As we get close to wrapping up this series we will take a short look at ERP and business software licensing. There are a lot of things to consider here and a number of strategies you can use in negotiating your licenses.
One thing to keep in mind here is that there are two revenue streams for the software provider. The first is the license sale and the second is the maintenance agreement.
ERP – SAP – Business Software Licensing Negotiations
One negotiating tip I learned a long time ago is to always, always, always ask for more than you really need or want. And I don’t mean in the form of the number of licenses or the amount of maintenance. What I mean are the concessions you want the vendor to provide. These are your negotiation “bargaining chips.”
It is always easier to give something up than it is to take something back so if you start from a position where you have several “throw away” items you will find yourself with a decent bargaining position.
- Software is licensed, not purchased.
- Determine “End Game” strategy for licensing
- This Starts “Hard” Negotiations
- Time is on Your Side – end of fiscal year and end of quarter negotiations are best because of pressure to meet sales goals
- Use a “give and take” approach, or a “good cop, bad cop” approach on the vendor(s)
- Carefully evaluate their sales approach
- Telegraph to the vendor your willingness to “walk away” from the deal if the right agreement cannot be reached
- What are the different payment terms?
- Consider “tiered” licensing options
- License “stage” commitments – # of initial licenses for developers / system users during setup, and then additional # of users at actual go-live only to be paid for when the system goes live.
- Ask vendors for interest free licensing options
- Down payment requirements?
- How are software modifications addressed in the license?
- Sticker shock?
ERP – SAP – Business Software Maintenance Negotiations
Software maintenance fees can be a real challenge to negotiate. This is one area where many software providers have a number of tactics they use to maximize your long-term payments to them. One large vendor will just about give their software away, and even entice you with a one or two year, low maintenance fee agreement, and then “let you have it” just as the business and software have started to stabilize. Right at the peak of your dependency on them they will suddenly balloon maintenance fees into the stratosphere.
- How much is the annual maintenance fee?
- What are the maintenance options?
- What if you go off maintenance?
- Is technical support included?
- What kinds of technical support and how frequent (Phone, e-mail, fax, online messages, etc.)?
- Negotiate any maintenance percentage of the software at the price you purchase it for, not at the list price.
- Link fee increases to standardized economic indicators like the Employee Cost Index (ECI), Consumer Price Index (CPI), Factory Orders Report, Purchasing Managers Index (PMI), etc. If you expect an inflation spike or economic downturn the PMI or Factory Orders would likely provide the best hedge here.
- Lock in the rate for the entire duration of the contract to avoid “shock increases” as time goes on.
- Require free license upgrades to any new version(s) of software as part of your maintenance.
- What about Source Code?
- Even after you make the final software selection decision, consider license negotiations with both of the top finalists to use as “buy down” leverage against the real selection
- Try to negotiate contract language with caps or limits on how much or how quickly fees can increase.
- Every publicly traded software vendor has strong market incentives at the end of their quarter to make any deal they can to increase revenue (often times regardless of the margins) so be patient!
- At quarter ends the larger software vendors may resist cutting maintenance percentages but may be much more inclined to provide great deals on licensing. As long as the maintenance is tied to the negotiated license cost then this is the same as getting a maintenance discount.
- Seriously consider hiring a professional consultant who specializes in software negotiations.
Final Thoughts on SAP – ERP – Business Software Negotiations
Make sure your contract agreement does not contain “penalty” language if you decide to discontinue and then renew maintenance. For example some contracts include provisions that if you stop maintenance and then re-start you will have to pay some amount of “make up” maintenance for the period you discontinued.
Probably the most important component of your negotiation strategy is patience. You ALWAYS have the option of walking away and pressing for serious concessions if the vendor wants your business. Believe me, you CAN wait them out. Be willing to wait as long as it takes to get the terms that are right for you but it is also important to be reasonable and fair. In the end everything is negotiable.
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