Negotiating the Best Software Deal

  • Written By: B. Hecht
  • Published: September 29 2000


Negotiating a software and services license is a multi-faceted endeavor in which many aspects of the vendors' strengths and challenges may be leveraged to the purchasers' advantage. Perhaps the most basic software negotiation tip is to treat the process as a combined system rather than a discrete set of individual point negotiations. In other words, do not walk into the negotiation without a plan. Rather, the lead negotiator must have a definitive structure in mind that encompasses all three components of a software negotiation - product pricing, product maintenance and vendor service and support. All negotiations should be conducted from two different but related perspectives - an absolute price (the price provided by the vendor in a vacuum) and relative price (vendor price versus its top competitors).

Each sub negotiation should be managed within the context of the larger process. The client should be willing to give ground tactically in areas that are known in advance to be vendor sticking points, while using that vendor inflexibility to gain additional strategic concessions in other areas. For example, when a vendor is well known for never dropping its software maintenance fees (Peregrine Systems is a good example), a client can use that information as leverage for reduced product license or service and support fees. In another example, a client could use Oracle's legendary stubbornness in reducing its professional services pricing to gain major concessions on Oracle application pricing. In all cases, a comprehensive plan should be designed prior to the negotiation discussion, with multiple project team individuals playing different roles throughout the process.

TEC analysts have separated the software negotiation process into three discrete categories. All three are critical individually, yet should always be pursued within the context of the larger discussion. The first negotiation category combines basic negotiation skills and recommendations with specific software pricing tips:

Basic Negotiation and Product Pricing Tips

  • Always have the final closing/acquisition call with the most senior vendor sales rep at your site. Ensure in advance that this sales executive has the ability to rewrite or adjust the deal on the spot given the direction of the negotiation. In general, this vendor sales position is, at minimum, a District or Regional Manager level or higher.

  • Ensure that you have legal or contract counsel at the final meeting in order to document all updates to the contract. All contract points agreed to at the meeting should be documented and initialed by both parties.

  • Negotiate up front the price for additional future seats/copies. Future copies should be included in the volume discount negotiated in the initial acquisition price.

  • Negotiate multiyear contracts for a percentage discount. In general, organizations should expect a five to fifteen percent discount off the final discounted price. Never mix a multiyear discount in with a volume discount. Both should be negotiated separately and subtracted from the original price.

  • Ensure that all pricing is done in one currency (preferably US dollars) and no price increases are applied for licenses used in other countries.

  • Extend payment cycles out for a minimum of net 60 days. As documented in more detail within the service negotiation section, map all payments to clearly defined, pre-negotiated milestones and service levels.

  • Ensure that you have the right to reproduce paper and electronic copies of the software documentation free of charge. This is an important, but frequently overlooked right that allows the client availability of documentation to every current and potential user.

  • Ensure that the software license is perpetual and never runs out, including if the maintenance fees expire or if the company is acquired.

  • Negotiate in advance the ability to place a copy of the vendor's software source code and all necessary supporting compilers and tools in escrow in case of a vendor acquisition or bankruptcy. In case of vendor bankruptcy, insert contract language allowing the user organization to recruit technical staff from the vendor for future product support.

  • Negotiate early access to the vendor's future beta software releases and first level access to vendor bug fixes if interested.

  • Specify in the contract the exact delivery date of the software. The first payment to the vendor should be gated by client receipt of the software.

  • The vendor should include the following for no additional price:

    • A provision for consultants or outsourcers utilized by the client organization to use the software

    • Given a site license, a provision that defines authorized locations as including all current and future facilities

  • Always have more people in the room than they do. An ideal number is double the total number of vendor representatives. Each individual should know his/her role prior to entering the meeting and multiple profiles should be present: technical guru, bargain basement financial representative, legal and contract resource, lead negotiator, bad cop, good cop.

Maintenance Pricing

This is one of the most overlooked negotiation areas for software deals. Maintenance pricing consistently represents a ripe opportunity for long term client savings because vendor sales representatives are rarely compensated for future maintenance fees. The result is an increased willingness on the part of the rep to either reduce the percentage of annual maintenance fees for the same level of service, or increase the level of committed service for the same fee. Client organizations should always aggressively pursue software maintenance reductions; some recommended tips are documented below.

  • Reduce the overall maintenance percentage. The industry average software maintenance percentage is 16-22 percent depending upon the level of service provided by the vendor. Start first by attempting to drop the overall maintenance percentage paid by at least 2%, for the same service through the duration of the contract. Always enter into this phase of the negotiation with competitive information on other vendor programs and use it as leverage during the discussion.

  • Ensure that the final negotiated maintenance percentage is taken from the final negotiated net price, not the initial list price. This is perhaps the easiest and most obvious maintenance reduction, and usually a "no brainer" for the vendor sales rep.

  • Negotiate the level of services provided for the final maintenance price. Never assume anything from the vendor, especially issues related to maintenance and service and support. Always build detailed service levels into the maintenance plan for the same percentage price. Service level agreement examples include specific time zones supported, overall support times, and committed response times for specified service levels.

  • Define severity levels with the vendor and tie levels to response time. As a followup to the service level tip discussed above, develop a minimum of 3-4 severity levels for service and support and require appropriate service levels for each. Four severity level examples with related support requirements are: Critical Priority (1 hour response, 3 hour resolution), High Priority (3 hour response, 12 hour resolution), Medium Priority (24 hour response, 72 hour resolution), Low Priority (72 hour response, 5 day resolution).

  • Ensure that the maintenance fee includes the right to obtain new versions of the product and all fixes at no additional cost. As documented in the general software negotiation tips, negotiate first access to all new versions and bug fixes, as well as write a named contact into the deal in the case of specific questions on new features and functions.

  • Do not allow the vendor to tie its software license grant to the renewal of its maintenance/support coverage. The software and maintenance licenses should be defined as separate transactions and negotiated separately. If the client organization decides not to renew its maintenance contract, it should retain the right to utilize the software as it pleases.

  • Ensure that vendor price increases do not impact pre-negotiated maintenance fees. If unsuccessful, negotiate caps on price and maintenance increases both per year (5% maximum) and over the life of the contract (20% maximum).

  • Make the vendor specify how many releases/versions will be supported concurrently by the vendor and for what minimum period. This is critical if the organization believes that it may stay on a particular software version longer than the vendor desires. It also ensures that the organization migrates to new software versions on its' time, not the vendor's time.

Service Negotiation

Perhaps the most valuable way to approach vendor services negotiation is to imagine the endgame as a vendor in a box. The entire goal of the service negotiation is to define a finite set of vendor cost and service limits while providing the greatest amount of client control over payment schedules, personnel approvals and service levels. Some recommended tips are documented below.

  • As discussed in the maintenance negotiation section, detailed service levels should be defined for all phases of the implementation process.

  • The vendor should always pick up all travel and expenses. If the vendor refuses, a cap should be placed on travel costs. Detailed expense reports should be filed by the consultants and approved by the client, with specific price limits placed on meals, and all personal expenses (phone calls, in-room movies, etc.) charged to the vendor.

  • The client should always have control and final approval rights over all original personnel and final approval of all personnel changes. This includes both personnel added to the project and personnel removed from the project.

  • Money should be placed in escrow based upon implementation milestones completed by the vendor and approval by the client. Upon reaching a specific milestone, the client signs off on the next stage of the funding that has been negotiated in advance. In general, funding is based upon a one-third, one-third, one-third model for services provided.

  • Negotiate in advance a price per day appropriate for volume and personnel level. Price per day will vary by area.

  • All services committed to in the contract must be completed for the initial price. Timeframes and pricing guidelines exceeded by the vendor should be picked up by the vendor at no additional cost.

Aggressive vendor negotiation should be perceived as both an organizational right and opportunity. Utilizing the tips documented above, a user organization should, on average, reduce its final software acquisition cost by 20 percent, and ensure higher quality service and support for the duration of the contract.

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