New York City got a better deal from Microsoft — you can too

No less a presence than Microsoft CEO Steve Ballmer attended a press conference with New York City mayor Michael Bloomberg to announce a new software deal for the Big Apple. Details of the deal, including the related discount and Microsoft’s willingness to be flexible, suggest that open source and cloud-based office productivity suites are becoming central to getting better terms in your licensing discussions with Microsoft.

According to New York Times reporter Ashlee Vance, Mayor Bloomberg began the press conference stating, “I am sorry if you are looking for a story of sex and pizzazz. That is not what this is about. This is about making the city government work better.”

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The key conclusion: Microsoft is willing to cut deals

The deal, labeled as a “first of its kind” by Ballmer, is valued at $20 million per year and will save the city $50 million over five years. To put these figures in perspective, New York City’s annual budget is about $63 billion.

New York City shifted from individual city agencies negotiating separate deals with Microsoft to a citywide licensing deal for the city’s 100,000 employees. Additionally, Microsoft is allowing New York City to pay license fees based on the actual applications that city workers use. Vance reported that “New York will put workers into three categories, based on how many applications they use.”

It could be argued that few enterprises are large enough and have not yet consolidated corporatewide licensing to follow in New York City’s path. In fact, Ballmer is quoted as saying, “Corporations often negotiate more nuanced licensing deals than government bodies.” However, categorizing employees based on the applications they use and paying for a few applications together versus choosing between an individual product license and a significantly larger product suite license could become more common in the enterprise now that governments have pioneered such deals.

Did Microsoft accept a 33 percent revenue reduction?

While “sex and pizzazz” may have been absent in the announcement, the deal and the negotiation could hardly be considered just another sale. Instead, it’s a sign that something is changing at Microsoft.

For one thing, it’s not every day that Ballmer attends a press conference to announce a deal, especially when the arrangement will potentially subtract $50 million in revenue for Microsoft over five years.

The quick math suggests New York City was able to negotiate significant concessions from Microsoft. The deal is valued at about $20 million per year, suggesting about $100 million in revenue to Microsoft over five years. Next, the deal is expected to save New York City $50 million over that same period.

Using these two pieces of data, you could assume that Microsoft was on track to make $150 million over the five-year period, had it been able to negotiate separate contracts with New York City agencies. Instead, Microsoft will settle for $100 million, or 33 percent less, over the five-year period. Additionally, this is a 33 percent reduction against the discounted rates that each New York City agency had already negotiated themselves as part of the potential original $150 million over five years.

It could be argued that the $50 million in savings is not entirely due to a reduction in license fees paid to Microsoft. Maybe some city agencies were using alternatives to Microsoft technology but will now use Microsoft products, thereby saving money for the city. This would represent net new revenue for Microsoft while also reducing New York City’s costs.

However, to even consider a 33 percent decrease on already discounted city prices, if Microsoft were displacing a competitor in any part of the New York City plan, Microsoft would have negotiated to make this fact public as a marketing tactic. But there was no mention in the announcement of such competition.

Playing the Google and open source cards

It was quite the contrary, as New York City Deputy Mayor Stephen Goldsmith credited competition for helping New York City negotiate the significant discount. Goldsmith said, “We took advantage of the competitive moment.”

IT decision makers are increasingly using Google Apps and open source office productivity tools as negotiation tactics. Vance quotes Mary-Jo Foley, a well-known Microsoft reporter, stating, “So many of the customers I am talking to play the Google card even if they have no intention of going to Google. Microsoft knows people are doing it, but what can they do?”

It’s logical to assume that Microsoft will be pushed to a point at which it will aggressively try to call a customer’s bluff. As much as companies would like to threaten “we’re going to drop Microsoft Office,” the realities of doing so are far from clear-cut — at least today.

That’s why I encourage IT decision makers to help a subset of users build skills with alternatives to Microsoft Office today. Users who require infrequent access to office productivity tools or who need to access files and collaborate across computing devices would be good candidates.

At the very least, developing this non-Microsoft bench strength will help companies appear more credible during future negotiations with Microsoft.

Although New York City has certainly negotiated an aggressive deal with Microsoft today, I can’t help but wonder if it’s lost future negotiating power in the process. Not only is New York City remaining fully committed to Microsoft client technologies, it is also increasing the number of city employees skilled with — and dependent on — Microsoft products. These two facts will make it even harder for New York City to adopt a competing product in five years.

Negotiate hard, like New York City did. But don’t forget to take steps to ensure you future negotiating power, too.

Follow me on Twitter at SavioRodrigues. I should state: The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.

This article, “New York City got a better deal from Microsoft — you can too,” was originally published at InfoWorld.com. Read more of Rodrigues et al.’s Open Sources blog and follow the latest developments in open source at InfoWorld.com.