Enterprise software vendors can be tough to deal with in negotiations.
Having spent decades developing their products and building their enviable market positions, large enterprise software vendors are often not shy of throwing their weight around. As a consequence, customers hoping to negotiate a reduction in their current spend - or a great deal on new software - often have difficulty gaining any traction, and can in fact find themselves moving backwards instead.
To make things more challenging, the customer will usually deal with a battle-hardened negotiating team on the vendor’s side. They are accustomed to managing these issues every day and have an intimate knowledge of their product set, contracting structures and commercial levers that a customer can often hardly hope to match.
Tips for re-negotiating a software deal
Having advised clients on a number of re-negotiations with major enterprise software vendor, we have identified a number of strategies that can help customers find more success when approaching new negotiations with an incumbent vendor.
1. Establish a clear baseline of your current and future needs
The key to success in any negotiation is to arm yourself with a full and complete picture of the negotiating battleground.
As we have already mentioned, you can assume that the vendor’s team will have a thorough knowledge of its product landscape and sales objectives. In order for you to not start negotiations at a disadvantage, it is critical that you have an equally clear picture of your organisation’s current and future requirements for the vendor’s software.
One way to do this is to carry out an internal audit in order to properly understand how you have deployed the software, including whether your current use is increasing or declining. This will give you a view as to what your overall objectives should be in the negotiations, as well as identifying any weak spots that the vendor could use against you (such as any potential areas of under-licensing).
In our experience, we have seen clients who have simply lost track of how many users they have for their licensed software. For example, they may have employees with multiple user profiles (e.g. where a new profile is created each time they change roles) or have dormant profiles for users who have changed roles or left the business. This can potentially be used by the vendor as negotiating ammunition to claim that additional licences are required to cover every user profile. If you can identify this type of issue in advance, you will be better placed to manage it in a pro-active manner, either by demonstrating to the vendor that there is in fact no under-licensing or by tidying up your records in advance so that they accurately reflect your actual usage.
2. Consider whether a change to your product mix may increase your negotiating leverage
While incumbents have a very strong market position, most established enterprise software vendors are facing increasing competition from smaller and more agile rivals who operate on a SaaS model and can offer customers greater flexibility to adjust their usage levels over time.
This in turn means that sales teams at many leading vendors are under pressure to retain existing customers and, in particular, to encourage those customers to migrate to their own cloud-based solutions. Indeed, some vendors offer their account teams significant performance incentives if they can convince customers to switch to newer products rather than stay on their existing products. This is something you may be able to use to your advantage.
If you are renegotiating your existing product profile, then you should consider this as an opportunity to seek some concessions from your vendor (eg to retire unused licences for existing products and reduce your maintenance base, or obtain special discounts on new products).
3. Pay attention to definitions, particularly in relation to concepts of “use”
It is hardly controversial to say that the licence agreements used by most enterprise vendors are not very user-friendly. A single agreement may be formed by multiple layers of documents, including general terms and conditions, product appendices, order forms, support schedules and use rights manuals. Often these documents are made available on the vendor’s website and incorporated into the agreement by reference so that the customer has to go on a wild goose chase to discover what the terms of their contract are at any given point in time.
While it can be a painful process, it is important to trace through all of these documents, and the definitions in particular, in order to properly understand what you are buying and avoid common errors such as:
- Buying a higher level licence or support option when a lower level would be sufficient to meet your needs.
Do you really need a “Professional” licence or would an ordinary “Employee” licence be sufficient, and does the difference between “Standard” and “Premier” support really justify the difference in price for your particular application?
- Not appreciating the types of use that may require a licence under your agreement.
In particular, the concept of “indirect use” has generated furious debate among customers around the world, as it often crops up in vendor agreements but is rarely explained in a very clear way. Some vendors are notorious for relying on this concept to argue that a customer is under-licensed, and that they need licences to cover users who may not directly interact with the vendor’s software, but do use other applications that rely on outputs generated from that software. This can result in a significant increase in the number of user licences required by the customer.
In order to avoid spiralling and unforeseen licence costs, it is imperative that you keep an eye out for “indirect use” provisions in your licence agreements and ensure that the concept is clearly defined. This way, you can architect your systems in a way that minimises any risk of unexpected licensing costs for indirect use.
4. Carefully frame audit provisions to prevent future fishing expeditions
Most vendors will want a right to audit your compliance with their licence terms. We often see vendors conduct an audit shortly prior to commencing a renegotiation with the customer, as any evidence of non-compliance can provide the vendor with useful negotiating leverage.
As an example, as part of the audit, the vendor may ask a customer to provide information about their system architecture, including any points of interconnection with other systems, which the vendor can then use to identify areas of potential “indirect use” (and claim additional licence fees) as discussed above. Given the complexity of many enterprise-wide licensing arrangements, it is unsurprising that most audits will identify some non-compliance – in fact, we very rarely see an audit that returns an entirely clear result!
While you cannot expect to avoid the prospect of an audit altogether, you should seek to ensure that the scope of any audit right is clearly defined so that the vendor cannot simply use the audit as an excuse to go on a fishing expedition. In particular, you should include:
- limits on frequency of audits, and a requirement for the vendor to give a reasonable period of advance notice before conducting an audit;
- a clear description of the information that you are required to make available to the vendor for the purposes of the audit, which should be limited to information that is legitimately required to measure and assess your compliance with relevant licence metrics used in your agreement; and
- pre-agreed remedies for any under-licensing identified through an audit (e.g. so that additional payments are calculated at your discounted rates rather than at the vendor’s full list price).
5. Factor in ongoing liability for maintenance and support fees
Many large vendors are deriving an increasing proportion of their revenue (and an even higher proportion of their profit) from ongoing maintenance and support services. While customers can often be fixated on the initial licensing cost, the vendor’s team may be more focussed on securing an interrupted future flow of maintenance and support fees. Over the lifetime of your licence, these fees can add up to many times the cost of the underlying licences.
Generally, vendors will calculate their maintenance and support fees as a percentage of the maintenance base, being the base cost of the licences covered by the relevant maintenance and support services. And vendors will make it as difficult as possible to reduce this maintenance base. If a customer wants to retire any of its licences, the vendor’s starting position will usually be that the maintenance base remain fixed, so that the customer must continue to pay for maintenance and support of licences that are not in use. Or if a customer wishes to suspend maintenance and support services for any period, the vendor may require back-payment of fees if the customer wishes to reactivate those services at a later date.
To mitigate the risk of paying for unnecessary maintenance and support, it is critical that you establish an appropriate usage baseline so that you do not buy more licences than you need. If possible, you should also explore the option of “resetting” your maintenance base as part of any major renegotiation or change in product mix.
Finally, it is always worth considering whether you can conjure up any competitive tension in your negotiations. Is it realistic for you to shift all or some of your business onto alternative products? If so, have you done any due diligence or commenced any initial discussions with other vendors?
Having a well-defined “Plan B” in place can dramatically change the negotiating dynamic and drive the vendor to work much harder to meet your commercial requirements, and show much greater flexibility in negotiations.
However, the negotiators you will be dealing with are not naive, and will easily be able to distinguish real from empty threats. If you do want to play the “walk away” card, be prepared to back that up with some real tangible action, or else it will only undermine your credibility as negotiations progress.