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Eight ways to avoid common software contract pitfalls

Negotiating a low price for software is good but the upfront cost is just one piece of the software negotiating puzzle. This tip explores the other areas that should be considered.

ANAHEIM, Calif. - So you negotiated a super low price for a piece of software? Good for you. Your bosses will pat...

you on the back. But that appreciation could turn to scorn when they realize the terms and conditions you negotiated for the licensing contract has more holes in it than a New England country road in March.

To many, software negotiations start and end with price. The goal: to get an application as cheaply as possible. Frankly, there is nothing wrong with getting a good deal, but the upfront costs are just the tip of the iceberg when it comes to software negotiations.

This week at the SHARE conference in John Anderson, IBMer and software contract guru extraordinaire, talked about how sometimes paying more for software upfront will save money in the long-term.

"Often people agree on the price then ask for the terms and conditions to be changed," Anderson said. "But in doing that, you are asking for something more and should accept having to pay more."

Anderson recommends you work out the terms and conditions then talk about price. Terms and conditions encompass a wide range of issues from when will the contract end to what happens if the vendor is purchased. Often the long-term happiness with a contract lies in the terms and conditions rather than the purchase price.

Here are a few areas that should be considered when negotiating a contract:

    Do you start with the vendor's contract or do you write your own? There are advantages and disadvantages to both approaches. For example, starting with the vendor's contract is easier and will make the vendor happier. On the other hand, starting from scratch allows you to get everything you want in the contract.

    What exactly is the software license allowing you to do? Generally, the vendor has all the rights as the owner of the software. By granting you a license, they are allowing you to use it but only for the purposes laid out in the contract. Companies should think twice when using software for something outside of the license. Flexibility is possible but it must be put in writing in the contract. A company can't defend itself by saying such and such software is used for XYZ reason because "there is no such thing as normal industry practice," Anderson said.

    Who exactly is the licensee under the contract? Some software contracts use language that limit use to a company doing business at a certain address. What happens if the company moves or the city changes the street name? Also, some companies have a network of affiliates and franchisees who must access systems. "The trick is to define the normal course of doing business. Have your lawyers created the appropriate working for business," Anderson said.

    What can you do without? Obviously, the spirit of negotiations is a give and take. So it is a good trick to come up with several things you don't really care about but you can give up during negotiations.

    Nail down how capacity will be defined. There is no master list of how many MIPS or MSUs a certain system has so it is important to include in the contract how specifically capacity will be define, Anderson said. Picking an independent analyst firm is better than using a vendor's ratings.

    What exactly did the vendor and customer agree on? This may sound obvious but it is imperative that everything agreed upon between the two parties is in the contract. A good contract would clearly communicate exactly what was agreed upon by the parties when picked up by someone not involved with the negotiations. This is important as often the people who negotiate contracts leave the company or switch jobs.

    What happens if your favorite vendor is purchased by your least favorite? Companies can consider negotiating a poison pill clause into software contracts. Such clauses would give customers money if the vendor is purchased. "You would never collect the money but it is great leverage for you with the new owner," Anderson said.

    How will it end? Some vendors write in clauses that let the contract renew automatically if the customer doesn't notify them by a certain date. Language should be included in a contract how it will end. For example, it is possible to negotiate options to extend the contract as is for a year or two. But watch out for portions of contracts that are indefinite. Confidentiality clauses are often permanent.


This was last published in March 2005

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