Covid-19's Impact on the Software Industry
Updated: Feb 22
At the beginning of the pandemic, we experienced a spike in software cases as clients moved quickly to adapt to the new remote work environment. However, this increase in new purchases did not last long, and as the overall impact of Covid-19 on the economy set in, our clients pivoted to cost-cutting initiatives.
We have seen a range of responses from suppliers to these cost-cutting demands. Many began showing signs of financial flexibility not seen before. For example, some suppliers waived their renewal uplifts. Others allowed customers that needed to decrease their renewal quantities to maintain their current unit pricing. Finally, we’ve seen suppliers offer more favorable contract terms and even allow customers to defer payments.
Several software suppliers have acknowledged the financial constraints that their clients are facing, but they are still clamoring for new business. While they recognize that many customers do not currently have the budget to purchase any net new product this year, we’ve seen suppliers offer an increasing number of free trials for products to continually expand their footprints in organizations.
We caution clients that free trials do provide some flexibility during this period, they are not without risk. They typically come with hidden terms in the contract’s fine print that can result in purchase premiums down the road. The free trial products often become embedded in your business, and if customers fail to identify and eliminate the concealed risky contract language, the vendor will have the ability to charge a hefty cost for these free licenses at renewal time, when the promotional period usually expires.
Let’s examine how some specific vendors are dealing with customers in the wake of the coronavirus.
Salesforce, a company notorious for inflexibility, has shown us a kinder, gentler side. The vendor has demonstrated that it values long-term customer relationships over short-term revenue. We’ve recently seen Salesforce offer flexibility around contract terms and conditions, and more competitive renewal caps in the 3-5% range, and even some at 0%. In the past, the vendor stuck to their standard 7% cap. In addition, we’ve seen Salesforce offer additional flexibility around the swap rights they offer, where prior to the pandemic these were only available in ELA’s.
In another case, a client reduced their license quantities by 40%. Prior to the pandemic, if a client significantly reduced licenses, Salesforce increased the unit pricing to keep their annual recurring revenue stream as flat as possible. In this case, the client was able to reduce their annual spend by $300K and only took a 5% hit on their blended discount prior to renewal. To achieve this reduction, the client created a compelling business case around budgetary restrictions and brought in their CFO at the end of negotiations.
At the beginning of the pandemic, SAP was not responsive to client requests around license reductions, but we’ve observed a change in that behavior recently. One client reduced their annual SAP Qualtrics spend by $50K on a deal with no net new product. The only caveat: SAP would get a one-hour meeting with the client’s CFO. This reinforces the point that bringing your executives into negotiations can be a significant leverage point for clients.
In another SAP case calling for a license reduction, the vendor allowed the client to reduce its Sybase licensing, but they first had to fill out a report detailing all SAP licenses to ensure compliance. (SAP has a history of asking to verify compliance because they believe you are out of compliance. If this happens to you, be aware that they are looking at digital access/indirect use licensing, which is a common non-compliant license set among SAP customers.)
Regarding Microsoft, we haven’t seen much pricing flexibility when clients have lowered their annual spend, but this is largely because the clients have needed to expand their Microsoft portfolio to adapt to the new work-from-home environment. We have seen two instances of flexibility from Microsoft. First, Microsoft has become more open to one-year extensions than they were in the past. The company recognizes that many customers are experiencing financial uncertainty and is granting them an extra year to vet a go-forward plan with Microsoft.
In addition, quarterly (rather than monthly) payment terms are being offered in Microsoft contracts just recently. Microsoft has also shown itself to be in tune to those industries impacted most by the pandemic. For example, the vendor is offering more pricing flexibility to healthcare clients. This behavior is consistent with what we’ve seen historically: clients with a strong business case achieve a higher level of flexibility from Microsoft. Not all suppliers have exhibited this behavior.
For example, Adobe and ServiceNow have told clients that they won’t be making any concessions in response to the pandemic. ServiceNow sent a letter to anyone asking for concessions that changing contracts would present too many legal and accounting risks for the vendor to consider. In that same letter, it offered customers emergency response apps at no additional cost. (As mentioned earlier, there are several risks tied to free trials for products.)
The one thing ServiceNow will offer is more leniency regarding renewal cap uplifts if a strong business case is presented, or if the client upgrades to new product SKUs.
Unknown still are the pandemic’s precise impact on the vendors’ bottom lines. Stay tuned: we suspect there will be an uptick in software audit activity as these suppliers attempt to recoup lost revenue.
Matt Gowing is an Analyst II at ClearEdge who focuses on the software industry segment.
This blog post was inspired by the webinar about the continuing impact of COVID-19 on IT spending. You can access the full recording to this webinar below. To learn more about SAP audits, stay tuned for part four of this series or contact a member of the ClearEdge Compliance team.