HRIS, ERP, PIM, CLM, CRM,… software is everywhere and is now essential to how a company runs. Implementing, maintaining and supporting this software means negotiating and signing licence agreements (also known as SLAs, for Software License Agreements, not to be confused with their namesake the SLA, or Service Level Agreement).
These licence agreements, sometimes hard to digest, cover a number of points: hosting, performance levels, pricing and penalty levels. In this article we set out the major topics and share our best practice and tips for negotiating these SLAs.
1. Understand what is at stake in the contract
Far too often, we find much the same software purchasing process at our clients: a business user, acting as the specifier, selects one or more suppliers through a more or less formal tender, then brings in, one after another, the procurement department to discuss pricing and commercial terms, the IT department to talk through integration and/or security arrangements, and finally the legal department to agree the content and terms of the contract.
The trouble with such a fragmented approach is that no single person has the full picture. The buyer has only a partial view of the business user's requirement, the lawyer does not really understand which clauses or topics matter given how the software will be used, the IT department sends the same cybersecurity questionnaire to a complex, business-critical package as to a commodity available in SaaS, and so on.
The recommendation here is to bring these different players together up front to explain the context and the stakes. The exercise lets each of them set out their expectations, their obligations and their tolerances, so that negotiations start with a clear view of the scope the contract must (or must not) cover, of the essential points and, conversely, of those that are negligible (and it avoids the 20-page GDPR annex for a piece of software through which no personal data passes).
2. Secure firm commitments on availability and support
Here you should favour firm, measurable commitments and avoid, as far as possible, "best efforts" undertakings and other promises drafted as "common industry practices".
Vague commitments on something as important as availability and support can indeed generate delays, stress and tension during contract performance. Setting minimum service levels (the famous SLAs), guaranteed restoration times, and maximum response times for incidents and tickets according to a severity level (see in particular the ITIL framework) are all good habits worth recommending.
These various commitments must of course be understood: what does a 99.7% SLA really mean for my business? Do I need that level at weekends? And so on.
On support, do you need a dedicated team, 24/7 availability or an on-site response within four hours? Remember to ask yourself these questions up front, because they will have an impact on pricing, on the choice of supplier and potentially… on your business!
Finally, what actually happens if these commitments are not met? Because the courts move on a very different timescale from business, you will need contractual provisions that match what is at stake. A range of solutions exists: penalties, credit notes, bank guarantees, invoice retentions, replacement services, and so on.
3. Align your actual usage with the contract scope
This is one of the most important optimisation levers of all! It is commonplace, during an audit or at contract renewal, to discover a significant gap between "what is invoiced and what is consumed".
While publishers and resellers have every interest in selling large capacities and volumes, your interest is the opposite: to match the contract to the requirement as closely as possible so as to avoid overpaying (this is often called "software license optimization").
It is therefore essential to set out usage terms covering the number of users, storage capacity and performance, and also.. geographical scope. Geographical coverage may look trivial, but it is nonetheless one of the most common licensing mistakes: in an organisation with stakeholders spread across the four corners of the globe, the information system will have to be deployed (in whole or in part) in many locations, and the agreement must allow for that.
Finally, still on aligning the requirement with the terms of the licence agreement, you must also check the usage rights. In some cases the software will be used as such; in others it will be embedded and form part of a product or solution that is resold, and so on. You therefore need to make sure the terms of the licence agreement really do match your ambitions.
4. Pick apart the billing arrangements and compare the offers
Between bundles, packages and other formulas, it is often hard to find your way and to understand what you are really paying for in a licence agreement. Offers from publishers and integrators bundle in numerous services and teem with free trials and other services provided at no extra cost, which look like a good deal but can quickly inflate your basket!
Licences can be billed by usage, by number of users, by number of companies or sites, or by a little of everything at once. On top of that, the licence agreement may grant the right to a fixed number of named unique users, a fixed number of concurrent users, a number of server installations, a number of fixed installations, a number of access hours, or the right to store and use a certain volume of data.
In short, before you commit, you must understand how the pricing structure works and determine which unit(s) of measurement will apply, so that you can compare competing offers more easily and, above all, avoid nasty surprises when the invoice arrives.
5. Use commitment term as leverage and stay in control of termination
Negotiating better rates in exchange for long-term commitments is common practice in many industries, including software, where acquisition costs for publishers and integrators have soared in recent years. Focused on growing their business, many software vendors are prepared to cut their prices (very significantly) in exchange for a long-term commitment that secures their ARR (annual recurring revenue). This can therefore be a good opportunity to seize, especially for complex software, solutions and applications that in any event take time to deploy, to train users on and to ramp up.
Still on the subject of commitment term, it is essential to ask yourself about renewal even before the initial contract is signed! If you do not, rest assured the salesperson across the table will! What will the price of your licence agreement be once you have deployed the solution, trained your users and added your precious data? The balance of power at renewal is very likely to swing the other way, with that "stickiness" used as leverage to obtain far higher rates at renewal time. Consider including renewal rights that set prices in advance, or that at least cap any price increase; and if you do, make sure the renewal right can be exercised unilaterally by you, the customer.
Finally, give thought to the end of your licence agreement, to the termination arrangements but also to exit management and to the (possible) change of publisher or supplier. How will you handle that transition? If the former supplier was cloud-based, how will you move your data? If you manage to move your data, will it be in an accessible, usable format? Will your old and new systems have to overlap for a time? Asking yourself these questions and building contractual answers will spare you a few disappointments.
Conclusion:
In this article we have tried to pass on a few tips for negotiating your licence agreements better. Experience and practice, of course, give you a better feel for how much room publishers and resellers have to move, and let you build on your own mistakes.
If you need more detail, support or advice on licensing, IT contract optimisation or IT sourcing more generally, our teams are here to listen.