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Phase 6 – Software Contract Negotiation

Negotiating software license contracts can be a very tricky process. Because the software vendors typically have an army of lawyers write their contracts, you need to be very careful to negotiate key terms and clauses that will protect your interests in the contract. As we mentioned in the software budgeting section of this site, there are actually 3 separate contracts you will most likely sign with the software vendor/implementer. These contracts are: 1) Software License, 2) Software Maintenance, and 3) Implementation Services. If you end up going with a Cloud or Software as a Service (SaaS) solution, you will be negotiating a Service Level Agreement (SLA).

Here are some key software contract negotiation tips to keep in mind as you negotiate your contract:

Software Contract Negotiation Tip #1 – Negotiate the Price

Price is very negotiable for the software license. Every one of our clients over the past 17 years has had a software license discount. You can get some great deals at the end of the quarter and especially at the end of the software vendor’s fiscal year.

Software Contract Negotiation Tip #2 – Define the Terms

Make sure that the terms of the contract are specifically defined up front. Pay close attention to the definition of a “user,” “installation”, “go-live” and other terms. For example “installation” can mean loading the software onto the server, or it can mean completed implementation. This is important because milestone billings can be based on when “installation” occurs.

Software Contract Negotiation Tip #3 – Define the Payment Plan

Define when progress payments will be made. The software vendor likes to get as much of the license cost as possible up front, but you can negotiate progress payments with retainage payable upon final acceptance.

Software Contract Negotiatin Tip #4 – Transferable License

If you plan on making acquisitions, make sure you are able to transfer the license to the acquired companies. You don’t want to have to pay full license fees for every new company or acquisition.

Software Contract Negotiation Tip #5 – Negotiate the Statement of Work

Make sure that you negotiate the Statement of Work (SOW) before you sign the contract. The SOW defines the scope of the implementation project and identifies both what the vendor is responsible for and what you are responsible for. Many companies that do not include the SOW in the contract are surprised by the work they are required to do in the implementation that they assumed the vendor would cover.

Software Contract Negotiation Tip #6 – Write the Terms

Make sure all of the negotiation and changes to clauses are written into the contract, exhibits, and addendums. This contract should be in effect for 7-10+ years and you want to make sure that if something were to go wrong that clauses are written in the contract to protect your interests. You have the best leverage with the vendor until the contract is signed, so make sure you take advantage of that leverage.

Software Contract Negotiation Tip #7 – Get Consultant Help

Software contract negotiation is one area where it can be very helpful to have a consultant involved. There are a number of standard clauses and discounts that are negotiable in the contract that a consultant well versed in software contracts will help you negotiate including: discounts, key clauses, terms, and protections.

Every software contract is negotiable. The software vendor writes the contract to protect their interests, you need to negotiate the agreement to protect your interests.

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