Pulling the Trigger (Points)

"Software licensing is as flexible as you want to make it," Neely says. "There is no one right way of licensing. Obviously the licensor - the vendor or software supplier - is looking at ways to maximise revenue, so they're looking for as many trigger points as possible where further licence fees will be payable. Because essentially you're talking about an intangible - it's really just a question of contract and scope of use - the customer needs to ensure that the licence is tailored to their needs so they're not constantly hitting these trigger points where further fees are payable."

The best way to resolve the tension between the vendor's need to maximise revenue and your own need to minimise cost is to take a precise understanding of existing software use and the anticipated use over a period of years as your starting point. Consider not only the number of potential users but also the desirability of upgrades.

Microsoft's new "Software Assurance" contracts, as well as contracts from other large vendors like SAP and Oracle, are designed to commit customers to buying operating system and application upgrades for an annual fee, Neely says. But many organisations may not want the hassle of upgrading every time a new version comes out. (Minter Ellison itself is still happily running Windows 97.) "So from a customer's point of view they need to understand exactly what their needs are going to be over the next three, four, five years, whatever the licence program is, so then they can enter the negotiation armed with that knowledge," Neely says.

Major upgrades cause disruption without necessarily providing added functionality useful for the company. Matthew Hall, a partner with Phillips Fox, says his firm tries to encourage companies to negotiate a right to stay on the older version for longer, at least to be two versions behind the current one, so they can upgrade every second time or third time rather than every time.

You also need to know exactly what the upgrade schedule will deliver, and when, says Phillips Fox senior associate Mimi Curran. That means knowing exactly what the vendor means by an upgrade, as opposed to a new release, as opposed to a patch. "Often each company has their own understanding of what these terms mean. You'd think it would be fairly general, but it isn't, so you have to look at those definitions carefully to make sure you understand what it is that you're getting," she says.

After that the best way to control what you buy is through a rigorous program of asset management, McIsaac says. In the case of a product like Oracle you should also look carefully at the value-add options. "Ask yourself: Â'Do I actually need business intelligence on every Oracle licence? Do I need to have these high availability options? Do I really need the Enterprise Edition when the Standard Edition is significantly cheaper?'"And you've got to be absolutely firm about the terms and conditions for things like maintenance. Is your maintenance based on the off-the-book value or the negotiated price? What's the maintenance percentage? Different vendors have different percentages, ranging anywhere from an absolute minimum of around 15 per cent to about 25 per cent. Do you need the gold-plated maintenance at 25 per cent or can you do with 22 per cent?" McIsaac says.

Maintenance can come at a very high price, McIsaac says, with maintenance after a few years sometimes costing as much as the product itself. Many vendors try to include a clause in the licence that will see maintenance costs increase by a specified rate every year. "And they have extraordinary rates, like 8 per cent, when the CPI is 2.5 per cent," he says. "I see clients now whose Oracle maintenance contract is greater than their annual purchases. So they're paying more in maintenance than in brand new bloody software. They're paying a million bucks on maintenance."

To avoid paying through the nose, make absolutely sure not only that the maintenance to be charged is based on the negotiated purchase price but that the annual increment to the maintenance cost is reasonable. McIsaac suggests 2.5 per cent rather than the 6 or 7 per cent some vendors like to charge.

And build flexibility into your contracts - mainly by opting for enterprise-wide licences whenever possible - in order to avoid unnecessary cost, Butler says. Customers forced to upgrade their requirements during the term of the contract frequently get burnt, more often than not when their licence is tied to particular machines or a particular hardware capacity.

"They find that they're paying upgrade fees before they really expected to, and we spend a lot of time with clients moving to enterprise-wide licences which give them a lot more flexibility. That means they're not tied to any specific machine in the first place, and second, in the case of non-mainframe licences they're not tied to any particular processing capacity either," Butler says.

Also be aware of locking yourself into any contract that is likely to penalise your organisation for choosing to restructure or increase hardware capacity, by the imposition of invidious upgrade fees. "A lot of our larger clients restructure their organisations. They have a lot of M&A [merger and acquisition] activity or divestiture of divisions that aren't in their core business any more," Butler says. "All of those things raise triggers in vendor-favourable software contracts, so we spend a bit of time trying to build in that flexibility as well."

Similarly, if there is a chance you will outsource during the course of the contract, build a clause into your software licence that will make it possible for you to hand the licence directly to the outside service provider without having to seek the approval of the software vendor. "A lot of companies, particularly those dealing with mainframe software vendors, have found that their licences can't be transferred onto the IT company's hardware without consent and a hefty upgrade fee and a protracted negotiation. It's a very difficult process," Butler says.