Software Contract Negotiation Tips

Negotiating software contracts is a very important part of your software selection project. The software vendor writes the contract to protect their interests in the engagement. You need to negotiate the contract to protect your interests.

Enterprise business software (ERP, HR, CRM, Financial software, etc.) contracts are typically very negotiable because the software vendors are looking to lock up a long term customer. They know that if they can get a customer in the door even at a discounted rate, they will have a long term maintenance revenue stream that should last at least 5-10 years. The reason for this is that after such a big investment, companies are reticent to change software solutions for many years. Therefore, it is important to remember that the time you have the strongest leverage with the vendor is during the negotiation before signing the contract. Make sure you use that leverage to your advantage.

There are basically 3 contracts that you will sign for a standard on-premise implementation.

1. Software License – This contract outlines the terms of use of the software. The pricing for the software license is typically set by module on a user or concurrent user basis. The software license is usually heavily discounted in the sales process so the software vendor can acquire the new customer.

2. Software Maintenance – This contract outlines the terms for support, maintenance, updates and upgrades. The cost for this service is usually an annual fee of 18-22% of the list price for the software license.

3. Implementation Services – This contract outlines the statement of work, hourly rates, and plan for the implementation. The cost for implementation services is based on the hourly rates of the implementation consultants and the estimate of hours to complete the project. A good rule of thumb for implementation cost in a mid-market environment is a 1:1 ratio with the software license cost. In other words, for every dollar of software license cost you pay, you can expect to pay a dollar for implementation services. For larger companies in more complex environments, this cost can end up being much higher – 2:1 or even up to 10:1 ratio.

If you are buying software in a Software as a Service or SaaS environment, then you will have a Service Level Agreement (SLA). This agreement includes the right to use the software as well as the hosting and data ownership clauses that will be necessary for the engagement.

A few key software contract negotiation tips to remember:

1. The software license is typically heavily discounted up front. Make sure that you look at the whole cost of the software over a 5 year period including maintenance, support, and implementation services.

2. Make sure that you define the terms of the agreement. For example, some vendors will include full payment upon software “installation.” This means that they can charge you the full cost of the software license when they come into your offices and insert the CD, even if there have been no modifications or implementation services.

3. Negotiate the statement of work before you sign the software license agreement. Make sure that you understand exactly what you are buying – including the implementation services plan.

4. Negotiate near the end of the vendor’s fiscal year or quarter end as large discounts can be negotiated so the software vendor can achieve sales goals. We have seen clients sign contracts late at night on December 31 and recently had a customer that was offered a 40% discount if they would sign by the end of the quarter.

Finally, understand that some clauses are negotiable in a software contract and some clauses are not. We recommend that you get assistance with the contract negotiation from a consultant experienced in this area. Their understanding can save you thousands of dollars and can help protect your interests in the contract.

The goal of software contract negotiation should be to have a long-term partnership with the software vendor. This means that the negotiation should not be adversarial. Instead, negotiate with the intent to reach an agreement that is a win-win for both parties for a successful relationship.