Eight tips for negotiating a software deal

We have been helping many clients in cutting deals with software providers. Although each case or situation could be different, below are some tips to take into consideration if you’re about to acquire software programs:

1) Treat software as a commodity. Let’s take ERP software as an example; Most ERP’s for a given industry provide basic and standard functionality, and the functionality gap within individual ERP tiers is continuously narrowing. This gives buyers considerable negotiation power to wield. Always have multiple competitors online and clearly communicate that you can walk away without disrupting your future plans.

2) Don’t over buy. Software providers push their clients to buy as much as possible to address both current and potential future needs (e.g. a better discount if the volume is bigger). As a result, buyers accumulate major unused licenses, subscription and functionality modules that wait on the shelves while generating annual maintenance or subscription costs. Know your needs and buy accordingly.

3) Pay when it’s used. In the same mindset, many software providers get paid at contract signature even if there is a long period until those software programs are used operationally -think of long ERP implementation projects. Structure your deal in a way to minimize first segment of subscriptions and licenses and favor future license purchasing at each go-live.

4) Clarify indirect or external accesses. On top of the classic usage of software by internal users, more and more the software data is accessed by other applications, external partners, vendors or customers (external users or API’s). It is important to clarify the pricing of this type of access in advance to prevent unpleasant surprises afterwards when it would be too late.

5) Make your deal sustainable. Business climates change. Your company might enter a merger, carve out some business units, expand functionally (e.g. new modules in an ERP) or geographically (new countries), or divest assets. Your deal must cover all these possibilities, or you risk additional fees at each event.

6) Use your leverage while you have it. Once the deal is signed, future discounts are more difficult to attain. As soon as you implement the software, you’re locked in. Your switching cost is usually prohibitive, and the software provider knows it. You’ll never have more negotiating power than you do before you sign the deal.

7) Most software vendors use their list price to lock the negotiation baseline. Always do your best to question the list price. Any deal with “any price” is profitable for software vendor: When you buy a software program, there are no direct costs linked to the deal (all associated costs are sunk cost). This means whatever the selling price, the deal amount goes directly to the bottom-line. This is an exaggeration but in theory, the starting selling price could be zero!! This gives tremendous negotiating power to the buyer. Typically, salespeople can’t go below a certain level without permission from a superior. Try to find out that threshold. Synchronizing your negotiation with quarter- or year-end, when the vendor financial results are expected, can help achieve additional discounts.

8) Clearly define your terms. This includes:

• Conditions to change the scope of the work and the associated pricing for additional modules.
• Conditions to cancel or terminate the contract. In the current business environment, macro- economic changes could force cancellation, particularly considering the length of time needed for some large implementation projects.
• Intellectual property. Clearly define the rights of usage and transfer of any developed codes in the case of mergers, acquisitions, etc.
• Change of control restrictions. These are often introduced by the IT software vendors and may force the buyer to repay all or a portion of the license at the rate effective at the time of the acquisition. Plan ahead, there will be very little negotiation leverage beyond that point.
• Vendor insolvency. Protect yourself against potential vendor insolvency by making sure software codes are deposited in escrow.
• Define the warranty period. Arrange for support with specific service level agreements during the project and after go-live.

To define your strategy and support your negotiation, the use of independent advisors throughout the process can be critical. It also adds another voice at the negotiating table. One that can draw on previous experience and deep knowledge of the IT software and service market - a potentially useful 'bad cop' during the negotiation!!! Many will propose pricing schemes linked to results and based on success fees.

Drawing on this advice can dramatically change the dynamic of the negotiation and improve the outcome in your favor.