By Ed Rossi
Most software contract negotiations focus on the upfront cost of software and aim to get the most purchase discounts from vendors. Finance heads must look beyond purchase costs as other factors help reduce the financial liability of software.
Some areas for consideration include the removal of limitations on geographic and organizational scope. This is especially relevant to the concurrent licensing model. Ensure that worldwide scope is granted by the vendor to a software license, which allows it to be used 24 hours a day globally. These limitations often exist because the software is purchased through a local procurement channel. Centralizing procurement of software provides the global focus and is probably the single most effective action that can be taken to improve terms and flexibility in a software contract.
Ability to change the portfolio of software licensed by allowing access to new functionality/feature sets. In significant contracts, enterprises can negotiate with vendors to allow the mix of products to change within a specified timeframe or within a percentage of the contract value, provided that the value of the new portfolio is not less than the old product inventory. This allows enterprises to change processes that in turn demand a different set of software tools. Likewise, as new software is designed and implemented, organizations gain access to new products by relinquishing tools no longer used.
The ability to increase licenses at the access rate are negotiated for the initial contract. True-up—annual payment for licenses used, but not paid for at purchase—is a dangerous area for enterprises. Although the popular notion is that owing a vendor at the time of true-up is desirable because it implies a higher take-up than the contract mandated, the terms of payment for over usage should be carefully examined. Avoid agreeing to pay excess at current market rate as this creates an unquantifiable exposure.
Behavior stipulation for maximized concurrent software usage. If a user leaves his work station logged on with a license, the software could be unavailable to others for an indefinite period. However, if a time-out can be specified where the license is automatically relinquished after an interval of idleness, then that license becomes available to the user pool again. This can positively impact on usage.
The ability to park unused software licenses for a period of time. Some software vendors may allow a quantity of unused named user licenses to be idle and unconsumed and be free of maintenance for every complete year of non-use, thus eliminating a major component of the risk of pre-paying for software.
Define maintenance rates applying for the contract duration. Agree on maintenance rates for the duration of the contract. Vendors almost never discount maintenance rates and they are usually based on counts of deployed software rather than used software. To illustrate, assuming a discount of 40 percent off list price—fairly typically negotiated by large software procurers, at current prevailing maintenance rates, after three years maintenance will cost as much as the original software purchase.
Be wary of software featured thrown in for nothing. The bargain-price tool or software option that is added as a sweetener to secure companies as a customer could be a bitter-sweet pill when its maintenance cost is added to the annual invoice. Closely examine the additional software’s recurring maintenance costs.
The ability to absorb mergers and acquisitions into existing contractual terms. An enterprise is in a far stronger position to negotiate how these events will be handled before the vendor contract is signed and when no merger or acquisition is apparent. Get insight into software usage, asset inventory, and purchased versus installed license reconciliation for both businesses in such situations.
Reduction of unplanned costs associated with vendor audits. A number of things should be looked at including involving the legal department in defining limits, conditions, and justifications under which the vendor can demand an audit, focus on usage rights of the software, pre-define the auditing process and maximum frequency, and define the process governing the outcome of an audit—i.e. who pays what and how the disputes must be resolved.
Definition of vendor interfaces to limit access by the vendor to specified individuals and functions. A software contract is an excellent repository in which to define how and with whom the vendor may carry out business. In addition to ensuring optimum efficiency by specifying interaction with the appropriate function and level, enterprises can channel and effectively manage the vendor’s sales activity.
Contract negotiation is an ongoing process. A clear view of the license estate is a must, which can be achieved by adopting a software license optimization approach—a methodology that helps analyze software purchased, minimize license consumption, and ensure the most efficient allocation of software across the organization. This process offers powerful insight that can put finance heads in the driving seat when it comes to vendor contract negotiations.
Ed Rossi is VP of product mmanagement for Flexera Software.