The continuing tight z/OS (new operating system) growth market and general economic conditions are pushing software vendors to tweak policies at the expense of customers. The newer tactics carry longer-term cost and infrastructure issues that will impact IT organizations into the future (e.g., lessened support, new-version charges). Customers must position and prepare for potentially difficult negotiations around these topics.
We believe that, by mid-2002, OS/390-z/OS independent software vendors will increase pressure to renegotiate enterprise licensing agreements due to expire by 2004. Modest z/OS growth rates will result in increased use of alternative tactics to force customers to sign agreements (e.g., version upgrade charges) and, through 2002, vendors will continue to change pricing models and support procedures to improve overall profitability.
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By 2006, 30% of mainframe software products, predominantly those inherited from acquisitions, will lack adequate vendor support resources. Through the same period, 20% of OS/390 products will be relabeled and charged as new z/OS products. Through 2005, customers failing to recognize and negotiate firm contract terms and conditions will pay 20%-30% higher product costs and incur a higher risk of failed support.
During the past three years, competition has dramatically increased within the OS/390 tool market, pressuring these vendors' financial results. z/OS software vendors were not accustomed to competition and, though many vendors are adapting, most are not well prepared for a truly competitive environment. Coupled with competition, the customer base is beginning to dwindle. The smaller, higher margin (from a vendor perspective) customers are finding total cost of ownership of Unix/Win2000 solutions a better fit for business needs. The remaining mainframe customers typically have established and seasoned negotiators that decrease overall margins for vendors. This leaves vendors with a smaller subset of customers, resulting in a flat revenue stream.
Legacy product suites are also becoming more onerous to support as customers continue to use obscure products. Low-utilization products add significant vendor burden as the customer base falls below critical mass, leaving vendors with a unsavory decision - reduce product support levels, which is unacceptable to customers, or reduce profits to retain customer satisfaction, which is unsatisfactory to shareholders. Although most mainstream products will remain well supported, customers are finding that little-used products brought in during data center consolidation can often carry support problems. (This is especially true when the product development had stagnated on a previous version of operating systems.)
In close association with an overbroad product suite, recent problems recruiting and retaining experienced mainframe personnel are problematic for vendors. The mainframe analyst experience pool is retiring, leaving younger, less experienced analysts with fewer mainframe skills. Increasing pressure resulting from vendor reductions in force and employee dissatisfaction will continue the struggle of supporting legacy products, while additional talent drain will result from the increasing shift to Unix/Windows Data Center Edition product lines.
The confluence of issues will drive OS/390-z/OS independent software vendors to reduce overall costs. We project that a marked increase in activity will occur across several customer areas. The first, subscription licensing, carries significant impact to customers. Although initial representations will indicate that the shift toward subscription is a revenue-smoothing exercise, customers will typically lose rights during the transition, ultimately leading to higher costs (though the near-term costs may seem palatable). In addition, due to the nature of subscription licensing, there is no commitment or assurance that the product will even be available for licensing in the future. This loss of control over product use rights can lead to higher costs or, worse, loss of rights to use the products, thereby creating business interruption. Customers considering subscription licensing must ensure safeguards are in place to protect long-term interests. Any enterprise license agreement negotiations must also incorporate terms and conditions to ensure support for all products continues through the end of agreement. We recommend customers pursue penalty clauses to ensure compliance.
There is an increasing trend toward new product charges for subsequent versions or new operating systems. Several years ago, Sterling Commerce led the charge on this paradigm with the upgrade charge for Connect:Direct for MVS to S/390 charges. More recently, charges have been seen for upgrades to new versions on former Platinum products. Asset managers must review all new contracts for weak terms and conditions that allow any charge for upgrades, ensuring that rights to subsequent products are clearly defined (not then current vendor policy).
Another area where customers will see surprises will be in subcapacity licensing. Although many customers believe subcapacity licensing will improve existing costs, we believe 50% of customers will find improved costs only through new licensing arrangements. Customers will be forced to acquire new licenses to qualify for subcapacity licensing. While this is arguably optional, many customers will want to exploit it as z-Series mainframes increase in penetration. We recommend customers cautiously plan and execute migration to z-Series mainframe, integrating the plan with strong software asset management principles.
Action Steps: Bar the Door
To prevent surprises, customers should utilize portfolio management tactics to balance the risk of waning vendor support and potential increased cost. Customers should understand the time to retirement and the cost to convert software, and that they may experience support disruption. Included in this analysis should be the cost of business interruption in event of product failure. Customers should monitor response time on product support questions to understand whether there is a deterioration in the level of support. User groups can also be beneficial in determining adequacy of a vendor's staffing level. Vendor mail notifications should be reviewed for critical information on product sunset dates (these letters are often lost in corporate mailboxes). In addition, customers should ask the vendor direct questions regarding whether existing products will be supported long term or under new operating systems (e.g., z/OS).
Business Impact: Tight economic conditions are spurring a contraction of software vendor support policies, leading to potential business interruption and increased systems cost.
Bottom Line: Asset managers must increase efforts at controlling contract terms and conditions to ensure cost, risk, and vendor support are tightly defined, preventing untimely business interruption and budget surprises.