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Hard times, tough talk: Vendor negotiations in '09

Nine ways to get more out of software vendors in 2009

By Thomas Hoffman
January 19, 2009 12:00 PM ET

Computerworld - A few years ago, while sleuthing out underused, undermaintained or misaligned software assets at Sony Pictures Home Entertainment, David Cortese found that he was paying for 266 ERP licenses at a cost of $7,000 per seat when in fact he was using just 177.

By reworking those agreements and some others, he cut several million dollars in IT overhead. "Everything is negotiable," says Cortese, the company's vice president of IT.

As the economy slides, that's becoming the mantra for more and more IT leaders, says Joe Auer, president of International Computer Negotiations Inc., a Winter Park, Fla.-based consultancy. "When [economic] times are great, it's tough to get people to do better deals," says Auer, who has 34 years of technology contract negotiation experience. "But when times are tough, they want to."

Do they ever. Forrester Research Inc. analyst Ray Wang says that over the past few months, more than 200 clients have contacted him and other Forrester analysts looking for help in renegotiating existing licensing and maintenance pacts. "They're looking for Plan B's" to cut costs, says Wang.

Now is the time to design your own Plan B. Here are nine ideas to help you negotiate harder with vendors, cut waste, sharpen licenses and get more out of your IT assets this year:

1. Do Your Homework.

To be adequately armed for effective contract negotiations or renegotiations, it's imperative that you know your existing contracts inside and out, says Roy Schleiden, senior manager of IT procurement at YRC Worldwide Inc., a transportation services company in Overland Park, Kan. "It's amazing to me how many people don't read their contracts and don't know what's in them," he says.

2. Give Back Shelfware, and Don't Buy More.

Wang says that many clients overestimate the number of user seats needed for a particular software system and end up licensing a lot of shelfware. "There's a lot of room to cut licenses," he says.

But many licenses are designed to make that difficult to do. If a customer wants to reduce the number of seats, some vendors, including SAP AG and Oracle Corp., typically respond by raising the price per seat, says Wang. The net result: You pay the same and get less.

Although both SAP and Oracle tend to be fairly rigid about lowering the number of user seats in software agreements, there are techniques you can use to get around this problem with other vendors.

Drive a hard bargain

International Computer Negotiations Inc. provides a comprehensive software licensing agreement checklist (registration required). Among those tips is that any software licensing agreement should identify the applicable parts of any collateral material that helped you choose the vendor or in which the vendor "promises" to meet your needs. Examples include marketing materials, portions of your request for proposals, the vendor's proposal and correspondence.

ICN also suggests that a software license agreement should include the following provisions:

  • It should state that no payment is required until you receive the goods or services.
  • It should allow a sufficiently broad scope of use for the software. A limited scope of use is the leading cause of higher license fees.
  • The agreement should allow certain parties other than the original licensee to use the software. Such parties include subsidiaries, the parent company or parties involved in a merger or acquisition.
  • The license grant should be broad enough to cover usage rights even if you don't opt for maintenance.
  • You should receive the right to use the source code, modify it and create derivative works from it.
  • If you are acquiring an application that isn't an off-the-shelf product, you should have the right to test and accept the software before any payment obligation is triggered.
  • Under the term and termination provision, your term of use should include the acceptance-testing phase, and your right to terminate before the expiration date should begin prior to final acceptance.
  • The contract should state what recourse is available to you if the vendor guarantees something but doesn't deliver.
  • The vendor should guarantee that it will fulfill its tax responsibilities.
  • The vendor's liability limits should be consistent with the magnitude of the deal. Normal vendor liability-limitation provisions severely restrict the amount of protection you receive from the vendor.
  • You should be able to terminate the agreement for any material breach by the vendor if it doesn't address the problem in an agreed-upon period of time.

For instance, since July, Schleiden and his team have worked with approximately 300 of YRC's software vendors to see if it would be possible to "park" unused seat licenses until the economy improves. Parked seats are set aside and licensed at a price that's significantly lower than the per-user price in the contract. Once the economy improves, the parties unpark the seats and revert to the original cost structure.

So far, YRC has been successful with about 80% of the vendors it has contacted, including providers of application software, technical tools and database systems, says Schleiden.

3. Use Your Leverage.

But renegotiation after the fact is never easy. Given the difficulty of adjusting a license in midstream, the best cost-saving opportunities are at the front end of a contract, when the vendor knows that you can still walk. For example, vendor pricing models are often poorly documented, says Wang, so before you sign, make sure you completely understand the terms of pricing and use them to your advantage. "It's more cost-effective to flex up," he says.

That means, for example, that a customer with 1,000 users should negotiate hard for the first 500 seats at the onset of contract negotiations and then add sets of 100 more licenses as needed, Wang says.

4. Ask, and You Shall Receive.

In light of the economic crunch, some vendors are coming up with creative financing to entice would-be customers to sign deals, says Schleiden. If they don't, you should. "We have a list of side perks we typically ask the vendor for," says Schleiden. These include cost caps on future maintenance and licensing increases, and free first-year maintenance. "We've never been successful in getting them all, but we typically get several," he says.