Strategic Software Contract Negotiating – Part 1

A few years ago I wrote a guide for a client on what the lead negotiators needed to think about when negotiating a contract for a piece of software that was going to be highly strategic to the client's business.  This post is largely from that set of guidelines, itself which came from a number of years of me negotiating software contracts.  It covers a number of guiding principles that govern the overall negotiation process, some specific preparation work prior to entering into actual negotiations, what to consider when reviewing the license agreement itself, and what to consider when reviewing the services contract.

The following assumptions are key criteria for what is in the rest of this post:

  1. The software and the implementation are strategic to the client.
  2. The best deal is always were everyone wins.

Overall Guiding Principles

The following four guiding principles are important to understand and internalise before and during the negotiation process.

  1. The negotiations have to be “win-win” — both parties must feel it’s a good deal, and that they have come away with value.  Otherwise, formation of a symbiotic partner-relationship will be severely hampered.  Given the strategic nature of this implementation to your overall goals and objectives, such hampering would clearly not be in your best interests.
  2. Everyone on your negotiating team must remember that you want “most favoured customer” pricing and terms.  That means that during the negotiation, document review, etc., each person needs to be observant for indicators that that may not be the case.  If it is ever suspected thus, very nicely but specifically ask of the vendor, and make sure adjustments are made accordingly to the agreement.
  3. The vendor must understand this is not a “done deal”, and that you are prepared to “walk away” if the negotiations cannot get all parties to a win-win.  Often the best way to do this is in opening remarks at the first negotiating meeting.  Stress that you are seeking a win-win, recognising and valuing that, upon success, the vendor will be a long-term business partner, the viability of which is very much in your best interest.
  4. Negotiations usually take time.  Make sure sufficient time is allowed for people to go away, think about the terms, come back with alternatives, and explore options, all in an anxiety-free arena.  The process must happen “in good faith”.

Preparation

You will want to do the following in advance of your first negotiation meeting:

  1. A thorough review of the RFP and the proposal along with its attachments is the first step.  Make notes about the most important things that you must have, in the form of a succinct check-list, so that you can ensure they are covered.  This will be more than just cost items, and will include support must-haves, etc.  Make specific note of elements in the proposal that are not what you want, as you will need to negotiate these to your favour.
  2. Determine your “upper bounds” for the various cost components, including initial license, support and maintenance, training, implementation, etc.  This may be what the vendor has already specified.  If you are satisfied with what the vendor has proposed, then negotiations may merely be making sure you have everything covered off that you needs vis-à-vis terms and conditions, and that you are covered for subsequent events (which will usually be in the terms and conditions if they are there — if not, you will want to write them in), audit provisions, etc.
  3. In discussion with various stakeholders in your company, determine what you are prepared to offer the vendor (you will want to have these in your back pocket be able to offer up when appropriate during the negotiations).  These may include:
    1. being a reference upon successful completion;
    2. participating fully in an advisory group for product direction and development;
    3. being a beta-test site;
    4. sharing information about your operations with the vendor (under an appropriate non-disclosure agreement) such as in the following ways:
      1. permit the vendor staff to observe and model your business;
      2. provide the vendor with privacy-data-scrubbed databases; and
      3. bring the vendor in early in your planning processes so the vendor knows what you are trying to do months or even years in advance of implementing so the vendor can plan better (I highly advise doing this regardless);
    5. being a lead sponsor and organiser of a User Group for the vendor’s product(s); and
    6. permitting the vendor to use your name, excerpts / quotes, and logo on the vendor promotional material.
  4. Do you have a pro-forma software licensing agreement that your company already uses for enterprise software that you like, and on which you have already had legal advice and approval?  If so, you should present this to the vendor as your contract in which you wish the vendor to enter as opposed to accepting the vendor’s license agreement.  If you do have such a pro-forma, it will need to be edited to include appropriate details based on the RFP and proposal, as well as any other specifics that may apply.
  5. Determine how you would like the implementation costs to be tracked and billed.  What mechanisms do you want in place to ensure work is progressing appropriately, being time-tracked, and appropriately billed?  If a system and process are not already in place, you will need to design them (either manual or automated).
  6. Make sure that your negotiators are intimate with your contracting process, and that the lead negotiator has spoken with all of your internal players, such as corporate council, corporate purchasing, internal audit, etc.  All these parties need to know what is happening, and will need to be prepared to participate appropriately in reviews, etc., at the appropriate times.
  7. Find out when the vendor’s year- and quarter-ends are, what the nature of the financial and operational reporting is at that point in time, and how sensitive the vendor is to having deals booked.  Often the closer negotiations happen to quarter- or year-ends, the more favourable the outcomes can be for the buyer.  It may make sense to delay the negotiations slightly to press the vendor.  However, this must not be done in conflict with the “win-win” guideline mentioned previously.  Do not do this so you can squeeze the vendor into a bad deal for the vendor.

Determine how you would like to manage your support relationship with the vendor.  There are various models, from a “free-for-all” where any of the client’s employees can contact the vendor technical support (generally not preferred by vendors) to a more controlled interaction, where only certain named individuals contact the vendor, and the client creates its own, internal help organisation that eventually funnels to those named individuals.

Stay tuned for Part 2 — The License Agreement / Contract, Implementation, and Conclusions

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