Ballooning Software Prices Complicate Tech-Spending Calculus for CIOs

“As a CIO, you should anticipate that your cost of cloud will increase year after year, or when terms end,” Mr. Phelps said. “But there may be one or two vendors looking at price increases, and leveraging the high inflation rate as an opportunity to accelerate their price increases.”

Mr. Phelps declined to name firms, citing a nondisclosure agreement.

In the past year, four of the 10 largest cloud-based software providers have increased list prices by 10% to 30% on some of their products, according to IT research and consulting firm Inc. Due to the effects of inflation, competitive labor markets and meeting environmental sustainability objectives, 16 of the 20 largest cloud-based software providers will increase their list prices by over 25% in the next few years, Gartner said. 

Last year, Corp. increased prices in the range of about 8% to 25%, depending on the software and subscription type, for some of its Microsoft 365 and Office 365 business software. Microsoft said the increase applies at the time of renewal for customers, and noted that it has not made significant pricing changes to that software in over a decade. The company also pointed to a corporate blog describing the changes, where it said it has added new products and features, such as Microsoft Teams and Power Apps, since launching the software suite.

German software giant SAP SE raised its support fees by 3.3% this year, describing the change as based on the consumer price index and “current macroeconomic environment.” It said it has not raised its prices in nearly a decade.

Others, like enterprise software maker Inc., have raised list prices in certain regions due to currency fluctuations, according to Gartner. Such exchange rate volatility can lead to price increases of over 20% in areas like Brazil, Europe, and Japan, the research firm said.

While negotiating new software deals with favorable terms has become harder, the real headache for CIOs is in renewing existing software contracts, which have increased in the range of 3% to over 10% above previous renewal rates, said Hannah Decker,

“If a customer is negotiating a brand new deal, they have the option to walk away or leverage a competitor’s proposal to drive the price down,” Ms. Decker said. “At renewal, customers often do not have the ability to make a competitive threat.”

At the same time, vendors have become less willing to negotiate price caps, so many enterprise software agreements don’t have any price protections. “Those significant, above-inflation increases are being passed onto renewing customers,” Ms. Decker said. “That puts those CIO budgets at material risk.”

Many business-software providers have warned of weaker sales and cooling demand for their products, with some citing economic volatility and higher operating costs as rationale for higher prices. So-called “subscription creep” has hit consumers, too, with the cost of digital subscriptions like YouTube TV growing by about 12%—its first increase in three years. 

“The same re-evaluations of our business model that we had to do internally because of uncertainty, our vendors are also having to do, and sometimes those vendors go and choose to rip up a contract pricing structure,” said Nicholas Mates, vice president of operations and technology at Chicago-based financial-services firm Lendr. Mr. Mates spoke during a CIO panel hosted by app-development platform company OutSystems Inc. last month.

Owing to the rise of cloud-computing, business-software has largely moved from on-premises data centers to the cloud, where it is hosted by the providers and sold as a subscription for each employee, rather than a one-time license per user. That’s made renewal time “a short ticking clock,” said

“The power has shifted to the vendor,” Mr. Clarke said, “and they have become pretty good at tailoring their price-extraction methods.”

Those price increases have served as a wake-up call to CIOs, analysts say. Though global enterprise IT spending is expected to grow to $4.6 trillion this year—with business software the fastest-growing segment of that spend, based on Gartner’s latest projections—CIOs are still tasked with balancing cost-cutting against continued investment in technology. U.S. economic growth slowed to 1.1% in the first quarter amid persistent high inflation, rising interest rates and banking problems, putting more CIOs in the hot seat to deliver on the basics.

Some tech chiefs are spending more of their time on contract negotiations, seeking outside help in doing so, or preparing to move their IT dollars to other vendors to gain negotiating leverage.

Scott duFour, global CIO of Inc., said the payments company has spent significantly more time on procurement in recent years to “lock down any projected increases.” Mr. duFour said the Atlanta-based company tries to negotiate price caps at the outset of a software contract and uses third-party data and advising to benchmark deal terms.

“When the renewal comes, they are relentless around growth, whether you have real need or not,” he said.

The underlying problem of software renewals with big price increases is that they aren’t necessarily going to “garner 20%, 25%, 30% more value,” said Andrew “Pete” Peterson, chief technology officer of executive-search firm Riviera Partners, who also spoke at the OutSystems panel. “It starts to beg the question, should I do something different?”

Switching software vendors can incur all kinds of costs, from moving data to change management and engineering resources, according to technology chiefs.

“It’s easy to get into a vendor relationship, similar to getting involved in personal relationships or getting married, but it’s very hard to get a divorce,” Mr. Phelps said.

In the next four years, 30% of IT buyers will seek out other vendors at renewal time, up from less than 5% today, Gartner predicts.

Write to Belle Lin at [email protected]