Best practices negotiating enterprise software

The last phase of the software selection process, negotiations, is often the most overlooked, especially from the perspective of the IT organization.  But once you have analyzed a vendor’s initial total cost of ownership (TCO) and evaluated the options via a balanced scorecard framework, you need to have a plan for software negotiations; it cannot be an afterthought of your selection process.   There are many negotiation points in the procurement process to consider when negotiating software versus  solely focusing on the bottom-line price of software licenses, but instead evaluate the overall value and bigger picture.

Before diving into specific negotiation points of the business agreement, an overall negotiation strategy should consider the following points:

• Always Have Another Viable Option: One of the foundations of negotiating is that all stakeholders need to be aware there  is another viable option at the table.  If the internal team is sold on one vendor, you need to keep them informed that negotiations may be unfavorable and the best alternative needs to be considered for negotiation.  Externally, vendors need to know that they are not ‘sole source’ and there is a competitor involved in your selection process.
• Timing Matters: The timing of the vendor’s sales and financial periods should be taken into account as the largest discounts correspond with a vendor’s month and fiscal year end (i.e., salespeople are fighting for their targets).  Additionally,  negotiations need to be planned in advance and enough time needs to be allocated to the process – we have seen negotiations last from days to several months, based on the complexity and negotiated points.
• View the Negotiation Collaboratively: Start to view your vendor as a supplier!  Negotiations have to be beneficial to both parties, having a self-serving view that you are going to “beat” a vendor is not a good start to a long-term relationship.  For example, are you going to help the vendor expand by growing their international customer base or help build their qualifications in an industry vertical?  Did you communicate to the vendor that you will be an advocate for them in the market if the implementation goes well?  The negotiation needs to be as close to a win-win for both sides.
• Build a Strategy for Communication & Control: Don’t tip your hand during the process and develop a vendor communication plan and strategy that controls all touch points with the vendor.  Communications should be funneled through a single owner for all vendors, with escalation points on both sides introduced early in the process.  For example, although it may seem trivial, during software demonstrations inform your team to limit the verbal “oohs and ahhs” or who the vendor is contacting after the demonstration.
• Tap the Experts: leverage external advisors (consultants and attorneys who specialize in software contracts) who have "been there, done that" to increase your value at the negotiating table – there is a high probability that the external advisors fees will pay for themselves based on the negotiation savings realized.

Once the strategy is laid, there are several tactical negotiation points that we have advised our clients to pursue in the software end user license agreement, maintenance agreement, and implementation professional services SOW:

• Implementation Professional Services SOW: beware if the vendor is reducing hours to stay competitive, all vendor proposals should be based on the same implementation assumptions related to the project management triangle of scope, timeline, and resources.  To reduce costs, you should seek to reduce the vendor’s services rates and not hours to lower the cost.  Also, consider negotiating no cost training/education courses and tools as part of the implementation services;  training related services help with change management and user adoption during your deployment and typically are priced at higher margins to the vendor.
• Software EULA (End User License Agreement) & Maintenance Agreements: Some vendors are more flexible than others, but negotiating even one of the below items can present very high value and mitigate risk in Mergers & Acquisition (M&A) situations or if the relationship with the vendor deteriorates:
  • Escrow: if the vendor goes bankrupt, the code will be protected in software escrow.
  • M&A Considerations: if your company’s corporate development strategy involves new acquisitions or divesting existing assets, software vendors often capitalize on these M&A transactions to receive one-time fees to transfer licenses or have “affiliates” access licenses.  Attempt to insert clauses to make these no cost events.
  • Intellectual Property: if your business model requires customizations that you feel are a differentiator, consider negotiating for the intellectual property (IP) ownership.
  • Open Source Specific: related to IP considerations, most open source software is released under the GNU Public License.   A common misconception with Open Source architectures is that any changes you make to them have to be made public.  Negotiate a clause in the contract that the vendor is able to comply with the GNU Public License in its development and does not use any distributed software that would require you to disclose any of all of what is developed to the public.
  • Software as a Service (SaaS) Specific Considerations: review the service level agreements (SLAs) related to application uptime and request/resolution times.  Evaluate language specific to flexibility of taking the data or solution “in house” if needed in the future.
  • Financial Terms: include your Accounting team to help negotiate payment terms and  cap the year-over-year increase in software maintenance by a percentage such as the consumer price index (CPI).
  • No Cost Disaster Recovery (DR): depending on the deployment model (does not apply to SaaS) you can negotiate to be allowed to have a zero cost license for your DR environment (which can be quite expensive), if the application needs to be highly available and the business has defined the RTO/RPO such that a DR environment is required for the application.
  • Maintenance Agreement: get the vendor to delay payment on the first year software maintenance.   Software vendors will want this paid upfront, but depending upon their financial quarters, this can sometimes be delayed until the beginning of the second year.
  • Additional Licenses: negotiate to maintain the license cost (i.e. no increase for additional future licenses) for an appropriate future time period (e.g. 2 or 3 years).