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SmartAdvice: Focus On Functionality And Requirements In Enterprise Software Contracts

Price isn't the only key factor in negotiating a software contract -- look at how long before your company gets its best business advantage, The Advisory Council says. Also, your company can expect everything from cost savings to greater efficiency in a well-handled data-center consolidation.

Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers two questions of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. Submit questions directly to

Question A: What specific issues should we consider when negotiating an enterprise software contract?

Our advice: Caveat emptor is the axiom in commerce that the buyer alone is responsible for assessing a purchase before buying. The principle is especially true for businesses embarking on a purchase or upgrade of enterprise software. Software purchases include issues of technology, licensing, integration, maintenance and price, to name a few, all of which can severely impact the success of a project. This article provides a checklist and advice to serve as a quick reference for companies about to launch a project in range of hundreds of thousands to millions of dollars. Perhaps surprisingly, the small and midsize segments are often the most profitable business segments for enterprise software vendors, because larger companies have more leverage and buying expertise.

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The best philosophy Start with the end in mind (One of The Seven Habits of Highly Successfully People). In this case, the idea is to negotiate with the implementation in mind, not just the idea of getting the best deal. After all, the ROI truly arrives when your company is able to use the technology to its best business advantage, not when the vendors give an 80% discount. The best way to get vendors focused on the end result is to offer them the chance of a reward. For example, if they achieve better than the agreed-upon performance metrics, they also get some upside.

Form your team Empower the users. In all likelihood, your company makes software-buying decisions by committee, giving all relevant experts and stakeholders a say. If possible, find someone, in your organization or externally, who can lead the process based on prior implementation experience. Of course, your team will include your IT professionals in many roles. However, successful implementation rests on user acceptance; business-unit involvement in the project from the earliest moments is essential to gaining that acceptance.

Understand your requirements The first thing to focus on is functionality. There's no software that will meet 100% of your requirements, but you have to get the most that you can out of the purchase. In addition to the detailed features and flows, you'll need to determine how many seats you need for a given application. Perhaps a hosted solution is best. You also must determine the degree of customization needed for your implementation versus set-up work, extensions, or modifications. The latter normally allow for ready upgrade of your software as new releases become available. Always call the vendor's references. Your list of questions should include the ease of doing business with vendor, support, etc.

Licensing terms and support Meet the top people to close the deal on the best terms. The average life expectancy for software is four to seven years. Implementations that are highly customized may last for decades, and support arrangements under such conditions must be clearly defined. Find out all the licensing options that are available. For example, a five-year license is often cheaper than a perpetual license and it may fit your business plan perfectly. Licenses usually have usage metrics based on seats, processors, transactions processed, etc. Discounts of more than 50% are the rule, as list prices are often meaningless. The vendor's highest profit is largely in maintenance and support. Support contracts typically are approximately 22% of the license price negotiated, with 7% of that for support and the reminder for future upgrades. And, finally, it's true -- vendor discounts are greater at the end of the vendors' fiscal year or quarter.

-- Peter Taglia

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