Effective Negotiations for Software Licensing Agreements

By: Hack Heyward, Director, TPI, Inc.

When a buyer is in a position to apply some leverage in negotiations with software vendors, there are three critical provisions that can be used, but may require a significant push:

  1. Maintenance fees as a percentage of the discounted license fee, not the list license fee.

     

  2. Language that locks the software vendor into providing a defined set of services throughout the term.  Many software vendors offer several types of support, but will redefine the terms over time requiring buyers to purchase a more expensive level of support.
  3. A fixed percentage of the license fees over a period – usually no more than five years.

On the other hand, here are two provisions, related to your software license, that would be great to have, but are very difficult to obtain because vendors don’t have much flexibility:

  1. Paying for and receiving maintenance only when it is most convenient.  Ideally one would like to begin paying maintenance only when licenses go into production and value has been gained, instead of immediately upon licensing.
  2. Negotiating the price of maintenance down between 17% and 20%.  Wall Street has adopted this percentage as a predictor of gross margins.  Even though the ongoing maintenance revenue coming into a public company like Oracle depends greatly on other factors like the original discount and whether licensees simply drop maintenance, Wall Street can calculate this percentage and ask about it.  If a public software company began allowing this percentage to erode, Wall Street would hammer it. 

In summary, I suggest that buyers negotiate where the vendor has the ability to be flexible.  Remembering these two steps will save companies a lot more money:

  1. Get the greatest possible discount at the beginning and make sure that the annual maintenance percentage is tied to it.  Find out what discount the government and similar sized companies receive.
  2. Don’t overbuy. Purchase fewer licenses than project people may need. This won’t be easy because technical people naturally want to have enough licenses and budget managers don’t want to ask for more funds.  Push back, because the penalty for not buying enough licenses is  buying more, while the penalty for buying too many is annual maintenance on extra “shelfware”. Most software vendors won’t sell maintenance on just 75 if 100 are licensed.