The buyer needs to be proactive to ensure a software licence deal meets their needs, rather than the supplier's convenience. Helen Beckett looks at how to create value and flexibility in real-world negotiations
Software licensing remains a minefield that all users – whether battle-weary or greenhorns – must pick their way through with care. While IT suppliers like to trumpet the virtues of software asset management, it can be a user fast track to under licensing. And once users are on the back foot, suppliers can pretty much dictate the terms of the next licence.
Seasoned negotiators encourage users first of all to get to grips with the terms and conditions of the software licence. The focus should be to negotiate the best possible terms and then to concentrate on fulfilling their part of the deal.
One caution from independent advisers is to beware the new trend for subscription licences. Traditionally, licences were bought in perpetuity with a one-off payment. Subscription licences, by contrast, offer no ownership, just renewal at regular intervals.
This advice is reiterated by the Surrey Police Force, which has just moved from a Microsoft Office of Government Commerce Enterprise Agreement to the Home Office Master Agreement, designed specifically for the police and criminal justice sectors.
“We buy perpetual licences,” says Russell Fowler, ICT technical support manager. “The major disadvantage of a subscription licence is that you never own it. As a result, you are never able to step out of the agreement. If you want to use a particular product, you have to continue to subscribe – you cannot take a break from the agreement.”
And all users need to be mindful of support clauses. Within subscription licences, support is often packaged with a “right to use” aspect. Support needs to be measured and prompted by service level agreements in the same way as an outsourcing contract.
“The worst mistake is to think that just because you have the right of termination, you do not have to build in other remedies,” says Kit Burden, partner with law firm DLA Piper Rudnick Gray Cary.
“Using the ‘H-bomb’ is not a palatable remedy. You need to incentivise suppliers properly to get it right the first time.”
Case study: Banking on change
Burden recently negotiated a software licence for an investment bank that was procuring an online trading application. The rate card price of the standard licence – £8.3m – was just the basis for the negotiation.
An important consideration was how long the user envisaged using the application. A warning signal for Burden was that the supplier was offering a five-year licence while his client envisaged using the software for eight to 12 years.
“You might have a situation where the user is happily bedded in with the software after five years, but the supplier is able to pull the rug out from under their feet because the licence is due to terminate at that point. The danger is that a supplier can lock the user in and then rack up the licensing costs.”
Burden advised the bank to pay extra to secure a “perpetual” licence, and it agreed to pay a further £2m for this extension. “It is vital to get a licence long enough to get the full return on your investment,” he says.
The other concern was to provide the bank with options to own the code or modifications, should it later prove commercially expedient to control these. Burden renegotiated the standard licence to gain two options.
The first option was for his client to identify functionality that it wanted developed from the core application – spot trading, for example – and to create an exclusive licence for this part of the code.
An “uplift” in price, to be negotiated according to the size of the modification, would take care of this.
The second option would be where the bank needed to take over development of the application as a strategic move, whether to safeguard the application’s future or to ensure commercial confidentiality. This option requires access to source code rather than object code.
If the bank ever wants to exercise this option, it will have to stump up an extra £6.8m.
“For the right application, you may have to pay a substantial sum to get the licence you want,” says Burden, although the business benefit and peace of mind may make it worthwhile.
“For users contemplating bespoke systems where millions of pounds will be spent on modifying a core product, not looking at future scenarios is nothing short of criminally negligent,” he says.
Case study: The capacity model
The pattern of server deployment in Trafford NHS Trust is different to that in the private sector and it follows that the trust prefers a different model of software licensing.
In the 15 years that Roger Fenton, deputy IT manager at Trafford, has been with the trust, it has gone through three licensing regimes for back-up software. He is responsible for renegotiating and introducing the most recent model for licensing back-up.
IT resources are assigned throughout the NHS on a project basis, rather than by central provision, because of the way budget is allocated. This has big implications for the way that software licences need to be procured.
“We have upwards of 40 servers running various applications that all need to be licensed and maintained,” Fenton says.
He has just moved to a new licensing regime with his back-up supplier, Computer Associates. The health authority now pays on the basis of total raw storage capacity rather than per server, and the licence can be scaled up incrementally.
It is a big improvement on the previous regime, both financially and in terms of simplifying and reducing administration.
“The price we secured was embarrassingly good,” says Fenton, who states he saved “thousands” on the previous licensing bill of £40,000.
Savings accrue chiefly because licensing on the basis of capacity, rather than individual servers, better suits Trafford’s pattern of deployment; as servers proliferated within its project-led culture, server-based licensing incurred a financial penalty.
This was compounded by the fact that in the per server model, CA charges both for the software running on the central back-up server, and for “agents” that run on the application servers that are backed up.
Keeping track of the annual maintenance charges for the separate agent licences was a major headache. Every additional back-up agent that ran on the application servers had to be licensed, and the maintenance fee renewed each year.
“Potentially, we had loads of different licences to maintain, all expiring on different dates,” says Fenton.
In addition, the overall cost of the model had become unpalatable. “In such an environment, each time we bought a new server, we were talking about another £750 or more in licence fees,” says Fenton. At the same time, server costs were falling below the £2,000 mark, making licence costs proportionately greater.
This licensing overhead had accumulated over time, creeping up on the health trust, which, like other former Unix users, had no previous experience of licensing back-up.
Before moving to Windows, Trafford had used Unix boxes, which have back-up built-in. Each Unix server came with its own low-capacity tape drive, and applications were accompanied by a script for the back-up. “They were turnkey systems,” says Fenton.
When the trust moved to Windows it initially repeated its approach with the Unix boxes.
“We used individual tapes for each SQL server. It was a logical extension of what we did with the Unix boxes. However, as the number of servers and applications mushroomed, managing tapes and back-up programs for each server became impractical.”
There are some disadvantages to the new approach. The first is having to licence back-up in blocks of 1Tbyte.
“As you tip over into a new increment you are faced with buying a large chunk of extra capacity that may be only partially used,” says Fenton.
A further disadvantage is the way that storage capacity is calculated – according to the raw capacity of the backed-up drives, rather than the capacity actually utilised. The large disc installed in servers may only be used nominally, while redundant array of independent disc (Raid) storage architectures are designed to ensure redundancy.
“Nonetheless, licensing capacity is cheaper and a lot less hassle for us,” says Fenton.
Beware the chamber of horrors
There are certain scenarios that users should avoid at all costs, says outsourcing broker Quantum Plus. Above all, always remember the golden rule: there is no such thing as a standard contract.
Seemingly innocuous “version updates”
Relatively minor updates of the “0.1” variety can incur unadvertised changes to terms and conditions that have a significant impact on customers. For example, a version update may change the way that the number of users is calculated or the nature of server licensing.
Obscure charging mechanisms
Be very sure of the supplier’s charging model for a licence. Is it based on the number of users, servers or even processors? Seemingly low-cost software can easily be installed in a non-compliant way. For example, if software costs are processor-based, and the server is a quad processor, the result is under licensing and a big bill.
Control of media
A number of suppliers of shrink-wrapped software have clauses in the agreement that require users to show they control the media on which the software is distributed. Examples of control might include a single point of contact for receipt of a disc, its safe storage, and an approval process for signing it out. A supplier could cite a lapse in control as breach of contract.
The outsourcing clause
Suppliers may try to insert into terms and conditions their right to renegotiate the licence should the management of an asset be moved to a third party. This can be invoked for an outsourcing contract, even when the software and server remain onsite. Suppliers may also reserve the right to charge an administration fee to transfer the licence to the third party. Beware: the transfer fee could run into thousands of pounds.
If you are underlicensed and on the back foot, the balance of power shifts to the supplier, who may insist you sign up to an enterprise licence. Such a licence may appear to be all-inclusive and cover every eventuality, but the reality is that it will likely be accompanied by a hefty three-year or more service and support charge that adds no value.
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This was first published in July 2006