How to get the most out of a software licensing agreement

What can happen if you mess up negotiations for your next big software vendor contract? The total loss of your contract, for one, cautions an expert. Falling out of compliance and paying for the wrong software are other consequences.

Eliot Colon, president and COO of Miro Consulting Inc., talks with Linda Tucci, senior news writer for SearchCIO.com, about tips for getting the most out of your software licensing agreements. Miro, a Ford, NJ-based advisory firm, provides consulting services for Oracle and Microsoft clients seeking help with their software licensing assets.

BIOGRAPHY: An expert on Oracle software licensing, Colon is responsible for the development and delivery of Oracle cost containment services at Miro. With more than 15 years' experience in the financial and technology markets, Colon assists companies with the configuration, negotiation and management of Oracle software licensing contracts. He is a frequent speaker at industry conferences, including Society for Information Management events. He is an active member of the International Association of Information Technology Asset Managers and is a Certified Software Asset Manager. He was also honored as one of the finalists in Ernst & Young's Entrepreneur of the Year New Jersey program.

Software negotiating expert Eliot Colon, Miro Consulting


Read the full transcript from this podcast below:

Linda Tucci: Hi, this is Linda Tucci, senior newswriter for SearchCIO.com. Thanks for joining me. Today, I'm talking with Eliot Colon about how to get the most out of your next software licensing contract. Eliot is the founder and president of Miro Consulting of Ford, New Jersey. Miro specializes in Oracle contracts, negotiating a new contract, re-negotiating existing contracts. The firm was founded in 2000. The company has over 375 clients under active retainer, at last count. The majority of them Fortune 1000 companies. Eliot, welcome.

Eliot Colon: Hello.

Linda Tucci: So, your firm has been doing this for quite some time, for eight years. What's the first mistake IT professionals make when negotiating a software licensing contract?

Eliot Colon: I think that the first mistake CIOs would make when negotiating or managing their contracts is maybe the false belief that their licensing agreement is dynamic and not static in nature as well as their contract may hold significant value after a few years when quite the opposite... their agreement may actually become obsolete in as little as two years. So there's a substantial possible loss of ROI.

Linda Tucci:Well, why would it become obsolete in two years?

Eliot Colon:Well, the terms and conditions could just be outpaced by certain changes in technology or within the business. Certain requirements are new to the company may just outpace the agreement and thus, reduce the effectiveness of the agreement.

Linda Tucci: I see. So, the company is changing but the agreement itself is static. So how can you avoid the loss of return on investment or value of that contract?

Eliot Colon: Well, I think the first thing to do is get a good sense of where your company is going over the next two to three years in the sort of business applications that are driving the requirements for Oracle. It's a good idea to take a look at your own business applications, perhaps your marketing information. In some cases, with public companies, a peruse of your annual report could be a good indication of where your company's executive level direction is heading.

Linda Tucci: Take me through what your firm does when you contract with a company.

Eliot Colon: Okay, well it starts with a baseline license review audit. We want to get a good sense of what the client owns, how they're using software, whether or not the clients have a defendable compliance position, as well as maybe some of the options that the client may have for certain changes, re-negotiation of their agreement. We find, almost always, clients look at us were quite surprised when they find out what their licensing agreement has and what it has not. 

Linda Tucci: So give me an example of something that they're surprised by.

Eliot Colon: Well, a couple good examples have to deal with non-production licensing and I would say maybe one in five of our clients, when first reviewed, are surprised as to how they must license their non-production environment. Some are surprised that they have to license them at all. The theory is, or the thought behind it is, "Why should I pay for development and tests when it would behoove a major software vendor to allow me to develop and test on an unlimited basis so I could put more applications into production?" But no, that's not the case. All licenses require payment and proper licensing. So that's one good area. Another good area has to do with usage rights and the fact that many contracts have very restrictive or limited usage rights for certain territories, certain types of users, certain countries of use, and that's usually a surprise for many CIOs when they find out that their license grant is very restrictive and doesn't allow them to do what they assumed they could do.

Linda Tucci: So that gets us back to also knowing what's coming down the road for your company, being able to see two or three years ahead. When we were talking earlier, you gave an example of a company that might be negotiating that contract with the idea of, say, 500 employees in Tulsa, when in fact the company is getting ready to expand globally or open up an office overseas.

Eliot Colon: Correct. And we find those examples quite often. As recently as February, a Fortune 1000 company negotiating a contract for employee usage. Essentially, every one of their employees to use a license but within their own public safety documents, we're talking about how there was going to be a divestiture and their company was possibly going to be split into two or three business units, distinct legal entities. So, obviously, buying 15,000 employees, those licenses when your company is going to be splitting into 5,000 employee, three separate legal entities would not be a wise IT investment. So things like that... sometimes the best use of information is found in your own public safety information.

Linda Tucci: Okay. So that's all part of the diagnostic or the audit that you do. How do you begin to build flexibility into a contract that really is aiming to lock you in?

Eliot Colon: I think one of the main items you have to look at is that there is certain custom pricing, custom licensing, that can be developed for very specific needs for certain organizations. Maybe the assumption that a price list is your only option is a bad assumption. There are some flexibilities there so creating certain custom licenses based on very specific usage. As an example, if you're a retailer, you may only need certain spike licensing during certain periods of holiday time and there may be a remedy for that in custom licenses.

Linda Tucci: Well, let's talk a little about the financial consequences of making some of these mistakes or mistaken assumptions. Can you give CIOs the sense of how much money or value they can lose by making some of these mistakes?

Eliot Colon: Well, the three big examples I have is one, total loss of value, two, non-compliance and three, incorrect software for a particular solution. And I'll give you an example of each. The first, total loss of value, the scenario where a client buys a license that is limited for a particular application. Let's just say SAP as an example. And then tries to want to introduce into that environment, a software outside of SAP. Well, if their license grant is restricted to SAP and they introduce even a small application used by only a few users into that environment it may cause their main contract to be obsolete and valueless. So that's an example of a total loss of value where they now have a contract that they could've spent millions of dollars for that they can't use anywhere in the organization.

Linda Tucci: Ok, so the first point to make is total loss of value. And then your other two?

Eliot Colon: Non-compliance. And the non-compliance is when bad assumptions are made in regards to a license grant you have. We had a major electronics company come to us last year essentially having negotiated a $5 million contract three years prior where the assumption was that they could deploy unlimited users throughout their environment for a particular EOP solution. Now, when we looked at the fine print, it was discovered by us that it was unlimited up to a certain amount of processors. So yes, it was unlimited users. But it was unlimited up to a certain size of the server and footprint. So the client was shocked to hear this news that they were actually out of compliance because they had been pushing their business units to deploy, deploy, deploy, under false assumption that they had an unlimited user grant. So, here's a situation where a client owes millions of dollars in fees to obtain compliance because of non-compliance due to a bad assumption.

Linda Tucci: Ok, so that's complying. And then number three?

Eliot Colon: Number three is incorrect software solution for a particular solution. Here, a real good example, working with a pharmaceutical company late last year where they had pointed out very specific requirements for a project they were looking to launch to track prescription and doctor information. In this particular case, they were looking for a solution for tracking and reporting that information. They actually had the incorrect software purchased so for the past six to nine months, they basically have been incurring support fees and licensing fees for products that weren't the right solution for them. How we would remedy that is being more clear within the software agreement as to what specific functionality we're looking to obtain from the software and how that functionality ties into the business solution you're trying to solve.

Linda Tucci: Ok, so here's a dumb question. Why wouldn't the vendor, or the valued customer, point that out?

Eliot Colon: Well, in many cases the software is just extremely complex and perhaps, the reps are not completely familiar with the limitations on their own software. So, unless you have a technical review and a preset technical resource at the hip with the particular rep. In many cases, the reps are simply positioning product not necessarily solving business problems or solutions.

Linda Tucci: Eliot, you raised an interesting point about volume discounts. I wonder if you can explain why they are not always the way to go.

Eliot Colon: Well, one of the big issues is because of the obsolete side of the software that may kick in two to three years later. I think the whole game now is to consolidate purchases, get purchasing to a volume so great where you can achieve greater discounting. Now that maybe all and good as long as you have done the proper analysis on your own business to focus on whether you need the software or not two to three years later and have a pretty good confidence level your requirements are not going to change and they're going to be in line with the software and the certain functionality you're going to be granted. But that's not always the case. I'd say, more often than not, it's not the case. So what ends up happening is you're achieving a few extra discount points but yet you're starting support screens so much earlier. So there has to be a pretty good analysis there to determine if those extra discount points that you are achieving are worth starting an annual support cycle earlier than later and taking the chance that two, three years down the road, your requirements are still going to be there for that same software.

Linda Tucci: You've been really helpful, Eliot, with your advice. Maybe just one last takeaway for CIOs negotiating these very expensive contracts?

Eliot Colon: Compliance is the key. It's the beginning, it's the end, it's everywhere in the middle. Without it, nothing else matters. When it comes to a contract, the discussions internally should always start with, "How do I obtain license compliance, defendable license compliance, how do I maintain it? How do I test for it? and how do I ensure that two, three years down the road I could still l descend it and test for it?" And it needs to be clearly stated within your agreement how to do it and you must have a defendable plan. I don't know of one CIO who's ever been terminated from a company because they paid extra points on software. But we have heard of many that have been terminated because they've negotiated an extremely poor TNC and contractual agreement on a large EOP project or a large database. That's my major takeaway. It's all about compliance.

Linda Tucci: Eliot Colon, thank you very much. We appreciate your advice.

Eliot Colon: Thank you!

This was first published in May 2008

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