Tuesday’s Tip: Software Licensing and Pricing – Get Rid of CPI Escalation Clauses In Maintenance

Published on December 2, 2008 by R "Ray" Wang

Consumer Price Index clauses represent additional costs of ownership that should be avoided.  Maintenance typically represents 2 times the cost of the original license fees after 10 years of ownership.  Many customers have these CPI clauses in their contracts.  In the worst cases, customers may have signed CPI + X%.  CPI adjustments provide very little value to the customer and their increases are often not used for reinvestment in the product line the charges are based from.  Some suggestions to increase vigilance in reducing unnecessary vendor imposed fees:

  • Eliminate the CPI clause. Take it out of contracts.  Eliminate the uncertainty all together.  The cost of supporting customers over time goes down with time and there really is no need for a CPI clause in your contract.
  • Include language for negative CPI. If the best is that deflation will occur, specify in the contract that a negative CPI indicator will lead to a decrease in maintenance fees.
  • Lock down a fixed maintenance price for the life of the relationship.  Take the hassle out of all maintenance fee increases.  Some vendors have honored life time maintenance fee agreements.  With the economy the way it is, we are seeing some vendor starting to rehonor such agreements.

The bottom line.

In a recent survey of major software vendors, 27 of 29 vendors have canceled their initiatives to raise maintenance fees for 2008 and 2009.  While outward increases are not common, the CPI escalation clause is a “stealth” way to increase maintenance on existing customers over time.  As inflationary fears are being replaced by deflationary worries, enterprises in the midst of contract negotiations should change how vendors adjust maintenance fees and eliminate CPI outright or seek a concession that limits these increases.

Your POV.

Got a tip for optimizing existing software contracts?  You can post here or send me a private email to rwang0@gmail.com.

(Added 3/5/2009) Take the new poll on what rights should be in the 2009 Enterprise Software Licensee Bill of Rights!

Copyright © 2008 R Wang. All rights reserved

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