Strategic Contracts With Software Suppliers

Author(s):

Kathleen E. Macie, C.P.M.
Kathleen E. Macie, C.P.M., Manager, Sourcing Projects NBC - National Broadcasting Company, Inc., New York, NY 10112, 212-664-4444

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

THE EXECUTIVE SUMMARY
A distinct challenge in today's purchasing environment is the emphasis by company management to foster and proactively utilize the purchasing department in all aspects of acquisition. It is because purchasing departments are needed to assist internal customers in acquiring software that draws interest to this workshop. It is intended for the participant to acquire a guide to software acquisition and licensing as well as a path to improved software supplier and purchaser relationships. The format is composed of three parts: (1.) Strategic negotiations and research results are outlined and described; (2.) A checklist of terms and conditions for mainframe, minicomputer and microcomputer (PC) software contracts is provided to the purchasing professional serving a wide range of computer and software users; and (3.) Proactive measures including the formation of strategy, timing of negotiations, avoidance of supplier's contract, determination of cost effectiveness and upgrades are discussed. A forum will be available to facilitate audience members who want to ask questions and share strategies. Lastly, handouts will include a sample of common contract terms and conditions, a list of firms that provide seminars on software contracting and related legal aspects, and a list of firms that provide expert consultation on the computer hardware and software industry.

For the buyer newly recruited into the software licensing arena, some of the vocabulary may be a challenge in so far as information technology (IT) vocabulary is specific to computer hardware and software technology. However, most contract terms and conditions and negotiation skills required for a profitable experience in this workshop will be familiar to the purchasing professional. For the experienced software licensee and acquisitioner, the information will range from basic practices to leading edge strategies practiced by purchasing professionals and by major software suppliers in today's competitive environment.

INTRODUCTION
As purchasing management (PM) seeks cost effective solutions to the challenges of software procurement and licensing issues, there is an ongoing evolution in standards and competencies practiced by successful software contract negotiators. Many purchasing professionals use current negotiation skills and past successful experiences as a template and apply these skills and experiences in the software arena. Over time, and at cost to the company in the near term, the negotiator becomes skilled in the computer hardware and software technology, makes effective gains, reduces costs and eventually avoids costs for the company - over time. Frequently purchasing departments recruit IT personnel into the department and apply the title purchaser to the new recruit. The PM's expectation is that the new purchaser, because s/he is highly knowledgeable in all the technological vocabulary, can utilize the high tech language to negotiate a sound, cost effective contract for the company. Experience has shown that neither method is the most beneficial route to take, although viable options. Among these and options not mentioned here, one important aspect must be included.

The education and training of the new software contract negotiator and ongoing education and training for the experienced negotiator. Whether training be the IT technology or the purchasing, C.P.M., technology, the PM must be fully supportive and the new recruit must be fully committed to the process. Education, training and experience also enables the software negotiator to achieve goals not only for the employer but also to achieve personal goals at a professional level. In any case, consideration and commitment to education, training and experience in the evolution of a good software contract negotiator is mandatory to real cost reduction in a market that is highly technical with many complicated variables.

The level of importance of software costs to profitable company operations is increasing at a very fast rate. In 1986 software was 20% of the IT budget. Typical budgets include computer hardware and facility, software and staff costs. In 1993 statistics indicated 60 to 70% of budget dollars were spent on software. By 2000, in only 6 years, software producers and market researchers predict software will be as high as 85% of the budget. IT budgets are on the rise overall and on average, amount to 15% of cost of operations. All money spent in training will be returned in real cost reductions and in real dollar contributions to the bottom line.

STRATEGIC NEGOTIATIONS AND RESEARCH RESULTS OUTLINED
In terms of history it is important to be informed about some past approaches and relationships of suppliers providing software to businesses. The marketplace has changed a great deal since the early years when IBM was the primary provider of both computer hardware and software. However, the black box sales technique used by sales staff continues to prevail. Scientific and custom software continues to be marketed much the same way since inception of these markets. Business operations software sales methods are beginning to change. Opening the mysterious black box has taken place much more rapidly because professional purchasing practices have not allowed perpetuation of the myth.

Since the emergence of independent software vendors (ISV's) in the 1970's, the software industry has moved towards flexibility, market aggressiveness and relationship building in various stages. ISV's are software producers only and not involved in manufacture of computer hardware. Because of the emergence of the ISV, the software market place has become highly competitive, highly creative and extremely alterable. ISV's are typically associated with the mainframe and minicomputer arenas. However, now advances occurring in microcomputer development blur the differences between the older low end mainframe and the high end microcomputer and the technology in between.

The emergence of the personal computer, PC or microcomputer, opened not only a marketplace for computers but also one for software. Developers like Microsoft and Lotus have created a commodity from what was once a black box product. PC software revellers play an undeniably vital role in the sales, distribution and support of the commodity software products and make excellent profits as well.

Software quality has reached a level where bugs are obscure to the majority of users, although the highly skilled are still plagued. Software pricing is based upon volume, volume, volume and not much more. Usually the more product the supplier sells the quicker the cost goes down. As the cost is reduced often so are prices. Volume may be number of packages, number of users or even based upon frequency of use. Mature software suppliers are seeing the percentage of profits grow in the upgrades and renewals as fast as profits in the new product market. Product support used to be provided as part of the product price. The marketplace has asked for separate prices for product and for service. The software suppliers have provided the separate prices, to the eventual chagrin of the customer. And what about warranties? Initially, software was supported until it was up and running to the satisfaction of the customer. Quality improved, bugs and system shutdowns became more infrequent and warranties plunged to 30 days from startup, however that date was defined. Quality improved so that the warrantee period could be reduced. As a common sense individual, does that make sense to you? Well, it should not. The second segment of the workshop was designed to assist the purchaser in recognizing terms and conditions that apply in many circumstances like those described above.

TERMS AND CONDITIONS FOR MAINFRAME, MINICOMPUTER AND MICROCOMPUTER SOFTWARE CONTACTS
The following terms and conditions, a checklist, are commonly used in software agreements and licenses. Expert legal counsel, preferably in the intellectual property area with a specialty in software law, should review licenses for issues of law. Frequently, experienced attorneys provide insight into business issues as well. Use all resources and cover all bases: get legal review of your agreement before completion.

Contract Terms And Conditions Checklist

1. Scope
2. Term of Agreement
3. Orders and Precedence
4. Definitions
5. Terms of Price
6. License
7. Quality Control
8. Disclosure
9. Documentation
10. Delivery
11. Acceptance Period
12. Maintenance Plan
13. Enhancements
14. Payments
15. Taxes and Duties
16. Termination
17. Mandatory Government T's and C's
18. Support Requirements
19. Notices
20. Title & Risk of Loss
21. Assignment
22. Warranty
23. Intellectual Property Rights
24. Force Majeure
25. Governing Laws
26. Severability
27. Compliance with Laws
28. Amendments
29. Americans with Disabilities Act Provision
30. General
31. International
32. Signatures of Authorization and Team Member List

EXHIBITS

1. List of Ordering Locations (Customers)
2. Supplier Products
3. Supplier Services
4. Supplier Pricing
5. Supplier Sales Locations
6. Escrow Provisions
7. Statement of Work
8. Sublicense T's and C's
9. Quality Assurance Programs
10. Relationship Evaluation Forms and Schedule

PROACTIVE MEASURES FOR SUCCESSFUL CONTRACTS AND BENEFICIAL RELATIONSHIPS
The focus of this segment is the Software Asset Team, or SWAT. The acronym was developed to draw attention to a fast growing asset. Whether or not your organization adopts the acronym is not important. It is important that some form of the concept is adopted and practiced.

As the above structure indicates, the team is composed of three parts, each interacting with the other through open and frequent communications. The objectives of SWAT are the planning and all phases of implementation in the management of the firm's fastest growing asset, software. Some of the primary aspects included here are schedule planning for new and replacement and upgraded products; negotiation and strategy planning and implementation, maintenance definition, protection needed as a result of supplier management change; and establishment of goals such as longer warranties, and extended test time allowances.

In the contract negotiation arena several of the terms and conditions that should get special focus are transferability, maintenance, warranty, time bombs and source code. Transferability is especially important in these times of outsourcing, downsizing and mergers. There are good business practices that can be incorporated into agreements that proactively protect the user. Maintenance should clearly define upgrades, enhancements and new releases as well as 'regular', 'significant' and 'periodic' for clear understanding and for relationship building between customer and supplier. Warranty needs very close attention and clear definition as well. Time bombs or software locks of any sort are unconscionable and are most difficult to eliminate. Users have been convinced of the necessity by suppliers. Think about what other products you buy that have built-in bombs. You don't buy those either. When is the source code a problem? When you have big system problems. Suppliers are not entitled to harm customers in any way but often when source code is discussed ears go deaf and minds go blank. Reasonable requests are doable, legal and ethical. Suppliers can be moved to reasonable actions often aside from prior experiences.

The immensity of the software marketplace and subsequent negotiation prospects allow only a brief overview to be presented here. Additional information will be provided in workshop handouts.

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