How to Negotiate Better Software Licensing Deals

By Scott Rosenberg

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While software purchase contracts are explicit in terms of fees, they require a level of knowledge and understanding of vendor rules and regulations that requires cross-functional expertise. As Forrester Research says companies are fed-up with enterprise “software licensing and pricing (as it) continues to be marred by complexity, soaring maintenance costs, and a lack of flexibility and alignment with business goals.”

Software maintenance fees are approximately 20% to 30% of the original software purchase price and can easily exceed the original purchase price of the software in a short time. In addition, a deeper understanding of assets―past, present and future―is vital for any contract discussion with software vendors and empowers the company to make requests and demands at the negotiation table.

Typically, there are three primary reasons for contractual gaps that can result in unnecessary financial expenditure:

Lack of knowledge: Non-compliance with vendors’ ever-changing licensing rules. Lack of information: Failure to accurately leverage and understand software assets, resulting in non-essential purchases of extra software or licenses, which leads to “overspending” and may significantly add to maintenance costs. No Big Picture: Changing deployment of applications and hardware platforms without understanding the big picture impacts licensing in a big way. Added to this, most organizations have a decentralized or nonexistent process for handling IT purchasing. It’s little wonder that software contracts and licensing are often not planned effectively.

If we can agree on the above, you can work towards building advantages including cost savings into your software licensing agreements.

Negotiate a Better Deal

So, now that you know what assets you possess and utilize, the question becomes how to take the next step and proactively manage your licensing agreements. To do this you need to know ahead of time that there is usually a baseline 20% discount offered by most software vendors. While the initial discount may be sizeable, if it doesn’t address the particular needs of your organization it may be detrimental to your budget in the not-too-distant future. Be prepared with your software needs laid out to ensure you request and get what you asked for, and not more unnecessary shelfware.

You need to understand your rights under the vendor’s software licensing agreement. Licensing is a multi-dimensional challenge, with issues including differing product versions, varying product releases, minimum and maximum user requirements, license types and terms, rule changes and more. A good example of this is Microsoft’s downloadable price book. It’s 100 pages long, and that’s just the basic primer on how to understand the software vendor’s licensing rights. While keeping up with the many changes from just one provider is hard enough, this difficult task becomes Herculean when you consider that most companies have about 100 different software vendor relationships.

Due to the multi-faceted expertise involved with licensing, most companies today are either over-licensed or under-licensed. Both scenarios lead to extra costs and increased risk. For that reason, it is critical to be cognizant of the vendor’s license rules and regulations and to be extremely diligent when deploying and using the software. Continuous business changes as well as changes to the user population and the underlying computer environment can easily result in being outside the boundary of what is permitted through your particular set of licenses.

You need to understand your repository, usage and the SLA. In order to negotiate from a position of strength, you must understand your assets, how they are being utilized, and your rights under the software licensing agreement.

Establish licensing best practices to ensure that you don’t fall prey to the costly mistakes outlined above. This goes hand-in-hand with establishing a good working software asset management process. First and foremost, corporate executive management and IT need to have a defined governance model with steering committees to provide oversight to the enterprise software decision-making process and software component of the budget.

Understand your short-term and long-term needs. Be sure that someone is present who can articulate the impending needs of the organization a minimum of 12 to 18 months in advance to plan for future software acquisitions. Remember to negotiate short-term agreements to allow flexibility for the business. For example, Hyperion (now an Oracle company) increased pricing on June 1, 2009 in order to align itself with its parent company’s price lists. A savvy CIO would renew or purchase Hyperion before the price change, while ensuring that long-range terms and conditions have some built-in flexibility and agreeing to concessions that would bring added value to the SLA.

Legal and IT need to work together. Aside from having a lawyer review software vendor agreements, it is critical to have it reviewed by a senior IT executive who understands the corporate strategy and business objectives as well as a specialist in licensing “best practices”. It would be best if that senior executive and specialist were one and the same person. Why? One example: several vendors include a clause stating that any new contract supersedes the terms and conditions of any previous contracts with the company. This standard language can be found in most legal contracts, and lawyers seldom change the wording. But, in this case, it certainly is not a best-practices scenario for a company. That small clause results in giving up potentially rich and extensive use rights to assume more limited and restrictive use rights, leading to all the additional fees we have discussed earlier.

Avoid ambiguous language. Make sure contract language is frequently reviewed. Publishers are pressured to make changes necessary to reduce complexity and the probability of future license disputes. All verbal agreements need to be backed up by a paper trail. This seems obvious, but you’d be surprised at how many people forget this during the negotiation period.

According to Gartner, “During the next few years, [sic] businesses need to devote more time to planning and preparing for software purchases because this will be a challenging period for software licensing. During periods of uncertainty, it's harder to negotiate lasting contractual protections.”

While I believe that each situation is unique, compliance is the key to building advantages into software vendor contracts and getting a better deal.

Scott Rosenberg, CEO and founder of Miro Consulting, is responsible for creating and driving the vision of the company. Today, Miro Consulting has over 400 clients across North America and has overseen more than $1 billion in Oracle and Microsoft transactions. Mr. Rosenberg is considered an expert on Oracle and Microsoft licensing and is frequently quoted in ComputerWorld, CIO, CRN, eWeek and InformationWeek.