META Report: 14 Warning Signs of Poor ELAs

By Mike Egan

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The combination of a March 31 fiscal year end (Computer Associates, Compuware), low OS/390 MIPS growth, and a tough economic climate will generate an increased percentage of poor independent software vendor (ISV) enterprise license agreements (ELAs) this quarter (and throughout 2002).


Although most large ELAs are straightforward, approximately 30 percent will contain poor pricing or terms and conditions (T&Cs) that users must avoid. In addition, ISVs are deferring advance ELA renewal negotiations to the last minute, which further aids an ISV's negotiating position.

Given these factors, plus the increased tendency of individual sales representatives to employ deceptive practices in a tough economic climate, users must manage enterprise ELAs more carefully, refusing to sign until fairness and value analyses are complete.

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One of the costliest pricing structures is one that binds all product pricing to total MIPS capacity. Although equitable where systems management products use all MIPS, independent software vendors often bundle lightly used products (e.g., those that operate on one to two logical partitions into capacity-based pricing. This generates a 200%-500% price boost for limited-use products, lasting three to five years. Some ISVs may try to push these schemes near term, because capacity pricing will begin disappearing after 2004. The emerging IBM License Manager (ILM) product (generally available in the second half of 2003) contains a Sub-Capacity Reporting Tool that will ultimately include ISV product usage reporting (2004/05), enabling users to better negotiate ELAs with light-use product pricing based on accurate usage statistics, not capacity MIPS.

Where users must negotiate large ELAs now (e.g., expirations), we recommend two tactical approaches. Users can negotiate steep $/MIPS discounts (e.g., 50%-90%) that reflect partial usage (10%-75% of MIPS) or can exclude these products from the ELA, offering to pay list price (based on used or tiered MIPS). By 2004/05, as sophisticated IBM and third-party monitoring tools evolve, these tactical strategies will be unnecessary.

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14 Warning Signs of Poor Enterprise License Agreements

We recommend examining enterprise license agreements for the following pricing, usage, or contract clause conditions. Where users uncover problems or questions that cannot be resolved quickly or to mutual satisfaction, they should postpone negotiations (if applicable). The primary characteristics of a poor ELA include:

Business Impact: To achieve optimal software cost reductions, users must implement a supervisory asset management office, with dedicated personnel handling scheduling, staffing, and vendor negotiation responsibilities.

Bottom Line: Users should negotiate ISV enterprise license agreements cautiously in 2002. This practice can reduce ISV costs simply by identifying, minimizing, and even eliminating poor or deceptive ISV enterprise license agreement offers.