25 May 2000: One of the UK's most experienced IT
negotiators lifts the lid on some of the sharp practices used by
software suppliers to get more of your money
Dozens of major UK users are now contributing to a
cross-industry initiative aimed at bringing fairness and
transparency to software licensing.
Eurim, the parliamentary/industry lobby body for IT issues, has
been asking users to speak about their experiences of stiffing –
where software suppliers exploit weaknesses in contracts to extract
extra revenue from existing customers. Several of those who have
been contributing to the Eurim initiative discussed the issue with
other users at the UKCMG user group conference two weeks ago.
Here, for the first time, one of the UK's most experienced IT
negotiators, the head of IT procurement at a major UK financial
services firm, reveals some of the dangers lying in wait for unwary
users.
1. One-sided licence terms
We have negotiated with numerous suppliers who seek to provide
totally one-sided agreements that exclude all customer rights,
limit their liability to a nominal sum, offer no support service
levels and exclude all obligations. We are increasingly finding
that newer start-up companies are relying on "shrink-wrap"
licensing on a "take it or leave it" basis. This last point has
proved a difficult obstacle to overcome, particularly if the
licensor is based in the US.
2. Initial term licences/end-of-term
renewal
In performing a recent due-diligence review, we have come across
a couple of fixed-term software licences that will require
renegotiation at the end of the initial term. The proposed licence
renewal fee is exorbitant, and for the business concerned it would
be cheaper to develop an entire replacement system rather than pay
the new licence fee and additional maintenance costs.
As an organisation, we prefer perpetual licences, and will not
sign up for any fixed-term licences of less than 20 years.
3. Usage-based licensing
We have come across numerous examples of concurrent, or
named-user, usage licence terms where the ongoing pricing policy
has not been provided as part of the initial contract. Some
suppliers refuse to provide such a policy/price list to assist with
future price protection and insist on us obtaining such pricing via
specific quotation. Some suppliers do offer, shall we say, a
discount against the prevailing list price. However, in some
instances it would be determined by how deep your pocket is rather
than by a generally available pricing document in the public
domain.
We have come across one instance where the concurrent usage
pricing policy was only defined in the contract small print, and
never openly discussed during the negotiations the supplier had
with our end-user. In this example, there was an uplift licence fee
of £150,000 per "xx" additional users. This fee was subsequently
eliminated through negotiation.
4. System upgrades and transfers to different
machines
Numerous suppliers have no open pricing policy for licence
agreements that stipulate the right of the supplier to charge
additional licence/maintenance fees if the customer were to upgrade
a server, or where the supplier's software is transferred to
another server owned by the customer. We seek to avoid all
stipulations for such payments at the outset, but occasionally
there is nothing we can do to eliminate the exposure.
In the mainframe world, where subsequent maintenance fees are
typically linked to CPU size, we seek to negate all such increases,
or agree price-capping mechanisms so we can comfortably predict
pricing for future years for different upgrade scenarios.
We have recently come across one software supplier which was
taken over by another firm that decided to interpret the licence in
a different way. It demanded additional usage-based fees –
subsequently withdrawn – and forcefully claimed that the
maintenance price should be based on CPU size, whereas in previous
years the renewal fee was based on the Retail Price Index.
5. Software maintenance
We never cease to be amazed at the different types of
maintenance contracts offered to us. If the software is important
to business operations, it is likely the maintenance terms will
require significant negotiation, as most suppliers seek to minimise
their support obligations.
Many suppliers, particularly the newer entrants, seem to offer
only limited product/technical support in terms of duration of
support for a particular software version. This duration can be as
low as three months from purchase, whereas typically we may choose
to stay on that version for a period of up to two years because the
software is typically incorporated with other software to form a
corporate system image release. When negotiating, we seek to extend
the support for any version for two years without incurring any
additional cost to allow the organisation to determine when it
wants to upgrade.
6. Overriding contracts
We have come across two major suppliers who successfully sought
out an unaware customer within our corporate group and convinced
them to sign up a new contract superseding all previous contracts
with that supplier on less favourable terms. The replacement
contract also stated that the replacement contract defined the
terms under which all future business was to be transacted. We
successfully overturned these contracts after delivering an
appropriate ultimatum.
7. Suppliers in a monopoly position
Some suppliers have been successful at achieving a monopoly in a
particular sector of the market. We have found they tend to adopt
an arrogant position, dictating terms. They are very difficult to
negotiate with unless you can find a negotiating lever.
8. Systems delivered in object code only
We have come across several suppliers who provide application
software in object form. Without a range of comfort clauses, the
customer is in a weak position if the contract does not address the
potential risks. This is particularly an issue for mission-critical
software if the service level agreement is not properly defined, or
if the quality of support is poor or subsequently withdrawn. From
experience, most escrow agreements do not contain suitable
invocation triggers for poor support or serious downtime
issues.
9. Breach of contract
We aim to exclude from contracts any breach termination
provision where termination could be instant or at very short
notice. The contract must contain a suitable remedy process and
acceptable termination notice period to allow the customer
sufficient transition timescales where software is critical to the
business.
10. Pricing
Just an observation – we have noticed that several of the
US-based suppliers' pricing policies seem to use an exchange rate
of $1 = £1.
What is stiffing?
Broadly, stiffing is a series of techniques used by some software
suppliers to squeeze additional revenue from existing customers by
exploiting weaknesses in software licences. It usually occurs when
there is a change in the customers' circumstances that the software
supplier can argue takes the company outside the terms of its
existing contract. The supplier then demands additional payments,
often outrageously large, to amend the contract to cover the new
circumstances.
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