The Future of Legacy Technology: Preparing for Escalating Software Costs

Though the distributed computing model dominates nearly all of today’s enterprise IT environments, it’s hard to find an organization that doesn’t rely at least in some way on mainframe systems that were put in place many years ago. In fact, many companies – save those born in the cloud – built their businesses on mainframes and continue to use them for essential processes like financial transactions or production and inventory control. To be sure, this is one of the major dilemmas of digital transformation. Mainframe systems are central to IT operations, but mainframe programmers are aging out of the workforce, and today’s students are focused on cloud computing and other modern technology platforms.

The skills shortage is putting companies in a difficult position: they must either pay retired experts absurd amounts of money to return to the workforce and run their mainframe, or they need to migrate to open systems. But converting the code from mainframe systems to open computing systems can take years and does not build a compelling business case for CIOs today, who must consider a quick return on investments in nearly everything they do.

The use of mainframes will diminish over the next 10-20 years as multi-cloud computing continues to accelerate. Some providers are offering mainframe in the cloud – in comparison to deploying a virtual server that runs on Amazon Web Services, Microsoft or Google for example – but someone from behind the curtain has to allocate resources from the mainframe, which runs counter to the on demand self-service consumption model and market appeal of cloud services.

Here’s a cautionary and true tale that illustrates the very real predicament for today’s enterprises.

A large enterprise uses a software product that runs on its mainframe system. The software prints approximately 10,000 invoices a month for its small- and medium-sized business customers. The company had been working with the software maker for more than 25 years, so it had fallen into a transactional rhythm. Eight months prior to contract expiration, the procurement team reached out to the vendor to request a quote for a renewal of the licensing, including requirements and multi-year projections as previously executed during the relationship.

Months went by with follow ups, including discussions about strategy but continued delays in gaining a quote. The client procurement team sent reminders and gently pressed for the quote, but when the vendor finally responded, it was just 60 days prior to license expiration. What’s more, the quote was 12 times the cost of the previous contract with just one option: a five-year term requiring advance payment for the license term, plus several hundred thousand dollars’ worth of support fees due annually.

Because of the short time frame until the keys to the software would expire and disable the software package, the company had no way of writing replacement code and no time to go to market to look for competitive solutions.

The client was stuck. despite escalated C-level negotiations and involvement of lawyers, the company had no leverage and was forced to agree to the terms.

Stories like this one are likely to become more common over the next five to 10 years as software vendors take advantage of companies that find themselves still reliant on software that runs on mainframe technology.

How do companies avoid this unfortunate inevitability?

1. Start planning early in the renewal cycle. Your organization’s software asset management function should begin preparing for contract renewal 12 months before it is set to expire. Don’t wait for your provider to initiate the renewal process. Reach out proactively to rev the engines for renegotiation and insist on a quote well in advance, so you retain leverage in a situation that can quickly get out of your favor.
2. Follow software asset management best practices. The vendor management and associated functions need transparency so they can track licensing agreements and see what’s coming far in advance. Involve procurement, IT and the business to understand requirements and get a full picture of the optimal solution before you’re forced to simply continue with yesterday’s fix or significant financial impact.
3. Evaluate and understand your options for leveraging new technology. Though moving away from mainframe technology may be expensive and present a less-than-exciting business case, it may be far less costly than the potential gouging that can happen in a market like this. Looking at new technology solutions can feel like charting new territory. But business and IT leaders must explore newer and different ways to accomplish their objectives, and though the return on investment may take a little longer, moving programs off mainframe may very well be less than the cost of doing business with a vendor that is willing to take advantage of the changing technology landscape. The money you may spend to renew mainframe costs may very well be more cost effective in the long run than the costs of building newer functionality in the cloud. Be aware, trying to save money in a slow-roll strategic transformation plan may actually cost you significantly more in the long run.
4. Create a competitive environment. Understand the market and the alternative software products that have similar capabilities. Software customers benefit from a degree of competition. Go to the trouble to create a back-up plan with another vendor, so you don’t end up down to the wire without the time or resources to shop around for another solution.

ISG helps enterprises implement software asset management (SAM) to stay in front of their software licensing needs, so they know what’s coming and have a deep understanding of the art of the possible in today’s changing technology market. Renewals and negotiations can be a source for dramatic savings, but they require expertise. Contact us to discuss how we can help you.