Nine Golden Rules for Software Contract Negotiations – The Complexities and Pitfalls

By Eliot Arlo Colon

The Search for Expertise: Why In-Depth Knowledge of Specific Software Licensing is Necessary

Far too many organizations are unaware of the intricacies involved in software asset management and complex software licensing negotiation. One cannot exist without the other. Many large enterprises have either a person or a group of people involved in both, but the realities are that these Software Asset Managers or Procurement Officers may only be:

  • Managing part of the process;
  • Generalists who are not specifically focused on the intricacies of a software vendor’s licensing rules; and/or
  • Part of a group within the larger organization

In our experience, all three scenarios are common, but larger organizations are becoming more mature in handing software assets and bringing it all under a common group. However, the issue still remains that within these groups there are very few experts on specific software vendors. While many feel that general SAM knowledge is all that is needed, the in-depth knowledge of a software vendor’s licensing rules is essential to understanding if the best deal is being negotiated for now and the future.

A perfect example of this is a U.S.-based media company that was expanding internationally. The company was extremely secure in its belief that the organization’s licensing was covered. However, the CIO did not take into account the complexities of a software licensing contract, the consequences of expansion into different regions, or the impact of growth to its licensing compliance. The initial software contract had deep discounts that translated into a ridiculously low price-per-unit locked-in for five years, but with high risk Terms and Conditions. With more than 10,000 licenses covering the organization’s employees, each employee had a license for each individual product. So, what were the issues?

  • Web-based publishing entities accessed by a global audience that may not have been covered under the original licensing agreement
  • Lack of specific language within the Enterprise Agreement to allow worldwide usage or usage outside North America
  • Little to no planning on licensing terms for affiliates, divisions, subsidiaries and partners, such as joint ventures
  • Absence of flexibility in the contract if there is a business event that leads to either a reduction or increase in headcount

Had this CIO decided to remain with the current software licensing contract or negotiated additional licensing, the software vendor would have found these issues and fined the company over $2 million in non-compliance fees.

Nearly Everything is Negotiable, but What is the Definition of a Deal?

No matter if it’s a Fortune 100 organization or the individual shopper, everybody wants to get a good deal. Many would define a good deal as a straight percentage discount, but purchasing anything for the discount isn’t necessarily a good deal. If you think along the lines of how many items you purchased, as a consumer, based on the deal, you feel really good about all the purchases. Now think how many times you used a “big deal” buy. Similarly, “big deal” buys based on percentage discount off the top will lead to licenses that you neither want nor need, resulting in over- and under-licensing. The real cost savings or actual net price paid for a software license or solution over the life of the contract.

The five discount critical questions that should be asked concerning any software contract negotiation are:

  1. How is a “good deal” defined?
  2. What is our ideal definition of discount?
  3. Do we know what was the best – and the least – discount our company received? What was the thinking behind accepting each discount?
  4. Can we anticipate the next discount we’ll be granted?
  5. What concession would be better than a better discount level for our company?

Don’t fall into the main issue of negotiating a contract based on the percentage discount alone. It is the number one pitfall, and almost always leads to over- and under-licensing issues.

The Many Complexities & Pitfalls

A great deal of time and effort is involved in planning, purchasing, managing and maintaining software licensing throughout an organization. Much complexity and many pitfalls are involved in software licensing. Starting out on the wrong foot can, and will, affect a company’s bottom line. There are some basic wrinkles in any software contract that needs to be considered:

  • Don’t assume usage rights: Never assume a license usage right. This is an issue encountered time and again with organizations that believe they have a certain right-of-usage, only to find themselves out of compliance and liable for penalties. The only assumption that should be made is that you do not have that right-of-usage. Confirm what is explicitly written in your contract, ideally with examples, and never rely on verbal promises or emails
  • Location! Location! Location: Geographic usage is fairly obvious, but one of the most common errors made with software licensing is not paying attention to whether or not a T&C covers use in multi-regions or globally, and in today’s increasingly global economy it is vital to majority of companies. Even emerging companies can find their operations migrating across national boundaries and continents. Make certain the agreement clearly covers the geographic usage area
  • User definition: Who is using? How? User definitions are also very important. Many assume a User is a single physical person, but in some cases a physical person can be counted more than once. For instance, suppose one person is running processes or batches. A legitimate argument can be made that the user is setting up multiple processes; therefore, the user should be counted multiple times
  • Right to audit: Unlike the right to an education, the right to audit is not a constitutional right. Majority of software contracts include a right to audit without cause. There is no requirement for the vendor to provide anything other than a legal notice by letter about an audit, and a reasonable timeframe for the licensee to prepare. Consider an added provision for cause
  • Ambiguous language: If I had a penny for every vague clause in a legal contract just in the U.S. alone, I would be a very wealthy man. Like any other contract, an Enterprise Software Agreement frequently has vague clauses along with extremely complex legal language. This invariably leads to the misinterpretation of usage rights. The solution is simple. Reduce the amount of complex language in contracts and state intentions clearly and concisely
  • Specificity: The Devil is in the details. Software licensing is about the right to use software in a very specific way. Unlike a tangible product, such as a computer or a mobile device, software is owned by the software vendor and an organization is just leasing a right to use under a specific set of usage rights governed by the terms and conditions of a licensing agreement. As with ambiguous language, even seemingly clear statements can be open to various interpretations. For example, if a vendor writes “allow for internet use” into an agreement, what exactly does it mean? While this seems relatively straightforward, the issue is with the interpretation. Does this mean that users can access the programs from the internet? Or does it mean the company can put information onto the internet for a worldwide audience to access?
  • Transfer rights: This may be one of the more important details when reviewing an Enterprise Software Agreement. Organizations are more dynamic than ever. In the last few years, we’ve seen many companies go through events that change the look, feel, and direction of its entire enterprise: from mergers and acquisitions, to spin offs, to divestitures. So, what happens with its software usage rights? Most software agreements do not cover these situations
  • A rose by any other name wouldn’t smell as sweet: While Shakespeare’s Juliet argues that the names of things do not matter, only what things are matters, it is not true in the case of Enterprise Software Agreements. Be aware of the legal name on the agreement. At least one in four companies is not aware of the significance. The question becomes who specifically owns that license contract, and who is entitled to legally using the software deployed. For example, if the division signed the software agreement, can the holding company use the software on its servers? Can the subsidiaries use the software?
  • Mobile and remote workforce: How we work has been redefined in the last decade by a mobile and remote workforce and is currently being redefined by the BYOD (bring your own device) movement. While the enterprise has become savvier in the way software is managed within the mobile and remote workforce, it is far too often overlooked
Negotiating the Best Software Licensing Agreement

By focusing on the Terms and Conditions of the contract based on current and future needs, the organization will score the best deal now and for the future. Remember that the real cost savings or discount is the actual net price paid for a software license or solution over the life of the contract.

Yes, there is value in percentage discounts, but with enterprise software purchasing; it can be a red herring. Most people, including CIOs and IT executives, can be seduced by a generous discount defined in percentage terms. This is easy to understand, and it resonates well with everyone. The usual thinking is along the lines of – “I got a 20% discount last time, so if I can get 25% this time, I’m doing better.”

The bottom line is that negotiation is an art form, but in order to negotiate a sweeter deal for enterprise software, pay attention, and have an expert on a specific vendor available even if it’s just for consultation.

About the Author

Eliot Colon is the President of Miro Consulting, Inc.