10 Tips For Getting A Good Deal In Software Negotiations

You've finally selected a vendor for your next big software implementation. Now how do you go about negotiating the deal? Here are 10 tips to help you get the best contract.

Don't tip your hand. And don't let your employees sabotage the deal. Often, vendors talk to people at buying companies "before the negotiations start, then gear the negotiation to the budget," says Ditka Reiner, founder and president at Reiner Associates, a software-contract negotiation firm in San Francisco. "The business ends up thinking they got a good deal, when they may have gotten another 20% off."

Use your leverage. Let the vendor know it has a credible competitor, but not who it is, says Mike Thacker, founder of Thacker & Associates, a Solihull, England, management-consulting firm. It's also crucial that the negotiator understand the marketplace climate and the relative importance of the deal. Buying a large package from a vendor that's coming off a lousy quarter can work to your advantage. A vendor trying to break into your vertical industry may be willing to discount a product to get a foothold in a new area.

Form the negotiating team early. "Nothing kills more deals than bringing in the team at the last minute, and that's what happens about 80% of the time," Reiner says. Too many companies think of contract negotiations in terms of price, when that's a small component of the deal. "Today, people are focused on price, but the risk and investment are a lot higher on the implementation agreement," Reiner says.

Future-proof the deal. What happens if the vendor goes bankrupt, gets acquired, or doesn't live up to the contract's terms? Future-proofing a contract gives your business rights. First, escrow the software's source code. "Most times, when a business licenses software, they get the object code. It's the difference between having the secret formula behind Coca-Cola and drinking a Coke," Reiner says. An escrow clause in the contract lets businesses maintain their systems should the vendor go bankrupt or sell its assets. Also include a term that states that if your employer sells your division, the new company will be allowed to run the software at no additional cost. "This is often overlooked, but it's very important when you're trying to sell your company," Reiner says.

Take advantage of the here and now. Use current negotiations to get better prices on future software purchases. You may be able to get a deal for additional products purchased within the next five years at a pre-specified discount.

Don't ignore outside parties. Determine the steps that you, the vendor, and any third-party partner will take to make the project successful, says Lenny Riley, director of business services in the contract negotiation and benchmarking services unit at AMR Research. Such agreements establish roles for the vendor, the consultant, and the buyer separate from the licensing deal.

Single out service-level agreements. What happens if a service level isn't met? How long will vendor support continue? What are the resolutions to each service-level failure? Are there financial penalties? If it's not in the contract, then the buyer has no recourse, Reiner says.

Beware of hidden fees. Does your business have the right to relocate the software without penalty? If you need a copy of the software to test a disaster-recovery plan, are you required to pay full price for another license? Such hidden costs can add up to hundreds of thousands of dollars.

Customization can bite you in the end. Be as specific as possible about what's being customized and how it should function. "If you're not very clear, the vendor can't build it right," Reiner says. Vendors often will include a provision that says if a company doesn't accept or reject the customization within 45 days, the customization is automatically accepted. "That shouldn't be the way it works," Reiner says. "A company should have the right to refuse a customization if it isn't functioning properly."

Know your definitions. How are you defining a user, a partner, or a customer? How are you defining the objective of the implementation? Says Reiner, "If it was clearly stated in the contract why you bought the software, what was to be delivered, and it wasn't delivered, and now you don't want to pay for it, your attorney is going to kiss you."

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