Insight | March 31, 2016

Changing Buying Habits That Are Good for the Agency, Vendor Alike

This article was originally featured on Federal News Radio. For more information about Censeo’s Procurement and Operations or Strategic IT practice, contact Sarah Haack at shaack@censeoconsulting.com.

The use of agency-wide enterprise license agreements (ELAs), primarily in the software publishing space, is a highly powerful, but underutilized, category management tool that helps drive service level improvements, cost savings, and the elimination of redundancy.

ELAs, including unlimited license agreements, perpetual license agreements and other enterprise-wide strategic agreement structures, have been used in the federal government for years, but have only recently been recognized for their strategic value.

Since 2012, government agencies have increasingly executed agency-wide ELAs that leverage higher levels of demand, aligning IT publisher capabilities with chief information officer roadmaps and driving larger concessions from software publishers. The departments of Homeland Security, Commerce and Navy — among others — have been at the forefront of executing agency-wide ELAs and instigating significant savings as well as performance improvements for their agencies.

ELAs make sense for agencies that have entrenched IT software suppliers critical to business/mission performance. Therefore, assembling ELAs is often a win-win for both agencies and software publishers.

For the government, ELAs leverage bulk buying power, which reduces costs, makes it easier for customers to order, reduces administrative overhead, improves contract terms and conditions, and simplifies the modification or revision of license counts.

For vendors, ELAs provide an enterprise-level relationship, which gives them greater visibility into program scope, delivers steadier revenue streams, and reduces administrative costs.

“Implementing ELAs is a real opportunity for agencies to take a leap in IT cost management while meeting new legislative and policy mandates,” said Behrad Mahdi, strategic vendor management co-practice leader at Censeo Consulting. “Done effectively, both the government and the software publishers are able to actively manage cost, security, and compliance risk across the enterprise.”

Unfortunately, every rose has its thorn. And the thorn here is that ELAs are difficult to assemble.
Some agencies have taken an easier route of consolidating multiple contracts into single agency-wide contracts, but without collaborative engagement with the software publisher, so they are often leaving additional savings and concessions on the table.

These deals are improvements over the previous status quo and usually come with a slight enhancement in pricing and a reduction in administrative complexity, but are only a stop-gap for the ultimate solution.

To negotiate a truly great ELA — one that saves millions of dollars and gains significant benefits through enterprise management and optimized terms and conditions — there must be a precise understanding of the entire agency’s install base, as well as its future requirements, a rigorous benchmarking analysis to understand the best pricing and terms available in the federal space and the lining up of funds for an initial buy.

None of these activities is historically easy for the government to pull off. But, when this diligence is successfully completed, agencies can quickly close the asymmetric information gap with vendors and improve their negotiating leverage.

However, some software publishers are hesitant about agency-wide ELAs for two reasons.

The first is that some vendors have little faith in the government’s ability to execute an agency-wide ELA. If a publisher invests time and resources to coordinate with multiple offices within an agency only to find that the organization has decided not to move forward with the purchase due to budget cuts, lack of direction, or even just a hesitance to succumb to change, then the publisher is left with no return on its investment.

“Unfortunately, the stops and starts happen too frequently, and it has a negative effect on vendors’ willingness to come to the table,” said Mahdi. “Strong leadership and governance is required to overcome office-level differences and push forth a unified enterprise-wide approach.”

The second reason some vendors aren’t incentivized to push for ELAs is because they can get better pricing with a fragmented supply base.

“Vendors give different prices to each agency, bureau and office. Sometimes the difference in pricing is so great that an agency-wide ELA could eat into their margins. One agency had a 40 percent delta between two of its own offices for the same product.” said Mahdi, providing an example of why large vendors might not push for ELAs. “But they will all eventually come to the table if they see a commitment from the government to build an enterprise relationship.”

These obstacles can be overcome with a dedicated leadership team from the government entity in the partnership that will commit to performing necessary diligence by working to initiate and follow-through on the ELA.

While these activities are time-consuming, the payoff is very real. Successfully implemented software ELAs can save tens of millions of dollars in upfront pricing, improve ordering capabilities, better manage overall TCO, improve terms and conditions and reduce administrative complexity.

Despite what the software publishers may initially say, it’s a win for them too!