We suspect that the pace of Merger & Acquisition activity that began in earnest in Q4 2010 is likely to continue throughout 2011. For this reason, we think it’s imperative that procurement, legal and IT organizations prepare themselves for the chance that their current software suppliers might be acquired. Aside from coming up with the right general strategies and preparations for the potential takeover of the owners of your licensed (or rented) application assets, it pays to look specifically at the opportunity that material change of control clauses present to reduce potential risks to your business and provide some reward based on your contributions to a supplier’s success at selling itself.

One structure for these clauses is to require the supplier to refund monies based on how soon the firm was sold. The theory behind such a clause is like a sinking bond fund requirement: the longer you get to use and get value out of your software ‘investment’, then the lower your liquidated damages are. If the supplier is sold after ten years, for example, you may get nothing for damages as you got full value for your investment. However, if the supplier is sold within the first year of your licensing, shouldn’t you get something for all of those implementation fees, license fees and maintenance monies paid to get this now obsolete solution partially installed?”

Suppliers hate these clauses; they believe that if too many of their contracts contain language that a potential acquirer would find economically challenging, then the value of their firm is adversely affected. Of course software providers are most likely to push back when they encounter additional considerations in these clauses that extend beyond the outright company sale. For example, a clause might also cover the loss of key software executives.

Regardless of how onerous you want to get with suppliers in negotiation, you’ll have far more leverage in larger suite deals than one-off module situations. And make sure that you allow adequate time in these discussions towards the end of a quarter to get what you want (incidentally you should always negotiate towards the end of a quarter, but hopefully you knew that already). The legal wrangling and back and forth between your legal counsel and suppliers could take days or weeks, hence the extra time to budget for. But in the end, it could very much be worth it.

It’s been a while since my last batch of top tips for negotiating better software deals. So here are a few more:

1/ Take your time. Don’t be rushed into any decision. A few extra days now to make sure things are right can save you months of wrangling later when things go wrong.

2/ Concede only slowly and in small increments.

3/ Trade off stuff; if I give you X will you give me Y.

4/It’s not just about the price; look for other value that might be worth more.

5/ Listen more effectively. Listen for nuggets and nuances; they all count.

6/ Communicate clearly and confirm everything in writing.

7/ Set the Agenda for every supplier meeting

8/ Know when to stop negotiating

9/ Never negotiate when you’re tired

10/ Enjoy it. Negotiating is fun!

Taking up customre references and getting comfort from the fact that someone else has ‘been there done that’ plays a significant role in the decision-making process of software  buyers. As a result, most software suppliers are keen to add new names to their reference lists. Whether the software vendor is a new start-up or global giant they are all especially keen to get advocates for new products , new software releases or when moving in to a new vertical markets.

By offering to serve as a reference you can often use this a leverage to negotiate yourself a better deal. And the amount of the extra discount will depend on what you are prepared to do as a reference. Taking a few phone calls in a year doesn’t take up too much time, but the logistics of having potential clients come on site can be quite time consuming and can significantly interupt your day-to-day job. You should insist your software suppliers reward you well for the time spent helping them sell their products to other potential users. Extra discount is one option. Free stuff is another, ie training, education, consultancy etc.

And finally, beware the software contract that already includes a clause that states you will be a reference site. Some vendors hide these clauses in their contracts as if it is a standard element of every deal; it’s not, it has value and it’s totally negotiable!

While it won’t save you money when negotiating the initial contract, asking your software supplier to remove the audit clause from their contract could well save you a bunch of money down the line. An audit clause gives your software supplier the right to audit your usage of their software at any time. Time and again software suppliers have audited users and found their actual software use is above the contracted level and so more licenses (and money) is demanded. My blog last week reminded you to check usage rights to avoid non-compliance. So during contract negotiations, always ask that the supplier remove the audit clause. Some will and some won’t. But if they do then you might well save some money and some compliance embarrasment in subsequent years.

Software license types and definitions vary from one vendor to another. Failing to clarify what the license types are and what the definitions mean in your software contract can cost you money! Before you sign on the dotted line, always ensure you have clarified and understood what it is you are buying and make sure that license types and definitions are clearly stated in the software contract.

Software suppliers are adept at auditing users and finding businesses where their software is being used in breach of the license types or definitions in their contract; the net result is usually an unexpected and unbudgeted invoice arriving on your finance directors desk asking for payment for the actual software usage. If you don’t want to get caught out, then make sure you know what you’re signing when a software supplier presents you with a license contract. Look particularly at the number of users allowed, the type of users (ie, named, concurrent, employee, cpu, affiliate, professional, lite, etc etc), the geography of use (ie, on one site, across multiple sites, in subsidiaries, outside the UK, etc), and also clarify the definition for each license type (ie, what does ‘concurrent’, ‘cpu’, ‘lite’ etc actually mean?). Also check to see what happens if you were to outsource your IT function; does your software contract allow free and easy transfer of use to an external party?

A little time spent up-front prior to signing a contract can save you a lot of wasted time and money later!

Last week a new client of ours was asking about software license usage rights. Specifically they wanted to know what was the difference between a concurrent user and a named user. The simple answer is that there’s a lot of difference, including the price per user. The definitions of usage terms vary between suppliers and failing to get usage terms clarified can cost you money when the supplier finds you are ’under licensed’ after only a year or two. If you’re buying software then clarifying and agreeing usage rights should be a part of your negotiation strategy.

Confirm the numbers and types of users you have. Then discuss different licensing options with your software supplier. Find out which license type best suits your business. It’s not just your employees that might need licensing; do you plan to use external consultants or your outsourcing supplier to help implement the solution, will you be allowing your agents or customers web access to do self-service activities, etc etc. And note; you can mix and match usage types which will bring your sofware costs (and pro-rate annual support) down. 

And some licensing is based on servers/CPU’s; so make sure you clarify what happens if you decided to upgrade or change server type during the life of the software.

And find out where you can use the software; UK may be fine for most of your business, but what about that subsidiary abroad?

Software suppliers have developed an array of ways to catch you out. So as the saying goes: caveat emptor -  buyer beware.

To engage in successful software contract negotiations, businesses must rigorously assess their needs and requirements, understand their providers’ strengths and liabilities, and anticipate change. Software contracts are often written to favour application providers and phrased in vague, high-level language that can make companies vulnerable to additional fees or fewer usage rights than customers anticipate. Introducing additional complications, change is the only constant in today’s IT environment. Mergers and acquisitions are the norm for companies and their service providers; business models, such as the progressive migration toward outsourcing and globalization, are continually evolving. Consequently, companies must approach contract negotiations as a strategic element of their business life cycles. After doing the necessary homework, a company might decide that a new, marginal or small application provider supplies the most-appropriate technology for its requirements. This presents the nagging question, “What happens if this provider becomes unable to abide by our service agreement, or worse, goes out of business?” As “insurance” against such a conundrum, customers are increasingly investigating software escrow agreements, wherein they have their software’s source code stored, either through the provider or a third party.