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What Software Vendor Earnings Can Tell You About Audit Risks

Submitted by Mathijs ten Tusscher on July 15, 2020
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In June, Oracle announced Q4 and 2020 results were down 6% YoY. While the company’s cloud services and license support saw a modest 1% increase, their on-premise and cloud license sales dropped by 22%. When one of the enterprise business software giants is struggling through today’s economic uncertainty, you can bet the others are too.

Oracle's fourth quarter results are a good indicator of the current state of the Enterprise Business Software market. What’s happening at Oracle is likely similar to the climate at other large enterprise software vendors including SAP, Microsoft, IBM and more. This drop is indicative of the frequently discussed shift from software solutions into the Cloud. It reflects the challenges vendors face with their software business in today’s disrupted market.

While we can’t forecast exactly how all this will play out, it’s pretty clear vendors won’t simply accept the revenue drop. So the question becomes, how will they recoup their losses?

A look back at lessons learned

If we look back to 2008, we can learn a lot from what happened just after the financial crisis. I’ve been in the software business for more than 20 years and can well remember that following the crisis, many large vendors made significant changes in their corporate organizational structures.

They also adapted their product offerings and price lists, and some vendors increased their auditing efforts massively, or started auditing if they hadn’t been already. These audits became a strong pillar for creating additional turnover in their software business in the years that followed, and the big vendors have continued using this practice to this day.

Vendors started to change their price lists, not always in favor of the customer. Their focus shifted towards increasing growth models (e.g. per Employee, Turnover, Processors, etc.) and away from the delivered business value.

All of these changes put increased pressure on existing customers. For most software vendors though, these tactics worked well. They continued their growth immediately after the 08’ crisis and are still going strong today. Today, as we enter another period of economic uncertainty, it is very likely that they will increase pressure on existing customers once again.

Changes are coming

Software vendors are feeling the pressure from stakeholders to achieve their targets and an easy option is to go after their existing customer base. Customers are likely to be presented with new corporate structures, new product strategies, and new price lists, with changes to support and maintenance plans and an increase in audit activity as well.

Vendors will rethink their current product portfolio; solutions will be put at end-of-life or end-of-maintenance which will force existing customers to move and buy newer solutions. These products might be replaced by cloud solutions or cloud platforms only.

Vendors may also cancel support or maintenance contracts altogether or, opt to increase prices. They will likely use audits for a short-term increase in turnover or to push their customers to newer products (like cloud) and related contracts. Some vendors might also push the indirect use cases and force customers to settle on this in the short term.

Arm yourself with information

To limit the impact of today’s uncertain times and the economic turbulence that will inevitably come in the future, one of the safest things to do is to ensure you have complete visibility of all entitlements and current usage. This will prevent any unpleasant surprises or unwanted negotiations.

Today’s uncertainty can also offer great opportunities. As the pressure on software vendors to achieve their targets increases, new deals will be more important than ever, meaning that “every – single – deal – will – count!”

Take advantage of this time to cut costs and negotiate good deals with your vendors. With optimal preparation, you can secure significant discounts and get great deals. Before you start though, make sure you have a complete inventory of what you currently have (shelfware / redundant solutions), what you need (short- to mid-term planning), and an idea of what the best possible deal will look like for your organization.