arther-reaching approach that we call SLO.
Not only does SLO minimize the risk o unexpected costs caused by soware audits, but it cuts total spend
by enabling reharvesting and eliminating wasteul buying o licenses that wont be ully used. Tese smart
organizations extended their SAM rameworks by: 1) dening central responsibility or proactive license
management to avoid nasty surprises; 2) establishing a contractual ramework or compliance tracking and
cost optimization; 3) implementing complete, up-to-date discovery and license reconciliation processes;
and 4) perorming demand management to analyze what users need, not merely what they have. See the
September 29, 2011, Introducing Sotware License Optimization report.
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global leaders in business and technology. Forrester works with professionals in 17 key roles at major companies providing proprietary
research, customer insight, consulting, events, and peer-to-peer executive programs. For more than 29 years, Forrester has been making
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Sourcing & Vendor Management Professionals
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stefan ValentI, client persona representing Sourcing & Vendor Ma nagement Professionals
About Forrester
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