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Tutorial: Negotiating the Best Software Deal

By Bradley L. Hecht of

Negotiating a software and services license is a multi-faceted endeavor in which many aspects of the vendors' strengths and challenges may be leveraged to the purchasers' advantage. Perhaps the most basic software negotiation tip is to treat the process as a combined system rather than a discrete set of individual point negotiations. In other words, do not walk into the negotiation without a plan. Rather, the lead negotiator must have a definitive structure in mind that encompasses all three components of a software negotiation - product pricing, product maintenance and vendor service and support. All negotiations should be conducted from two different but related perspectives - an absolute price (the price provided by the vendor in a vacuum) and relative price (vendor price versus its top competitors).

Each sub negotiation should be managed within the context of the larger process. The client should be willing to give ground tactically in areas that are known in advance to be vendor sticking points, while using that vendor inflexibility to gain additional strategic concessions in other areas. For example, when a vendor is well known for never dropping its software maintenance fees (Peregrine Systems is a good example), a client can use that information as leverage for reduced product license or service and support fees. In another example, a client could use Oracle's legendary stubbornness in reducing its professional services pricing to gain major concessions on Oracle application pricing. In all cases, a comprehensive plan should be designed prior to the negotiation discussion, with multiple project team individuals playing different roles throughout the process.

TechnologyEvaluation.COM analysts have separated the software negotiation process into three discrete categories. All three are critical individually, yet should always be pursued within the context of the larger discussion. The first negotiation category combines basic negotiation skills and recommendations with specific software pricing tips:

Basic Negotiation and Product Pricing Tips

Always have the final closing/acquisition call with the most senior vendor sales rep at your site. Ensure in advance that this sales executive has the ability to rewrite or adjust the deal on the spot given the direction of the negotiation. In general, this vendor sales position is, at minimum, a District or Regional Manager level or higher.

Ensure that you have legal or contract counsel at the final meeting in order to document all updates to the contract. All contract points agreed to at the meeting should be documented and initialed by both parties.

Negotiate up front the price for additional future seats/copies. Future copies should be included in the volume discount negotiated in the initial acquisition price.

Negotiate multiyear contracts for a percentage discount. In general, organizations should expect a five to fifteen percent discount off the final discounted price. Never mix a multiyear discount in with a volume discount. Both should be negotiated separately and subtracted from the original price.

Ensure that all pricing is done in one currency (preferably US dollars) and no price increases are applied for licenses used in other countries.

Extend payment cycles out for a minimum of net 60 days. As documented in more detail within the service negotiation section, map all payments to clearly defined, pre-negotiated milestones and service levels.

Ensure that you have the right to reproduce paper and electronic copies of the software documentation free of charge. This is an important, but frequently overlooked right that allows the client availability of documentation to every current and potential user.

Ensure that the software license is perpetual and never runs out, including if the maintenance fees expire or if the company is acquired.

Negotiate in advance the ability to place a copy of the vendor's software source code and all necessary supporting compilers and tools in escrow in case of a vendor acquisition or bankruptcy. In case of vendor bankruptcy, insert contract language allowing the user organization to recruit technical staff from the vendor for future product support.

Negotiate early access to the vendor's future beta software releases and first level access to vendor bug fixes if interested.

Specify in the contract the exact delivery date of the software. The first payment to the vendor should be gated by client receipt of the software.

The vendor should include the following for no additional price:

A provision for consultants or outsourcers utilized by the client organization to use the software

Given a site license, a provision that defines authorized locations as including all current and future facilities

Always have more people in the room than they do. An ideal number is double the total number of vendor representatives. Each individual should know his/her role prior to entering the meeting and multiple profiles should be present: technical guru, bargain basement financial representative, legal and contract resource, lead negotiator, bad cop, good cop.

Maintenance Pricing and Service Negotiation: Page 2 >

The Author

Bradley L. Hecht is Executive Vice President of TechnologyEvaluation.COM. In that role, Mr. Hecht manages TechnologyEvaluation.COM's global research process and methodology as well as its E-Commerce and Technical Infrastructure practices.