‘Vendor meltdown’ a growing concern for IT shops

IT leaders are more concerned than ever about the financial viability of prospective software providers, according to several industry analysts.

In a survey of business intelligence (BI) software buying habits during 2008, IDC Corp. analyst Henry Morris found that about 70 per cent of companies are increasing the importance of their vendors’ financial viability when deciding on an IT purchase.

“It would seem only natural that with worsening economic conditions buyers would be looking at their vendor’s financial situation,” said Morris, senior vice-president of worldwide software and service research at IDC.

In covering the information storage, management and security sector for the Enterprise Strategy Group, senior analyst Brian Babineau has also noticed a growing concern among CIOs and IT managers over the economic future of their software and service providers. While acquisition costs still top the list of priorities for most IT leaders, the economic viability of their vendors has moved its way up as a top five criteria.

“It will continue to move up as more and more companies go out of business in IT,” he said. “If I’m a customer working with 30 vendors inside my organization and five of them go out of business, you can bet I’ll be doing everything I can to mitigate risk on future purchases.”

The concern for most businesses, Babineau said, is not whether the vendor will stay in business, but rather how well the vendor is able to support their software and services.

“If it breaks will somebody answer the phone at 3 a.m. and help me. That’s what companies are most concerned about,” he said.

Babineau added that if a vendor with a fairly decent customer base goes under, there’s a good chance somebody will pick it up and try to collect on the additional support revenue. The only problem, he said, is it’s not necessarily going to be the level of support you might need.

Another issue for IT leaders to consider is whether or not a vendor is going to be committed to enhancing their product in tough economic times, according to Morris.

“Will they be able to keep up with competing products?”

Marc Perrella, vice-president of IDC Canada’s technology group, recommended that IT organizations question their vendors on their future product road map and how that fits into your company’s long-term goals.

“Obviously a vendor is not going to tell you that they’re going to be bought, but you can use a scenario like ‘if you were to be acquired, how would you support me,’” he said.

Perrella said that having a maintenance agreement with guaranteed service levels might mitigate some of the risk. He added that bigger enterprises might even be able to work guaranteed upgrade provisions into their contracts.

IT organizations looking for other alternatives might turn to software-as-a-service (SaaS) offerings, which allow companies to avoid upfront capital costs and use software on a pay-as-they-go model.

“In a solution, I might need a number of different pieces from different vendors,” Morris said. “This favours moving to a service provider who integrates all these different pieces and provides a service for me. I still have to worry about the viability of the provider, but that’s just one company as opposed to any a number of products integrated together from a variety of companies.”

For IT shops with a vast set of in-house skills, open source software might also be a worthwhile alternative, according to Perrella.

“But you need to be able to manage, incorporate and integrated that technology in your environment.” If you don’t have those skills, however, you’re better off buying a packaged application, he added.

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