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.
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.