Six Tips for Negotiating Better Software License Agreements

Software is the life-blood of many manufacturing companies -- and it isn't cheap. Here is some tried-and-true advice to help make sure you get what you need from your vendors -- including some return on your investment.

Posted on Jan 19, 2006

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Acquiring software is unlike any other purchase a company can make. That's because -- unlike other high-ticket items -- you aren't really buying the software; you're licensing it.

"If I buy a desk or a chair, I can do anything I want with it -- set it on fire, give it away, sell it," says Phil Bode, COO at International Computer Negotiations, a consulting firm in Winter Park, FL. "But with software, I'm just granted rights that are defined within the contract itself." In other words, what you're buying is the right to use your new acquisition in a limited set of ways.

The trick is defining those limits to work for you. And that's where the complications begin. It's not easy to establish a contract in which all the terms are indisputable. "One of the primary complaints we hear from customers concerns the interpretation of usage rights in the contract," says Jane Disbrow, research director at Gartner, Inc. in Stamford, CT. And it's only getting more complicated, as vendors continually introduce new license models in the hopes of simplifying the purchasing process and better matching expense with the value received.

Before you sign on the dotted line, then, you have to ensure the contract doesn't contain traps that down the road will cost you more money than you meant to spend. Here are some tips to arriving at the best deal (click here for additional online resources).

1) Consider future business plans

The most common mistake customers make when negotiating a software license agreement, according to Bode, is in failing to understand how the software will be used, and by whom, over its expected life span. "If you intend the software to have a five-year useful life, and you know you're merging with another company, that's going to have an impact on the license terms vs. a company that is fairly small and only operating in the state of New York with no plan to expand beyond the New England area in the next five to 10 years," Bode says.

In some cases, it may be difficult to gain this type of perspective on your own. That's why Bode recommends a team approach, with members from different parts of the organization ascertaining whether plans are afoot to, for instance, migrate to a new platform, add employees, expand the business or add locations.

For instance, say you sign a per-machine license agreement, only to have your company arm its employees with PDAs. This would entail purchasing an extra license for everyone using the application on the new platform. Or what if you sign a per-user agreement, and then the company decides to allow job-sharing? You end up buying two licenses to cover the two workers sharing a desktop computer to cover one full-time position.

You also need to be aware of your company's potential for increasing or decreasing its work force, says Alvin Park, research vice president at Gartner. If you lose a significant number of people because of a divestiture, and you've signed a three-year contract based on number of seats, you're still responsible for paying for those seats unless the contract states otherwise. Park suggests building in a clause stating that if you change the size of your work force by 10% that you can renegotiate license terms in good faith.

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