Traps lurk in licensing snafu

In a rush to get software contracts finalised, time-pressed IT executives are not scrutinising the long-term costs of their terms and conditions, getting stuck with "ambiguous vendor-sided deals".

Suresh Padmanabhan, CIO of the Australian Institute of Management, said software licensing terms and conditions are getting more complicated day by day.

He describes the variation to these contracts and their impact as "mind boggling".

Padmanabhan said that, most of the time, he finds "the overall assumptions and agreements" in software licensing contracts he initially agrees on when in the negotiator's hot seat "are not carried through to the life of the software".

"You could buy a multiple licence for a specific software then find that any module added later isn't directly linked to the initial licence. In fact, the new modules have to be licensed for the whole [organisation] and not to the number of users of that module, increasing the licensing cost substantially."

He said with "every vendor developing their own licensing policies", it's not only crucial to read the fine print, but also understand any mutual obligations.

"Many [companies] have been affected when vendors change their licensing policies for newer versions of existing software. Site licences are suddenly changed to per-seat licences, increasing the licensing cost considerably," he said.

Meta Group analyst William Snyder says while upfront cost and financial payment streams dominate software negotiations, the cause of most vendor-client conflict is "ambiguous vendor-sided" contracts.

Poorly-defined contracts drive higher, long-term software costs for the client.

Also fuelling vendor-client tensions are changeovers in vendor relationship managers, who when negotiating deals are "frequently different from those who [later] face issues or are involved in negotiations," Snyder said.

Meta Group suggests that software agreements only reflect customers' needs if the terms and conditions are negotiated rigorously from the outset and early in product life cycles.

Ken Larbelastier, a former IT manager for the Department of Defence, says the key to negotiating watertight contracts is to focus on the cost of the product and any ongoing maintenance for current and older products. "Be clear on the purchase cost and annual maintenance cost up front. Doing this simplifies your invoicing," he says.

Faced with negotiating a maintenance agreement for a $300,000 Lotus Notes deployment for 5000 users in Defence, he said he was offered a "complex" range of payment options including per-user, concurrent usage or a corporate licence -- the ultimate choice of which had to be the cheapest.

When dealing with an array of cost structures, IT managers can get the most economical deal by weighing the cost benefits of the product against its quality, Larbalestier says.

"The more you come to use a product, the more you'll find it doesn't have the features or flexibility you need over time and the downside is you'll find the cost of changing the product can be massive."

Such was the case for him when installing a new helpdesk solution by Peregrine at Defence three years ago. Larbalestier said he and his team underestimated the cost of installing a newer version of the product after a few years, yet signed a contract with unknown support costs involved for having a new version installed.

"It cost us $20,000 just to change one screen, whereas we thought two days of man-work with a Visual Basic programmer for this would cost us $2000."

He concedes he "hadn't thought about" the support cost involved in changing product versions, but argues: "This costing strategy was to discourage [us] from asking for more work to be done. Vendors are reluctant to support their customers' changing requirements and, when they do, [they] charge something phenomenal.

"Most desktop software companies I've dealt with say they will only support two versions of a software application. In those cases this has made me act quickly and ensure things like our standard operating environment (SOE) had the right software to be supported and our organisation the right in-house skills to maintain our SOE," he says.

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