Sidebar | Mission Impossible

How one bank held its ground on a critical contract clause that's typically "not up for negotiation" with software vendors

By Thomas Wailgum

Vendor contract negotiations can be complex, arduous and costly. And sometimes there appear to be competing "must haves" on each side that can end up breaking a potential deal.

Such was the case as a large European bank entered into negotiations for enterprise-class database technology with Oracle. Forrester Research senior analyst Duncan Jones, who wrote a report on the situation, says he cannot name the bank or provide many specifics on the deal, but the bank's approach to the negotiations provides best practices for how to deal with seemingly insurmountable disconnects with vendors.

First off, there was one big sticking point that the bank needed to address at the outset. Software companies, including Oracle, typically include clauses in their licence agreements that remove their liability from any kind of negative business-related events resulting from the software (like crashing all your company's servers), nor are there any warranties for the buyer to fall back on.

In other words, it's "buyer beware" on steroids. "If it doesn't do what you thought, it's not our fault," Jones adds. "[Vendors] are very unlikely to do anything that creates promise in the future."

Two of the main reasons why software companies typically include such licensing provisions are because, first, they can; and second, because there are accounting rules designed to stop vendors from misstating the timing of when they record revenues. For example, if a licence agreement includes a 12-month warranty period, explains Jones, the vendor could not book the revenue from the software deal until after the 12 months expired.

In the report, which Oracle did see a copy of before Forrester released it, Jones notes that "these clauses are not usually up for negotiation because revenue recognition policies are sacrosanct, and a single exception can jeopardize a vendor's entire accounting framework". (Oracle declined to comment on the Forrester report to CIO.)

"I've heard other licence-negotiation experts describe the issue as 'Don't bother to ask, they'll never agree', and not just for Oracle but for SAP too," Jones says. He notes that in his experience Oracle is more open than some of its competitors on software licensing deals.

But this particular bank had a corporate software-purchasing policy just as sacrosanct as Oracle's licensing policy: The bank needed some software guarantees.

That's because large financial institutions "insist on warranties and indemnities from their suppliers to avoid getting dragged into litigation by third parties trying to pick the bank's deep pockets", Jones points out. They want protection. And from day one, the bank was dead set on getting this concession from Oracle.

So as the negotiations commenced, these two "immovable policies", as Duncan terms it, were in direct conflict with each other. One side would have to blink first.