United States: Decoding Software Proposals

Most executives avoid the details of software licensing. Yet in today’s tech-dependent economy, businesses "can’t live with it, can’t live without it." Even though proposals for new software have become ever more complex, executives, rather than the IT department, must become involved. Not only is software a major expense, technology often provides a firm’s competitive edge.

For example, Microsoft recently overhauled its licensing schemes for its omnipresent Office (R) business applications. The new structure has forced many businesses to confront the escalating cost of regular upgrades, rather than purchasing new software only as needed.

While businesses may see no alternative to Microsoft’s demands, other technology purchases may be more negotiable. Let’s look behind the typical software proposal.

First, no firm can negotiate the vendor’s terms for software purchased "off the shelf". Instead, some protection may be available from the "VAR," or independent "value added reseller", who packages and installs software to meet specific needs.

When choosing, compare each VAR’s own warranty. No one will offer more than what the vendor provides on the software itself.

However, the VAR’s assurance that the program will work on your system, compatibly with your applications - and come back to fix any problems, within a short time after a service call - can be critical to uninterrupted operations. Try to lock in prices for service after the initial warranty as well.

Don’t forget to get a certificate of insurance to check the VAR’s coverage. Product warranties never cover the catastrophic consequences costs of software failures, like Hershey’s recent supply chain disaster when software snarled candy deliveries just before the holidays. Warranties typically only reimburse for the software cost alone, and many VAR’s are small firms without deep pockets.

Larger proposals may have more flexibility. In today’s depressed economy for tech spending, don’t be shy in asking for more aggressive discounts and other economic terms, as vendors struggle for any sales.

Although software vendors rarely will vary standard legal licensing terms, some may offer a side letter on points critical to make the sale, for example, price protection if a new release of the product is issued in the next year. Matters within the scope of the sales representative’s authority should be "on the table", such as pricing, maintenance costs or additional products or training. Just confirm that the vendor has approved the deal offered by the sales rep.

Turning to the proposal terms themselves, don’t ignore the details. The sales rep doesn’t know your business, and may be quoting only a standard package that can be better customized to your specific needs.

Most importantly, consider the total cost of the product. The actual licensing fees are only the tip of the software cost iceberg.

Understand all you must pay in yearly maintenance charges to keep the software current, and for bug fixes. Examine whether you have the hardware necessary to run the program effectively, or if workstation upgrades will be needed. Converting data to new formats is never cheap or seamless.

Don’t forget the out-of-pocket costs of trainers to help staff understand the new product. You will certainly face hidden costs of lost time during installation, and while employees adapt.

In fact, you may not even need to go through this aggravation. Your existing packages may already serve your needs. Today’s common business applications offer so many options that few firms actually use - or even know - all that is available.

If new software makes sense, pick a license that will meet both current and future needs. For example, a typical license, like that purchased through a retailer, allows internal use only, not in a product to be sold to third parties. That "distribution" license will be more expensive.

Don’t underestimate the number of licenses needed. "Multi-seat" or "site" licenses encourage greater use of the software, often at significant discounts. Even if you don’t need more licenses today, it may cost only slightly more to cover future needs.

If you must modify the product to meet your own requirements, you must obtain a license that will provide code. However, some vendors won’t allow such tinkering to insure future revenue, or will demand ownership of your modifications.

Software licenses are often sold as "standard", to discourage close examination of the details. Don’t let those details cut into your bottom line.