Avoid licence pitfalls in outsourcing contracts

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Avoid licence pitfalls in outsourcing contracts

Nick Huber

Organisations could save millions of pounds by paying more attention to their software licences when outsourcing their IT to a supplier, according to a report from analyst firm Gartner.

The licensing terms of software agreements are often overlooked by organisations when they are outsourcing even though most licensing contracts do not reassign the rights to outsourcing suppliers, said the Gartner report, published earlier this month.

"Organisations that wait until the outsourcing arrangement is completed before thinking about software could find that they are breaching their licensing terms," said Alex Bona, research director at Gartner Intelligence.

"To make matters worse, the software supplier's salesperson will probably know that an outsourcing decision has been made, giving the organisation little room for manoeuvre to negotiate a reasonable deal. Some organisations have had to buy software licences again on outsourcing."

Organisations have three main options for handling software licences when outsourcing, each with their own risks and rewards, said Gartner.

Option one is for the organisation to retain control of the software licences but allow the outsourcing supplier to use the software solely to process the organisation's business. The advantage of this is that the user can maintain a direct relationship with their software supplier and is aware of their rights and entitlements for software licensing if the deal ends.

However, not all suppliers allow outsourcing providers to access licences on behalf of their users, Gartner warned. PeopleSoft, for example, does, but SAP, Oracle and Siebel do not.

Under option two, the outsourcing supplier takes over the user organisation's licences and becomes the licensee. This means that the software contract must include a clause that allows licences to be assigned to a third-party outsourcing supplier, solely for the purpose of processing the user's business.

This approach ensures that an organisation will save by not having to manage its software licences or the relationship with the software supplier, according to Gartner. The risk of this is that the user loses contact with its software supplier and may not be able to negotiate with it when the outsourcing contract finishes.

The final option is for the outsourcing supplier to negotiate its own licence for software with the user's supplier, passing on any savings to the user. However, Gartner said the outsourcing supplier does not always pass on its discounts to its customers, who risk paying twice for software licences.



Outsourcing licensing options

  • The user organisation retains control of the software licences but allows the outsourcing supplier to use the software solely to process the organisation's business
  • The outsourcing supplier takes over the user organisation's licences and becomes the licensee
  • The outsourcing supplier negotiates its own licence for software with the user's supplier, passing on any savings to the user.

Source: Gartner


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