The Art of Negotiation

SAN MATEO (07/31/2000) - It was a simple mistake, but an expensive one nonetheless -- and even multinational corporations such as this one are vulnerable to simple, expensive mistakes.

The company in question invested in electronic fax software to the tune of 20,000 licenses, intending to roll out the technology gradually to get a feel for how it interoperated with the existing infrastructure. The initial wave covered only about one-third of the company's seats.

"We went back and said we wanted to buy it for the rest of our desktops," says the Fortune 500 company's IT manager, who requested anonymity. "Their reply was, 'The price is doubled.' What do you do when you've already rolled it out and you have 40,000 or 50,000 seats to go?"

Now, thanks to the IT manager's hindsight, it's obvious the company should have budgeted for the entire rollout from the start, or made sure the license had a clause that kept the price stable. "Where most companies come up short is that they don't think down the road," the IT manager says.

These situations are not uncommon, and usually the consequences can be tough.

"The whole licensing thing is a can of worms, and the buyer has very little control over it," says Marc Perl, CTO and principal at Tecknowlogy Associates, in Petaluma, Calif. "In general, you don't see too many people coming away licking their lips and saying, 'I just got the best of Oracle (Corp.).' "Pending legislation, such as the Uniform Computer Information Transactions Act (UCITA) and the Digital Millennium Copyright Act (DMCA), could inject a whole new batch of sticky questions into this already uncertain process.

But industry observers say a few factors are emerging to level the playing field. Technology-savvy buyers, the proliferation of horror stories such as the anonymous IT director's, a wider range of choices, and new market phenomena such as application hosting are giving customers the power to wield more clout at the negotiating table.

"Overall, it has to be a win-win [situation] for everyone, but we must remember: The customer is always right," says Alan Boehme, e-business CIO at General Electric Co., in Atlanta, and a member of InfoWorld's Corporate Advisory Board.

Staying simple

A myriad of questions must be addressed before entering into negotiations (see chart, below). And the most important one to answer is, "Are you sure?"

"Once you've figured out what's best from Microsoft, you have to go through that with Vendor B and Vendor C -- comparing two or three finalists -- to end up with some meaningful data," says Dwight Davis, an analyst at Summit Strategies Inc., in Kirkland, Wash.

Most customers who complain about complex licensing contracts think that the complexity is there for one reason: The vendor is trying to mask higher costs, either through price per seat, support, or upgrade policies. Although this may be true, there's no reason for you to fall in that trap.

"Getting the business decision and agreement out is the easy part," Boehme says. "Getting the legal wording is a different story."

Lisa Kenkel, an attorney at the San Francisco Bay area firm of Fenwick & West LLP and member of the firm's online licensing and online commerce group, says that keeping as much legal jargon as possible out of the contract is the best way to focus on the battles worth fighting.

"If you're crafting an agreement that's easy to read, that's concise and not confusing, you really isolate the issues that you really need to negotiate," Kenkel says.

"What nobody wants is some form of agreement that gets completely rewritten by the other side and gets stuck in your legal group," Kenkel says. "You need to really identify the handful of issues that you really care about and focus on negotiating those issues."

In June, Microsoft Corp. moved to make licensing a little easier for e-commerce server customers by changing its model from charging companies per person using the software to charging per processor used. As a result, some servers -- the Enterprise Edition of SQL Server, for example -- will cost more, but others will cost less. And, Microsoft and observers agree, the licenses will be simpler.

"It's difficult to understand Microsoft licensing policies, and to comply with them can be a real pain ... our licensing model doesn't work for Internet applications," says Barry Goffe, group manager of the Microsoft.NET Platform Solutions Group.

Shopping around

The obvious plus of evaluating different software solutions is that you can compare and contrast offerings, and play vendors off of one another. Having viable options in the marketplace, at least in theory, is a key to gaining the upper hand.

"If you think you really have no leverage, sometimes the best thing to do is make sure you have a backup plan," Kenkel says. "Don't be completely dependent on a vendor and have no leverage."

In practice, however, the prevalence of certain technologies -- IBM Corp. mainframes, at one time, and now Microsoft's Windows -- knocks much of that leverage off the table before the negotiations really start.

Before founding Tecknowlogy, Perl spent many years at Visa International wearing many hats, including director of business for Merchant Business. He negotiated many software licenses at Visa, mostly making technology decisions, and saw firsthand the "you'll never get fired for buying Microsoft" phenomenon.

"Looking at a utility, say, to draw pictures, you might go with Microsoft Visio, and 5,000 seats is no big deal. That gives you a choice between Visio and a competing drawing program," Perl says. "But for something like Office, it's totally different for large corporations. They are completely limited; you don't find too many not using Microsoft Office."

"Unless there's somebody who's a really close second, then typically that is your decision and you are locked into it," the anonymous IT manager says. "With Windows, for example, you have no choice. It's just a question of which version of Windows."

Application hosting

Since bursting onto the scene in late 1998, the ever-growing application outsourcing market has irreversibly changed the way many companies use their software, and vendors have been scrambling for months to set up licensing schemes that do not choke profit.

For customers, going to an ASP (application service provider) offers many potential benefits. Up-front costs can be extensive, and paying on a monthly basis has a positive impact on cash flow. Issues such as installation and incremental upgrade fees can go away completely, and businesses benefit when they pay on an actual-use model, many observers say.

The Web lends itself to the ASP scenario because it has created a proliferation of specific enterprise applications that can be difficult to roll out internally. Renting an expense routing application, for example, makes sense because users don't have to go through the pain of installing it, and they don't necessarily have to sell the IT department on it.

"Every user has a Web browser," Kenkel says, "and they can easily access the whole functionality of this application without going through the whole in-house installation.

"If you've got an enterprise application that does HR hiring and management resources, you don't have to sell it to the IT group," Kenkel adds. "A whole tier of bureaucracy is being pushed aside."

Application hosting is becoming more and more popular at large companies with dot-com and e-commerce divisions.

"There is complexity there now, because the market is so new; everyone is taking their best shot at building a licensing model that is flexible and makes sense for the customer and the software vendor," says Paula Hunter, president of the ASP Consortium and a vice president at CMeRun Corp., a consumer-based ASP, in Hudson, Mass.

"I do see a very disruptive factor in the market," Hunter adds. "New software vendors are writing Web-enabled apps from the get-go, and there are no legacy issues; they're not accustomed to getting licensing fees up front, and those issues have to be addressed."

Enterprises going with a subscription-based rental model must weigh those benefits against the consequent lack of control.

"You're trusting a third party to have the application available and have it backed up," Kenkel says.

Microsoft, considered to be an enemy of application hosting or any model that didn't include off-the-shelf software sales, recently revamped its licensing for ASPs hosting its Windows servers and Office software. ASPs will pay either per user or per CPU, in what Microsoft President and CEO Steve Ballmer says would offer flexible, "scale-out" licensing.

The structure makes sense for vendors and customers alike, Summit's Davis says.

"Selling an old-line enterprise model, working with a client-access model, is fine if you've got 400 users on Exchange servers and 400 CALs [client access licenses], along with a server license for Exchange," Davis says. "But if you're hosting Exchange, that CAL model becomes pretty expensive, and not too many people want to go out and lock in all that stuff. They are not going to want to pay $130 for the right to access e-mail in a hosted environment."

Do the research

Other steps a customer can take before opening licensing talks include paying close attention to a technology's capabilities to make sure it does what you want it to do, Kenkel says. Historical data such as benchmarks can be invaluable to avoid "getting [a product] for a few weeks before finding out that it doesn't work, and that it doesn't do what the salesperson said it would do," she says.

Also, consider your hardware strategy. The nature of hardware licenses lends itself to rolling out PCs on a scheduled basis, and customers have an inherent negotiating advantage because, at least in theory, PCs from the various major vendors are interchangeable.

"These guys are ultracompetitive in price because they really want that business," Tecknowlogy's Perl says. "The total cost of ownership for hardware is much more predictable."

Knowing the lay of the high-tech land is key, too, particularly when dealing with privately held companies that could be acquired, which can lead to product discontinuation, strategy changes, and new licensing schemes. For example, says IT director Perl, Islandia, N.Y.-based Computer Associates is notorious for buying companies that provide mainframe products, letting many of those employees go, then hiking up maintenance costs and ending development.

"For someone who licenses software, coming to work and finding out the company [that makes] your software product has just been acquired by CA, that's the beginning of a bad day," Perl says.

Existing market forces always make navigating the licensing landscape tricky, and far-reaching laws and regulations often only add to the uncertainty.

"Look at the way UCITA has graced the software industry -- such a giant blessing," Perl says, laughing. "If UCITA goes through, [and if] I'm the vendor, I'm going to shove it down your throat."

Send comments to Associate News Editor Bob Trott (

Preparing for battle

These action items can help seal the most cost-effective software deal.

1. Decide how much you want to pay.

2. Know your current and future technology needs.

3. Consider the level of services, support, and training you will need -- and the length of time you will need them.

4. Investigate whether or not you might get a better deal from another vendor.

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