Articles Posted in Legal and Contracting Issues

Deploying a software package across the company (or most of the company) is becoming a reality for most companies. Standard processes and systems drive cost, quality and performance improvements. Unlimited deployment rights may also reduce transaction costs and project completion timeframes. The right enterprise and unlimited license agreement can make all the sense in the world.

In the first installment of this blog, we set up a scenario where you are a CIO faced with a decision on whether or not to enter into an “enterprise” or an “unlimited” license arrangement with a major software publisher. In discussing the first of our four questions (“What does “enterprise” or “unlimited” really mean?”), we explained that there are many potentially perilous pitfalls in these license arrangements, and conveyed how you might to look to avoid or mitigate them.

Again working from our four-question framework, let’s now focus on the second question: “Do we really want to be doing business with this publisher?”

You’re a CIO and a major software publisher proposes an “enterprise” or an “unlimited” license arrangement. Having made its way up the chain to your desk, you are told the deal looks promising. There can be pitfalls in any software deal. In “enterprise” or “unlimited” license arrangements the pitfalls can be devastating.

Asking yourself (and your staff) four basic questions may help you ferret out the risks and reduce your exposure to many of the big problems.

This is the first of four installments identifying and explaining each of these four questions. The first question is:

“The details are not the details. They make the design.” – Charles Eames

Indiana vs. IBM

In 2006 Indiana awarded IBM a contract for more than $1 billion to modernize Indiana’s welfare case management system and manage and process the State of Indiana’s applications for food stamps, Medicaid and other welfare benefits for its residents. The program sought to increase efficiency and reduce fraud by moving to an automated case management process. After only 19 months into the relationship, while still in the transition period, it became clear to Indiana that the relationship was not going as planned. The expected levels of automation were not being realized. Instead, the program reverted back to a caseworker process, and performance was consistently slower than agreed to levels.

When customers decide to outsource part of their operations there are many factors to be considered and decisions to be made over the course of the initiative. Getting to the “right price” is obviously one of the key objectives in any outsourcing transaction. Nobody wants to pay too much for a particular service and, while it might seem nice at first blush, nobody really wants to pay substantially below market price for a service because of the problems that will ensue later in the relationship. However, once the right price has been determined, then a decision must be made as to how to structure the payment of this right price.

The Dead-Band Method: For some customers, especially those with little variance in their monthly usage, having a consistent invoice amount from month to month may be more important than perhaps squeezing that last dollar of cost savings out of the operations. For such customers, paying the same amount for volumes that are within some small percentage (up or down) of the original baseline volumes can be a preferred way to structure the payment.

With the Dead-Band Method, the amount the customer pays each month doesn’t change within a small percentage of volume changes (e.g., +/- 5%). In addition to the stability in amount paid, this method can also reduce the angst created by conflicts with the supplier over the accuracy of volume counts. Counting issues often arise in the early days of outsourcing relationships as volumes that have been loosely measured in the past suddenly take on far greater importance. If the invoice price doesn’t change until the dead-band is passed, then small changes in volumes can be validated and worked through without the pressure of an aging supplier invoice. Ideally, by the time the dead-band limit is reached, the counting issues have been worked out.

It pays to closely read the payment terms in your software license. Or rather, it costs if you don’t read them closely enough.

I was reviewing a software license for a client recently and came across this term:

“We may increase the license fee in a renewal term by giving you notice at least 60 days prior to the commencement of that term by an amount considered by us to be reasonable if we determine that the existing license fee does not give us an appropriate return when compared to returns from other of our customers, but in no event will any such increase be greater than 10% of the renewal License Fee.”

As customers continue to embrace Software as a Service (SAAS) solutions that are hosted in the cloud, rather than traditional software solutions that are loaded onto and hosted on the customer’s own environment, they should closely review the contract that will govern their relationship with their SAAS provider. Frequently, we see SAAS contracts that are missing certain basic (and key) requirements that serve to protect SAAS customers.

In Part 2 of our two-part series, we continue our list from Part 1 of the critical contract protections that SAAS customers should keep in mind, before signing any SAAS agreement. Alternatively, if a customer already has a SAAS agreement that omits any of the following terms, the customer should explore amending its current agreement to include these protections, during its next contract renegotiation.

Who May Use the SAAS Solution? SAAS customers should think about who they need to access and/or use the SAAS solution. SAAS agreements frequently place limits on those who are allowed to access the solution. Make sure that the contract allows access and/or use by all of the necessary categories of users. Will the persons accessing the solution only be employees of the customer? What about employees of a customer’s affiliates? What about a customer’s customers – are there any VIP, downstream customers who need access rights? And what about agents, subcontractors and independent contractors, whether they work for the customer itself, an affiliate, or a customer’s customer? (More about the last category directly below).

As customers continue to embrace Software as a Service (SAAS) solutions that are hosted in the cloud, rather than traditional software solutions that are loaded onto and hosted on the customer’s own environment, they should closely review the contract that will govern their relationship with their SAAS provider. Frequently, we see SAAS contracts that are missing certain basic (and key) requirements that serve to protect SAAS customers.

In the first of a two-part series, we offer the following critical contract protections that SAAS customers should keep in mind, before signing any SAAS agreement. Alternatively, if a customer already has a SAAS agreement that omits any of the following terms, the customer should explore amending its current agreement to include these protections, during its next contract renegotiation.

Implementation Schedule If a SAAS solution is being put into service for the first time for a customer, the customer should make sure that the contract lists the expected schedule for the implementation, including the milestones that must be met and hard dates (not wishy-washy “we hope to get it done” or “we will use reasonable efforts to try and get it done” by a certain date) by which the milestones must be met. If the milestones are not attached to hard dates, then arguably, an implementation that is over one year behind schedule may be “late” in terms of what everyone expected, but it may not be late in terms of the specific guarantees in the contract.

The timelines of most strategic IT or sourcing projects are punctuated with key moments that can make or break the deal. These include defining the customer’s strategic objectives, determining which suppliers will be asked to compete (assuming it’s not a sole source deal) and, of course, executing the contract. Another critical juncture is downselection. This is when the customer eliminates competition by choosing a “winning” supplier and focusing on getting a contract signed.

Customers should manage the downselection process thoughtfully. Here are some factors to think about:

1. Timing.

In negotiating outsourcing agreements, I sit on both sides of the table – obviously not at the same time. I represent customers about half of my time, and I spend the rest of the time representing suppliers.

It’s always interesting seeing a transaction from one particular viewpoint, but also knowing the dynamics that are at play for the other side. One thing that strikes me is that, regardless which side of the table I am on, my clients always think that they have little or no leverage, and that the other party in the negotiation holds all the bargaining power.

The customer sees itself pitted against a team of professionals who negotiate outsourcing agreements day in and day out, whereas the customer might have an agreement (or a handful of agreements) that is up for replacement or renegotiation every few years. They may be under time pressure to get the transaction executed, either to meet internal deadlines, to implement new technology, or to give termination notice to an existing supplier.