How to Protect Against Vendor Lock-In

When a vendor has a contract for virtually all your infrastructure in one area, they can exert an uncomfortable amount of control.
Posted November 18, 2010

Rob Enderle

Rob Enderle

It appears that Oracle CEO Larry Ellison is aggressively either buying or putting out of business potential competitors. SAP and HP look to be his latest targets on the latter path and his goal appears to be total account control, that is, a situation in which one vendor single-handedly has an enterprise’s entire account.

Ellison says he is building a company like IBM in the 1960s, which wouldn’t be a bad thing. But I’m pretty convinced he is building a company more like IBM in the 1980s and that IBM and EMC both are closer to the way IBM was in the 1960s than Oracle ever will be.

However, Oracle isn’t the only company going after this total account control concept. And given total account control often has historically led to account abuse, I thought it would be timely to revisit the defenses you have when a vendor gets this bug and then decides to abuse it. So let’s talk about all of that this week.

Looking back, the IBM of the 1960s was in line with many companies of that time. Employment was for life, there were pensions, even a company song and that was when the phrase “no one ever lost their job buying from IBM” was founded. IBM was trusted and didn’t abuse that trust and had unbreakable rules with regard to disparaging competitors. The idea of chasing a competing CEO across the country with process servers would have been below the firm. It defined ethics, honor, and good behavior in business.

Not many companies like this exist anymore, but if you were to make a list, firms like IBM and EMC would head it.

In the 1980s, IBM took advantage of their near total account control and, largely due to a long line of strategic mistakes, began to look at their customers less like partners and more like mines of money that could be plundered. IBM had become arrogant and by the end of the 1980s they had to fire their CEO, bring in an outsider and rediscover customer satisfaction if they were going to save the company. This is because no technology gets automatic buy-in – people will eventually find alternatives if they feel they’re being taken advantage of.

Avoiding the Downside of Account Control

First and foremost is, you should do everything you can to avoid letting any vendor get the kind of control that would allow them to dictate pricing. But even if they get that kind of control you have options.

One option is to freeze new purchases and expand on other platforms. This reduces the account control over time and you can increasingly use the very real threat to negotiate more favorable terms when you renew your licensing agreements.

Your second option is to negotiate some flexibility for things like virtualization during initial contract negotiations or during renewals. You do have to look at credible competitive alternatives, but in this market you should be able to find strong migration offerings from competing vendors and seriously bring them into the process to give you negotiating leverage.

You may have to do one or two competitive migrations before any dominant vendor gets the hint. But this will pay dividends long term and balance out the negotiating process.

You can also form buying blocks or use centralized buying services. The US Government has the General Accounting Office, which often sets contract terms for most agencies and state governments, often for buying blocks to get more favorable terms. Similarly, companies can often use large services organizations like HP’s, Dell’s or IBM’s to get more favorable terms. I expect HP’s services organization would be especially aggressive at the moment.

Notify the damaged vendor. If one of your other vendors is damaged by the practices of the dominant vendor, that firm may be able to argue anti-competitive practices. They’ll likely be able of offer ways other customers have used to get around the problem. This gives you access to more information on how to respond and may put additional pressure on the dominant vendor to discontinue this practice.

Finally, think about outsourcing the solution. Often large service providers have much more power in a negotiation than you do because they aggregate customers and can use their massive size to gain more favorable terms.

Wrapping Up: Avoid Account Control like the Plague

Don’t let any one vendor control your decisions because they will invariably eventually figure your budget is their piggy bank and begin abusive pricing practices. If you can remember and execute against this one rule you don’t really have to worry about any vendor taking significant advantage of you.

You’ll always have the recourse of going someplace else and they are much less likely to take advantage of you. The argument in favor of allowing a vendor to control your account is that you get “one throat to choke” if something goes wrong. But the problem is that the throat that ends up getting chocked is often yours, because the vendor has more power than you do. Something to think about.

Tags: SaaS Contract, Vendor management

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