Negotiating Software Contracts

This paper discusses what factors should be taken into account to negotiate the software contract, what targets should be set for the negotiation, and what are the really important long term considerations, that need to be negotiated.

More Best Practice and Training Links at bottom of page.

The Selection Process

This is described in IS / IT Strategy, Software Selection and Implementation. It is assumed that you have followed this process up to this point. In particular I am assuming that the buyer has reached this point as a result of
competitive comparison based on a structured statement of requirements, and invitation to tender, followed by a formal proposal, and has checked out referees.

The Negotiation

Provided you use good purchasing principles in buying software the best deal
can be achieved.  These include:

1. Make the vendor aware that he has a credible competitor, but not who it is.
2. Identify all the costs and deliverables. These might include:

• Initial costs

• Hardware
• Software
• Communications
• Installation

• maintenance/ongoing support cost
• Application implementation support
• Technical support
• Documentation
• Integration costs now and when you implement new releases of either the software.  Do you intend to link to other systems to or from this system such as PDM, CAD, ERP, APS systems? If so how? It is essential when defining integration parameters that the interface is both specified and stable.
• Entitlement to new releases/bug fixes.
• The cost of tailoring
• Etc. (Suppliers still might have a few hidden tricks so be sure to include a clause that specifically precludes other costs, now and in the future.)

• One that I came across recently was that you could have new releases but they would be supplied as fixes to the old release, or for a cost they would integrate the fixes for you.
• Another was a time limit for "free" upgrades

3. Read the contract very carefully.  Ensure it is future proof:

• What happens if you change/grow/shrink?
• What happens if the supplier changes/grows/shrinks/disappears?
• What if the technology changes?
• What if the project is delayed/changed/scrapped

4.  Use competitive comparisons, ideally by negotiating with two credible vendors.
5.  Before the purchase, time is on your side.  You will have up to 10 years to regret the mistake. So do not rush even if there are internal reasons to make a quick decision. That is not a good negotiating tactic.

In particular you should view all aspects of the proposal as negotiable.  I would concentrate on negotiating up support rather than negotiating down the price first.  But:

• I would not pay up to 10% of my annual turnover for an ERP system, (including implementation costs), as I know a number of people have.
• I would not pay 18% annual maintenance costs, and I always insist an inflation clause. The best I have achieved is 8% of current software price at the time of purchase plus an inflation ceiling of the retail price index.
• I would pay initial costs after proving trials (conference room pilot), or at least in stages. The best I have achieved is an overall 40% discount on proposal price, half paid after installation and half paid after conference room pilot.
• I expect project management support from the supplier but do not expect to pay separately for this, particularly on a time and materials basis.
• Use fixed pricing not time and materials or mechanisms to ensure that if there are delays, due to no fault of yours that you do not pay penalties. Or at least share the risk with the supplier.
• If source code is not supplied ensure that ownership of the source code is held in "escrow" on your behalf if the supplier for some reason is unable to provide maintenance in the future. (In which case you would be able to make other support arrangements). There are a number of independent "escrow agents" available.

You can use a number of competitive arguments in the negotiation such as:

• Better fit so less tailoring(enhanced functions added at their expense)
• Easier integration( to get more help)
• Less risk(to get more guarantees / help)
• Better price (if you are looking for a discount)

In a rolling multi-site implementation, other costs and risks can come into play.

Longevity and security remain the key parameters for data.  Make sure that there is adequate protection in future proofing above in the contract.

Finally the technical infrastructure set up can make a significant difference to the operation costs and support requirements particularly in multi-site implementations. The best I have done is to support 108 implementations with 22 people.  This included running: implementation support, technical support, help desk, new release testing and implementation, enhancement & modification. If the supplier sees that you intend to be largely self-sufficient, (which you should), he will usually be more accommodating on maintenance costs. A "win / win" situation!

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You may also be interested in the following related further best practice articles:

Examples of checklists of functional requirements, Utilities (like report writers, enquiry facilities), and other software evaluation criteria, can be supplied on request. (This service is not available to consultants)

The following training workshops deal with IS / IT Strategy, software selection and implementation:

I1 Information Systems / Information Technology Strategy

I2 Systems Selection & Implementation

I3 Best practice Data processing

The following article deals with best practice Purchasing

E3 Supplier Interface (Purchasing)

E4 Supplier Development

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For more information or if you are experiencing difficulties contact us at enquiries@smthacker.co.uk

Version 2: July 2000

© SM Thacker & Associates July 2000