Negotiating Software License Agreements


February 02, 2021

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As enterprises accelerate their transformation initiatives, a meticulously negotiated software license agreement has never been more important. But that’s easier said than done – particularly now. Disruption challenges even the strongest negotiation plan. Vendors’ licensing, pricing and contractual business terms have become increasingly complicated and change frequently. And many enterprises are working with software vendors for the first time, which removes the advantage of experience. In the content below, we explore ten tips for negotiating software license agreements in the coming year.

Negotiating Software License Agreements: Our Top 10 Tips

1. Perform IT Price Benchmark Analysis on all Renewals and New IT Purchases

Pricing in the IT world is notoriously inconsistent, making it difficult to determine fair market pricing. Licensing terms are also becoming increasingly complex and, as noted above, change frequently. What one customer pays for a similarly-scoped IT purchase or renewal can often be 20, 30 or 50 percent more than the next customer.

Performing IT price benchmark analysis on material purchases and renewals serves as guardrails for overspending. It ensures you pay equal to or better than best-in-market pricing. Smart businesses use this tactic to eliminate overspending, keep pace with changes in vendor pricing and licensing, and conduct data-driven vendor negotiations. By equipping your IT buyers with transaction-specific IT price benchmark analysis, you will be ensuring you get the best possible deals, purchase-by-purchase.

2. Break Down Bundled Pricing

Enterprise software vendors favor bundled pricing that combines multiple SKUs into a single package. However, failure to show line-item pricing makes it difficult to understand what you are paying for and the value of each item in the bundle. To boost perceived value, vendors often include offerings “at no additional charge.” What may seem like a good deal can be a perfect recipe for shelf-ware that drives up maintenance costs. NPI recommends requesting vendors provide item level pricing and discounts. This way each item can be evaluated for its true value to the organization, and line-item price benchmark analysis can be performed.

3. Align Software Usage with Best-fit License and Subscription Options

When it comes to negotiating software license agreements, the savings tactics that happen before negotiations even begin are often the most impactful. Case in point: software license optimization. Most companies overspend by paying for unused licenses and subscriptions or higher-level licenses than necessary. To avoid overpayment, you need to fully understand which licensing options (including the cost implications of things like virtualization, indirect access, etc.) best fit your unique user and business requirements. If you don’t have vendor-specific expertise in house, consult objective third-party licensing experts that do.

4. Consider Taking Advantage of Better Pricing in Exchange for Longer Term Commitments

The practice of trading better pricing for long term commitments is common among many industries, including enterprise software. Focused on growing their businesses, many software providers are willing to lower their prices in exchange for continued user loyalty. This is a good opportunity for companies to balance their own needs to minimize IT spend while still pursuing mission-critical IT objectives – but requires careful evaluation. Vendor lock-in can have negative implications on IT and cost agility.

5. Buy Only as Much Support as you Need and Explore Third-Party Support Options on Major Software Estates

Companies routinely overpay by purchasing more maintenance and support than necessary. This can occur when either opting for a premium support package versus the standard alternative, or by failing to evaluate less expensive third-party support alternatives. Like license optimization, support optimization should be performed prior to negotiating software license agreements. Be sure to clearly define and align your support requirements with available options. In many cases, those options will include both vendor-direct support and third-party support alternatives.

A note on third-party support: these options are becoming more mainstream as providers often offer support at levels that match or exceed those offered directly by the vendor. The benefits are numerous with the most obvious being significant cost savings – often half the cost of standard vendor direct support.

6. Negotiate Favorable Renewal Rights – and Don’t Wait Until the Last Minute to Renew

How well you negotiate the renewal rights covered in your software license agreement will have a direct bearing on your costs down the road. Vendors know your motivation to renew will likely be much stronger than your motivation to enter a new agreement with a different provider. It’s one way they extract higher rates at renewal time. For that reason, consider negotiating caps on annual and renewal price increases with your vendor.

Another piece of advice – don’t wait until the last minute to renew. It used to be best practice to let your vendor sweat it out as end of quarter/year/term approached. That’s no longer the case with many vendors. As deal pipelines get full, a vendor’s deal desk can get overwhelmed making it difficult to secure last-minute concessions. Timing is a lever that’s applied differently depending on the vendor – know how to use it to your advantage!

It’s also worth considering the terms that will govern what happens if you don’t renew. As the IT landscape and your business requirements evolve, you may need to switch vendors. It’s important to negotiate favorable termination and transition assistance clauses that clearly outline who’s responsible for what and what kind of transition assistance will be provided.

7. Inspect Product Use Rights and Online Services Terms – Particularly for Renewals

Your renewal is a perfect time for vendors to sniff out the state of software license compliance. Vendor tactics range from formal true-ups and self-declarations to more innocuous exercises like cloud economic assessments. Regardless, it’s important you have your compliance house in order before negotiating your renewal.

Most enterprise software license compliance issues are unintentional. Inadvertent misuse, misinterpretation of licensing definitions and product use rights, unintended consequences of upgrading or downgrading license types – to name a few. But the hard truth is most vendor audits uncover noncompliance and seven- and eight-figure penalty fees are typical.

The best defense is proactively conducting an internal self-audit – a License Position Assessment – on your largest software estates. Think of it as preventative maintenance. Rather than waiting until a vendor initiates an audit, you can proactively spot potential risk, and fix it. The ideal time to do a license position assessment is well before your next renewal or true-up, allowing yourself plenty of runway for remediation decision-making and implementation.

8. Pay Close Attention to Clauses that Govern Software License Audits

When negotiating software license agreements, it is crucial that all audit rights are stipulated and agreed upon with every enterprise software vendor involved. As a result, the negotiated audit rights should specify the following:

  • The allotted time a company must respond to a formal audit request
  • Which vendor resources have the authorization to audit
  • What tools will be used
  • What data must be provided (and how soon)
  • How arbitration will be handled

By fully understanding audit rights prior to an official audit, companies can model their self–audit using the same rules of engagement that the vendor will use.

9. Get Price Benchmark Analysis on Professional Services Rate Cards

If there are material implementation fees associated with your purchase and they are being provided on a time and materials basis, be sure to get a detailed project plan that outlines the resources, talent, time, and milestones required by the project, and a rate card for the various roles. Then perform price benchmark analysis on the rate card – this frequently identifies multiple roles that are overpriced as compared to market and need to be negotiated downward.

10. Have a Protocol for Who Communicates with the Vendor During Negotiations

As we’ve covered in another post, team alignment is fundamental to strong software license negotiations. You’ll likely have multiple stakeholders involved on your side of the table – all with their own motivations and communication styles. Vendors know how to work this dynamic to their benefit.

All vendor communications and interactions need to happen under the purview of a shared internal protocol and process. Who in your organization is a target for vendor communications? Who is allowed to speak to whom on the vendor side (and who is not)? What is each person’s role and what are they allowed to share with vendors? When do certain team members need to “go dark” or tell the vendor they don’t know any details? Remember, your vendor has a playbook for negotiating software license agreements – you should too.

Negotiating Software License Agreements

Software license agreement negotiations are complex and resource-consuming. The risk for overspending is high and the cost implications can be years-long if not properly executed and managed. On the flipside, there are levers that can be used counter this risk – and savings are only one important measure of success. A strongly negotiated software license agreement can increase IT agility, accelerate digital transformation and other strategic initiatives, smooth the pathway to compliance, and uncover areas of toxic spend that need attention.

If your enterprise has a software purchase or renewal negotiation on the horizon, NPI can help.