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Tech Industry

Software-licensing costs predicted to fall

Gartner says vendors' profit margins will drop as SaaS, open source, and outsourcing give buyers more bargaining power.

Software-licensing costs are set to fall over the next decade, as IT industry trends converge to give buyers more bargaining power.

Research firm Gartner predicts that vendors will find themselves increasingly challenged as IT departments look to reduce software costs, as they have done with hardware and services.

"Up until now, the unique nature of the software market has meant that buyers had very little negotiating power after the initial purchase of a software license," Gartner Vice President William Snyder said in a research note. "We expect those dynamics to change considerably over the next 5 to 10 years, giving CIOs and software procurement officers more bargaining power while potentially reducing software vendor profit margins."

Gartner has identified seven major trends converging to change software delivery models, reduce dependence on the giant application vendors, and force prices down.

These include business process outsourcing; software as a service; low-cost development environments, such as China and India, combined with modular architectures and service-oriented architectures; the emergence of third-party software maintenance and support; growing interest in open source; the rise of Chinese software companies; and the expansion of the Brazilian, Chinese, and Indian markets.

Although Gartner says open source won't topple the likes of IBM and Microsoft, the firm believes that it will put pressure on traditional software margin structures, particularly in areas such as servers, operating systems, development tools, and database technologies.

Gartner also predicts that a fourth of all new business software will be delivered by software as a service by 2011.

Synder said buyers need to realize that the pendulum is beginning to swing in their favor, with an increasing number of alternatives in the software market.

"We would advise IT organizations to use BPO (business process outsourcing) and open-source alternatives to improve their negotiating power with software suppliers, as well as employing the emergence of third-party vendors as a means to reduce higher maintenance fees on older versions of software," he said. "(Pricing) out the possibility of using offshore skills to build application functionality as Web services will also help negotiations with vendors."

Andy McCue of reported from London.