Everyone wants to “win” when they enter into a software contract negotiation. The negotiators for the publisher seek to maximize revenue for their company, while the end-user strives for the most cost-effective agreement that includes only the products and services that are absolutely necessary, along with fair contract terms and conditions.
But years of negotiating experience have taught us that good dealmakers reach agreements, not compromises, and that this is true from both sides of the negotiating table. A strong, negotiated “win-win” agreement attains your goals but also contains elements important to the publisher.
There are many books on the market about strategies for winning negotiations; however the specific focus of this article is on preparing and negotiating software publisher agreements. When you negotiate a contract with your software supplier, do you know if it is a good deal for your company? What should you do to prepare for the negotiation and ensure that the final agreement is the best possible outcome for your organization?
To maximize the chance that you’ll end up with a good deal, it is important that you ask and answer the following question up front: where’s the value line for your company? If you fail to remain focused on the answer to this question, you could continue the negotiation process unnecessarily, potentially losing leverage gained beyond your estimated value line.
Let’s examine some key steps and techniques to ensure the successful execution of a software agreement that is the right size and includes the most favorable terms and conditions.
Limiting Interaction with the Publisher
It is very important that you don’t tip your hand and that you don’t let your employees unwittingly sabotage the deal. Often, publishers talk to people at buying companies before the negotiations begin, then gear the negotiation to the budget and products they learn about during those discussions. Implement a quiet period across the company, limiting any communication and interaction with the publisher.
Assemble Your Negotiating Team
One of the most critical steps in preparing for a contract negotiation is to assemble an experienced contract negotiation team. Form your company negotiating team early; nothing kills more deals than bringing in the team at the last minute, which experience tells us happens about 85% of the time.
It is important to establish a fully-represented, cross-functional team to gain complete insight into the requirements and desired outcomes. This entire team does not necessarily need to be present at the negotiating table. However, the requirements and priorities of each member of the team must be understood and represented. The contract negotiation team may consist of end users, financial approvers, technical experts, high-level stakeholders and legal counsel.
One of the essential roles on the team is the Contract Analyst. The Contract Analyst is responsible for understanding the specific terms of the agreement between the parties and ensuring that the legal language in the contract accurately reflects these terms. Additionally, the Contract Analyst reviews and interprets existing contract provisions, and advises on potential harm or disadvantage that may result from the proposed language. Finally, the Contract Analyst will recommend areas that require greater clarity by way of a re-draft or amendment.
Many organizations pay legal counsel to do this type of work for them. But in most instances, these attorneys are not directly involved in the negotiation and subsequently draft language based on what those who are involved provide them. The advantage of including the Contract Analyst in the negotiations is that this individual hears all of the conversations first-hand to gain an understanding of what the parties agreed to, which leads to more accurate draft agreements. It is particularly beneficial if the Contract Analyst has some commercial contract management background or experience to call upon in order to advise on the potential legal implications of particular proposed contract terms.
While there is an entire contract negotiation team in place for the end user organization, there should only be one “voice” or individual leading the negotiations. Make sure that everyone on the team agrees on who this voice will be. This limits possible miscommunication on the part of the end user organization, as well as the ability for the publisher to engage various members of the team to “divide and conquer”during the negotiations. Whenever possible, hold the meetings on your premise. Avoid attending social events with the publisher.
Understand Future Initiatives
Prior to negotiating a software contract renewal or a new agreement, it is imperative to understand future business initiatives within the company that will require technology. Engage with the stakeholders to learn and understand the six to 36-month roadmap of projects in the pipeline, as well as the specific technologies needed for each. Understand the “must haves” versus the “nice to haves” as they relate to the requirements. Since most agreements span one to three years, having a 36-month outlook on the project landscape should cover all requirements for the purposes of your new contract.
Conduct a Self-Audit
While it is imperative to understand future technology requirements, an organization should never begin a software contract negotiation without knowing its current license deployments versus entitlements, or software license position (SLP). Are you over-deployed, or do you have licenses not deployed (i.e., shelfware) that are costing the organization money? The answer to this question will impact what software you include in the agreement and the associated number of licenses.
To determine your software license position in advance of the negotiation, perform a self-audit. The self-audit involves establishing license entitlement and deployment baselines, then conducting a reconciliation of entitlements to deployments. To reconcile properly, ensure that you understand product use rights, such as the ability to upgrade or downgrade between different versions of the software license or to use the same version of a license on multiple machines. The components of bundles and suites are constantly changing, presenting another nuance of understanding entitlements. It is also important to know whether there are licenses deployed in the environment that are not being used or have been decommissioned. Organizations may be able to uninstall or reallocate licenses if permitted according to the contract licensing terms and conditions, thus impacting the final software license position.
Develop a Contract Deal Terms Sheet
Prior to the first negotiation meeting, it is important to develop an internal contract or negotiation “deal terms sheet” that clearly defines your requirements. It should include:
- Business unit requirements
- Professional services requirements
- Financial terms (i.e. purchase, lease, rent or other options, CAPEX and OPEX splits)
- Business terms
- License or product terms
- Contractual or legal terms
- Vendor commitments required during negotiation
- Vendor scorecard
- Major business disruptions or issues during the current contract term
Schedule regular internal meetings to review your deal terms sheet with the contract negotiation team and any other stakeholders in the Legal, Sourcing, Finance and IT departments.
Understand the Goals of All Parties
In order to negotiate effectively, in addition to knowing what is important to your organization, you need to understand what is important to your software publisher. Typically, a software supplier desires the following:
- New revenue
- Ongoing support or maintenance stream
- Professional services
- Fixed quantity of licenses
- Changing license metrics
- Audit rights
- Limiting rights for future events (i.e. mergers and acquisitions)
Knowing the software publisher’s objectives will help you prepare to counter on some of the terms proposed by the publisher’s team. For example, if the supplier suggests conducting an annual audit over a three-year agreement, your organization may propose a single audit over the course of the contract term. If your supplier recommends a maintenance level based on deployed software licenses, the self-audit results may potentially reduce the maintenance fees if you happen to be in a state of under-deployment or shelfware. If your supplier proposes a fixed quantity of licenses and you believe you will exceed this number, try to negotiate flexibility into the number of licenses that will be used over the contract period.
While it is always preferred to be liked by your supplier, it is more important to be respected. The best approach: negotiate a strong agreement and don’t worry about whether or not the party on the other side of the table likes you. You can build a solid relationship with your software publisher, but at the same time be assertive and persistent in the negotiations so that you will arrive at a final agreement that is both good for your organization and good for your supplier.
By applying these negotiating techniques, software publisher license and maintenance contracts can be substantially improved and your IT budget shifted to other business value and revenue activities. This will get you to “win” in your contract negotiation.