A Censuswide survey of 2,018 CIOs and senior IT decision-makers at large organisations in the US and UK for third-party support company Origina has found that organisations spend almost $13m on upgrades pushed by IT providers.
On average, 28% of enterprise software budgets go on upgrades, migrations and licensing changes driven by their IT suppliers. IT leaders who took part in the study reported that their organisation would not have actively chosen to upgrade.
This has a profound effect on new projects, which extends to artificial intelligence (AI) initiatives. Asked about the last time an AI or data programme was slowed, paused or cancelled, 34% said IT supplier-driven costs made a major contribution to that decision, and a further 56% a moderate one.
The research published in Origina’s The software tax report, in partnership with Thinkers50, suggests these costs have shifted the balance of power between buyers and sellers. Customers exercise choice once, at the point of purchase. After that, control over the timing and terms of change passes largely to the IT supplier.
Out of those surveyed, 78% agree their primary provider of enterprise software, rather than their own organisation, sets the timing and terms of change. A similar proportion said they would have no meaningful choice but to accept if a major enterprise IT provider changed its commercial terms. Some 76% said their organisation has very little real leverage in negotiations, and 80% said moving away from major IT suppliers would cause significant disruption.
While software as a service (SaaS) and cloud computing make deployment, updates, access and security simpler, the report’s authors said that the shift from owning software to renting access also changed the economic relationship.
“Switching off a service became easier technically; switching away from the provider could become harder commercially and operationally,” they warned. “Over several decades, dependence accumulated with few external guardrails to constrain it.”
Marshall Van Alstyne, professor at Boston University and co-author of The software tax, said: “Economists have studied this problem for decades: once a customer makes relationship-specific investments, the vendor gains leverage that no contract can fully anticipate.
“For CIOs, the lesson is simple: negotiate the exit before the entry. You don’t have to leave a vendor to benefit from being able to.”
The report points out that an organisation can rationally accept an unfavourable upgrade if refusing it means losing support, creating a security risk or jeopardising access to software on which critical operations depend.
“What looks irrational when the upgrade is considered in isolation may be perfectly rational when the available alternatives are considered alongside it,” the report’s authors said. “The customers in this survey had a choice, but by the time it had to be made, their realistic options had already narrowed.”
Tomás O’Leary, CEO and founder of Origina and co-author of The Software Tax, said: “When the alternative to an unwanted upgrade is losing support on systems the business runs on, saying yes is often a rational response.
“That’s exactly the problem. The market has left some of the most experienced technology leaders in the world with little room to refuse, and that cost shows up in budgets, in engineering time and in innovation that never gets funded. We want to make that cost visible so customers can start to take back control of it.”
