Negotiate to get the best licensing deal

While stories abound of users being stiffed by suppliers, getting a good software licensing deal isn't impossible - you just need...

While stories abound of users being stiffed by suppliers, getting a good software licensing deal isn't impossible - you just need to know how to negotiate a good deal.

Software licensing sits at the cusp of IT, procurement and finance and so it is hardly surprising that many companies come to grief in this area.

The most common mistake reported by users and consultants is that companies allow themselves to be put on the back foot. "People come to us because they don't know what is happening in their organisation and Microsoft or the BSA is giving them a hard time", says Paul Sloane, CEO of Monactive, a software audit tool supplier.

Reasons for this reaction are manifold but all stem from the fact that software is a notoriously difficult asset to control. While it may be easy to count company cars or PCs, software can be downloaded over the Internet or smuggled in on the front of a magazine.

Most significantly, organisations rarely have someone dedicated to software licensing. "It's usually the last thing on IT's mind," observes one reseller.

Take control of the situation
Even when companies do realise that their software is out of control, it's not too late to renegotiate a decent deal. The key thing is not to go cap in hand to supplier who then has an expectation of licensing revenue that can be milked from a user.

Once a supplier has such an expectation it is very hard to renegotiate the price down, warns Zak Virdi, software services director at licensing specialist Bytes Technology Group

Virdi urges users to arm themselves not only with accurate audit information but also with a strategy for desired usage before approaching the supplier. Arriving at this point may require the advice of a trusted third party or consultant, he suggests, but users should do this sooner rather than later to reap maximum rewards.

Virdi cites two examples of large retailing outfits that Bytes worked with recently to renegotiate their software licences. The company that enlisted advice up front was able to secure a £2.8m saving over three years, whereas the retailer that sought assistance at a later stage in negotiation was unable to make any savings.

Rupert Battcock, of law practice Nabarro Nathanson, also advises early involvement of the experts. Issues that lawyers need to look at include warranties, the scope of the licence itself (the "scope of use" clause), limitation of liability, any warranty exclusions, and intellectual property indemnities.

There are also practical matters to consider, which often need to be picked up in the licence agreement. For example, do companies have access to source code (otherwise known as software escrow) if the supplier goes bust?

"Tactically I'd say the important thing is to raise these issues as early as possible and practicably in the circumstance. There are many cases where involving your legal team early at the invitation to tender stage can both make it easier for you to negotiate the deal you require, and also save time and legal expenses later on" he points out.

However Battcock warns against lawyers who are over zealous in specifying their client's requirements. "Any lawyer setting out or reviewing requirements or comments in an invitation-to-tender (ITT) document needs to be commercially aware of what it is sensible to specify as being required - being too inflexible can just mean the legal requirements are just ignored or will not really be of value as negotiation benchmarks"

Inevitably, the amount of negotiation leverage will be determined in part by the size of the deal on the table. Virdi recommends that users try to be as big a fish as possible in their supplier's pond. "With a small vendor, a company with 1,000 users has a lot of clout. With big vendors, you need at least 5,000 to have any real input and 10,000 seats to have the muscle to change any major contractual terms," he says.

In addition, adds Battcock, there is a big difference between purchasing licences for off-the-shelf software where scope for negotiation may be limited, and purchasing on a higher value basis, or where there is an element of customisation which may offer real scope for negotiation on a lot of issues.

Know your true worth
The most common reason for companies paying over the odds is that they are over-licensed according to their real usage needs, says Monactive's Sloane.

Figures from Gartner Group confirm this pattern of over-licensing among enterprises in order to be on the safe side: According to the analysts group, 60% of applications are over-licensed, 30% are under-licensed - thus presenting a legal liability, while just 10% of applications are spot on.

Monactive's auditing tool, dxPRO, reconciles what software is installed against what is used and what is licensed on a daily basis, thus enabling a company to build up a picture of requirements. Sloane names four packages as the most under-utilised across organisations and a main reason that companies shell out unnecessarily: Microsoft Access, Visio, FrontPage and Project Manager.

However, Microsoft is not the only supplier which benefits from over-licensing. Two sources interviewed for this piece identified redundant implementation of Bloomberg financial information feeds as key wastage. At up to £20K per seat, such financial services represent a major outlay and need to be carefully monitored.

Key options for SMEs
Small and medium -sized companies face the same problems but on a different scale. A key decision for these companies is whether to adopt the traditional Open Licensing Programme offered by Microsoft, or to opt for the more recent Open Subscription Licensing model.

James Hall, team leader at reseller Softcat, says that for a recent customer - a dynamic media company with 700 staff - OSL offered better value. "It's cheaper than buying outright plus there is the flexibility of being able to upgrade.

Hall points out that OLP, by contrast, represents a capital expenditure over three to four years and is therefore best suited to companies that have limited and specific needs. A firm of independent financial advisers that just uses word processing, Excel and e-mail is probably better off with OLP, he recommends.

Virdi counsels all users, whatever their size, to take a three-pronged approach to getting the best software licensing deal: "There are three aspects: the contractual rights of how to use software, the physical issue of how and where software is installed and its usage and finally, the financial element of cashflow," says Virdi.

But regardless of the process pursued, the company that takes a long-term view will secure the better result. Far from being a one-off negotiation exercise, software asset management should be ongoing and supported by corporate policies.

"Often audit projects fail because they are delegated too low. A software licensing committee needs heavyweights on it, representing finance procurement and HR," says Sloane.
This was last published in February 2002

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