jane disbrow negotiating a crm software license agreement

Jane Disbrow

Negotiating a CRM Software License Agreement

These materials can be reproduced only with Gartner’s official approval. Such approvals may be requested via e-mail -- [email protected].

Notes accompany this presentation. Please select Notes Page view.

Negotiation Is Key

• Choosing a vendor before negotiating the software license agreement is dangerous to the financial health of the enterprise.

• Do the same due diligence on the contract terms and conditions as should be done to determine functionality requirements.

Key Issues

• Who should be involved in the negotiation and what process should be followed?

• What are some of the license models being used by software vendors today, and what are the advantages and disadvantages of those license models?

• How can enterprises spot the problem clauses often found in license agreements?

Entire Agreement Clause

“This agreement replaces and supersedes any prior verbal or written understandings, communications and representations between the parties and constitutes the complete agreement between the parties. No other act, document, usage or custom shall be deemed to amend or modify this agreement unless agreed to in writing and signed by both parties.”

Contract Reality: Warranty is often just 90 days and states that the software will perform substantially in accordance with the documentation, and the vendor must be notified of any nonconformance within the warranty period — which is not practical if there is a long implementation.

Getting Started: Who Should Negotiate?

Technology negotiation is a specialty

• It must include negotiation skills.

• Legal will usually focus on legal terms and conditions.

• Business issues related to technology need to be covered in the license agreement.

• Technical terminology must be understood by the negotiators.

• The direction of the enterprise and |the IT division must be taken into consideration.

Responsibilities of Software Negotiators

• Research and obtain financial information about vendors.

• Assist with RFP preparation; include contract terms in the RFP that are required by the final agreement.

• Review RFP responses for issues to include in final agreement.

• Review any current contracts with any possible vendor to see if they can be used for the new deal, or if the contract will need to be redone.

• Read potential contracts and inform management of major problems.

• Negotiate the contract as the central point of contact for all parties — legal, business units, technical.

Who Should Be Part of the Negotiation Team?

DatabaseRequirements

HardwareRequirements

Future Direction ofTechnology

Technical

Primary Point ofContact With

Vendors

Ensuring All Issues Are Documented in

Contract

Final PriceNegotiation

Coordinating theNegotiation

Process With All Team Members

Negotiator

BusinessRequirements

Functionality

BusinessProcess Changes

Business

Installation

System Integration

Development

Future Direction ofApplications

IT Apps.

Limitations ofLiability

Enterprise Name

SubsidiariesAffiliates

Mergers/Acquisitions/Divestitures

Legal Risk

Legal

• Usage rights• Price protection• Maintenance caps

CustomerVendor

GOAL: Equitable Contracts Between CRM Vendor and Customer

Users can balance the scale by focusing on such things as:

• Financial due diligence• Clarifications with examples• Legal review

Trends in CRM License Agreements

• Buyers market for current CRM deals

• More-complicated license models

• Greater discount for initial license, but higher ongoing costs

• Licenses as part of a package “deal” that will include services, implementation and training

CRM Pricing Survey Results, November 2002

Percent Count Answer42.7% 38 Named user65.2% 58 Per module20.2% 18 Module per named user27.0% 24 Concurrent user

9.0% 8 Revenue or other financial-based metric 3.4% 3 Number of employees 7.9% 7 Transaction-based pricing

12.4% 11 Role-based pricing (professional, employee self-service, business partner)

13.5% 12 Size of hardware platform36.0% 32 Other

237.3% 211 Multiple license models per vendor

Results from 89 CRM software vendors on their licensing models

License Models

Named User: Many vendors offer some form of this license model for their CRM software. It is usually easy to understand but may be costly if there are many occasional users.

Concurrent Users: Usage rights are often ill-defined in the contract.

Role-Based User: Can be costly if not well-defined as to usage rights, and there are not rights to convert from one role user to another.

Business Metric: Often ill-defined; consider what should be eliminated from and/or added to the business metric.

Transaction-Based Metric: Can be difficult to estimate usage in advance. How it is measured is very important.

Problem Clauses in CRM Licenses

Example of onerous term and condition: “If the licensee decides to change from one supported database to another supported database, the cost will be horrendous.”

Likely way presented in the contract:Database: Oracle (or any other specific database listed)

Example of solution (not legal advice):“This software is not subject to any upgrade, downgrade, usage or transfer fees within the organization. Licensee may transfer this software at no additional cost to any hardware platform, software operating system or database that the vendor supports for this software.”

Charges for Changesin Technology

Example of onerous term and condition: “If the licensee drops maintenance, then reinstatement fees are subject to whatever we want to charge at the time, and the licensee will have absolutely no leverage.”

Likely way presented in the contract:“Reinstatement fees are subject to then-current policies in effect.”

Example of solution (not legal advice): “Licensee can resume software support and maintenance for lapsed periods by paying licensor an amount no greater than the back support fee that would have been due if software support and maintenance had been continued over the lapsed period.”

Reinstatement Fees

Software Compliance

Example of onerous term and condition:“We are going to send you software that you are not licensed to use. If you use this software in error, you will be out of compliance with this contract, and woe to you if we audit.”

Likely way presented in the contract:“Licensee shall not access or use any portion of the software not expressly licensed and paid for by the licensee.”

Example of solution (not legal advice):“Licensor shall not ship any software to licensee that licensee is not authorized to use.”

Downsizing of Usage

Example of onerous term and condition:“During the sales cycle, we sold you more software than you can use. Now that your enterprise is facing budget cutbacks and a large reduction in the workforce, we still expect you to pay for all licenses and modules whether you need them or not because we need the money too.”

Likely way presented in the contract:XXXX (not addressed at all)

Example of solution (not legal advice):“Licensee shall have the right to remove unused licenses and modules from support at the renewal of the maintenance term, with a corresponding reduction in ongoing maintenance and support costs.”

Example of onerous term and condition: “Software vendor may, in its reasonable judgment and its sole option and expense: 1) obtain for licensee the right to continue to use the software; 2) replace or modify the software so that it becomes non-infringing; or 3) terminate the license for the infringing software and return the license fees paid for such software prorated over a five-year term.”

Four problems with the above clause: “Software vendor may …” This does not set very high requirements

for the vendor. It may or it may not do something. “Shall” is usually standard.

It should be required to go with Option No. 1 first, as continuing to use the same software would be easier for the enterprise.

Only the “infringing” software will be reimbursed — maybe just one module. A complete system was licensed.

License fees are prorated for five years. The replacement cost would be more than this. Try for a full refund of all software.

Indemnification Clause

It’s time to play …

“What’s Wrong With This Order Form?”

What’s Wrong With This Order Form?

Anytown, USA

Any Enterprise Corporation

Server

AS400 S/N 12345

Windows NT application serverHP Unix database server

Oracle 8i

Designated Location:

Business Unit:

Computer Environment:

Hardware Manufacturer:

Software:Operating System and Version

Database Manager and Version

Number of concurrent users:Number of servers:

Client

IBM PC or compatible

Windows NT

N/A

500 1

Included

System and Item Description

Module AModule BModule CModule DLicense feeUser Fee for 500 Concurrent Users

TOTAL LICENSE FEE:(Less) Discount

DISCOUNTED LICENSE FEESImplementation (estimated)

License Fee

Included Included

Included$1,500,000

$30,000

$1,530,000 (430,000)

$1,100,000 $350,000

Continuing Support Fee

Year 1

$300,000$6,000

_____________________________ ____________ ___________________Vendor signature Licensee signature


Anytown, USA


Server

AS400 S/N 12345


Oracle 8i


Business Unit:






Client


Windows NT

N/A

500 1

Included





License Fee

Included Included

Included$1,500,000

$30,000

$1,530,000 (430,000)

$1,100,000 $350,000


Year 1

$300,000$6,000


Total Due Upon Signing $1,450,000 $306,000


Anytown, USA


Server

AS400 S/N 12345


Oracle 8i


Business Unit:






Client


Windows NT

N/A

500 1

Included





License Fee

Included Included

Included$1,500,000

$30,000

$1,530,000 (430,000)

$1,100,000 $350,000


Year 1

$300,000$6,000


Developing a Checklist

Why a check list is important:

Saves time — can be reviewed quickly to see the terms and conditions to be added to a license agreement

Can include terminology that can be repeated in license agreements again and again, and be pre-approved by legal

Prevents overlooking some major clauses

Missing terms and conditions often cause more problems than terms and conditions that are included

Before signing on the dotted line:

Perpetual license

Escrow clauses

Audit protection

Mergers, acquisitions and divestitures

Right to change location, platform, operating system or database

Service-level agreements and entitlements for maintenance

Broad usage rights — parent, affiliates, subsidiaries

Important Terms and Conditions Often Missing From Contracts

Include as Part of the CRM Contract

Support Issues

RFP Response

Oral Promises

Presentations

Recommendations

Use trained negotiators for the CRM software license agreements.

Establish best-practices procedures for the CRM software procurement and follow them.

Use a team approach to negotiation to ensure that all requirements — legal, procurement, technical and business — are taken into consideration.