Quick Guide to Licensing Agreements: Future Proofing (Part 2/3)

28 August 2009
5 minute read
Best practice

Quick Guide to Licensing Agreements: Future Proofing (Part 2/3)

28 August 2009
5 minute read

parachute1Timothy Nuckles is a technology lawyer from Madison, Wisconsin. He runs Nuckles Law , a technology law firm specializing in helping companies do better deals with IT Procurement.

In this series Tim gives us a quick guide to negotiating more favourable licensing agreements.

•    Part One – Tipping the Balance of Agreements towards Clients
•    Part Two – Future Proofing Contracts by Maximising Flexibility
•    Part Three – The Software Maintenance Game

PART TWO – Future Proofing Contracts by Maximizing Flexibility

I think flexibility is a really important issue, and one that is under-appreciated by software buyers in my opinion.  Among even my more sophisticated clients (those having been through relatively more deals over time), on flexibility issues I often hear, “That’s a great idea, and quite honestly, that has never occurred to me.”  This flexibility stuff simply isn’t on the minds of most software buyers.

So, what are we talking about in terms of flexibility within a software deal?  Well, for me, flexibility centers mainly around expense items, license and service fees (maintenance and support).  The goal is to create as much flexibility as possible for things like the base license structure, user license structure, and maintenance and support options.

Buyer Options

For example, instead of checking the “single server” box in a schedule to denote the base license structure, and then checking the box for “100 to 300 users” to denote the tiered user license structure, and calling it done, we can accomplish a lot more.  These should be regarded merely as the choices made at time of purchase.  We want to create ability in the buyer to switch among all base and user license options available now, as well as those made available by the software vendor in the future, at any time and without penalty.  In other words, this should not be, and does not have to be, a one-time, live-with-it-forever selection.  Let’s call this side of the flexibility ledger the “buyer options” side.

Vendor Obligations

The other side of the flexibility ledger is called “vendor obligations”.  These are affirmative duties we create for the software vendor, and they feed into the buyer options and drive toward cost containment.  For example, we want a software vendor to tell us whenever it introduces a new base or user license structure (or associated fee structure) during the life of deployment (because that may be the thriftier choice for us going forward).  The new license or fee structure should be made known to us, on the one hand, and made available to us without a penalty for switching over to it, on the other.  “We’re tiered now, but we want to be on that new Flexi-Seat option.”

Countering Vendor Audit Rights

Flexibility within software deals serves many purposes for software buyers, but cost containment is probably chief among them.  On cost containment specifically, a  strong and meaningful “most favored nations” provision (MFNP), and one that ties back to all flexibility issues, is critical.  Have you ever known anyone who, if they managed to get one into their software deal, has ever benefitted from or enforced a traditional (impotent) MFNP?  Personally, I do not.  There’s a lot of hay that can be made with this type of provision, and software buyers need to start to realize that.  Think of an MFNP as the mirror image of a vendor’s audit rights.  Upon the occurrence of each license and compliance audit, you as a buyer get to do your MFNP audit, part of which requires your vendor to certify that you have gotten at least as good a deal as the best deal made available to the vendor’s new and deployed users over the last revenue period, and if not, it’s payback time.  Now, isn’t that a refreshing idea?

One aspect of this is what I call the “Cable TV syndrome”, where a new neighbor moves in, and you find she is paying less than a third of what you pay for the same Cable TV channel selection.  And you have been a loyal cable subscriber for 8 years!  That pisses you off, and software buyers are pissed off when they find out others are paying a third of what they pay for the same software.  You may not have much ability to negotiate terms with your Cable TV provider before you sign on as a customer, but you have lots of ability to negotiate terms with your software vendor before you sign on as a customer.

Timothy Nuckles is a technology lawyer and runs Nuckles Law.

Read Part Three – The Software Maintenance Game.

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