Tempe, AZ April 25, 2002 Purchasing organizations negotiating contracts for software should read the fine print on their application licenses and assume that the solution provider will strictly enforce all the provisions in the agreements, according to a recent report from technology consultancy META Group.
In the report, entitled, Users Must Analyze Software License Terms and Expect Strict Enforcement by Vendors, META's analysts warn that software providers are looking to maximize their revenues from existing customers. So while software companies may offer licensing deals that appear to favor the user, often the opposite is the case.
For example, licenses may provide for "per user" pricing but then count trading partners accessing the company's applications over the Internet as users. Providers of enterprise resource planning (ERP) systems may also include clauses that allow a company's employees to access "self-service" functionality, such as choosing insurance options, for a fee. For a company with thousands of employees logging transactions on such a system, those fees could add up quickly.
"Purchasers must be careful about the explicit terms of the contracts that suppliers offer and the implications of those contracts to their organizations," the analysts write. "They should behave as if suppliers will enforce most provisions in contracts, regardless of any statements made by sales reps or the current enforcement policy."
Suppliers may also take the approach of offering "value-based pricing" based on company revenue, total number of employees or cost of goods sold (COGS). Purchasers negotiating such agreements must ensure that the pricing scheme corresponds to the value that the application will bring to the company. "A tin-can manufacturer and a platinum jewelry manufacturer might have very similar manufacturing processes and might be of roughly equal size, but a uniform metric based on COGS just would not work," explained META Group analyst Barry Wilderman.
An agreement with value-based pricing could also lead to trouble down the road should the company using the software buy another firm of any substantial size, thereby expanding revenues, adding employees or increasing COGS. "Users need to negotiate specific language into their contracts to handle such expansions," META advises, adding, "The customer should also negotiate terms that reduce contract fees if the organization becomes smaller (e.g., spins off a division)."
META also warns that purchasing organizations accustomed to low switching costs must consider the long-term implications of investing in an enterprise software application that will become a standard for the company for years to come. "Once a commitment is made to a supplier, the user essentially enters into a monopoly situation," says META Group analyst William Snyder. "If the supplier comes back later with new charges or licensing increases, the user has little recourse given the high switching costs. Corporate purchasers that are used to thinking in terms of low switching costs often do not appreciate this."
The META report co-authored by a group of eight analysts at the consultancy and available on the group's Web site (http://www.metagroup.com/cgi-bin/inetcgi/search/displayArticle.jsp?oid=30416) offers advice for dealing with additional software provider tactics, such as offering discounts when users buy licenses for future expansion, locking in maintenance fees for a projected maximum number of users rather than the actual number or recycling past, unfavorable contracts that might have been used for relatively small purchases.
