Tuesday’s Tip: Software Licensing and Pricing – Do Not Give Away Your Third Party Maintenance And Access Rights

Published on February 10, 2009 by R "Ray" Wang

In several contract negotiation support calls this month, clients have discovered interesting language in their contracts designed to prevent them from choosing a third party maintenance option.  The language is often buried deep into the legalese and many unsuspecting clients may sign without understanding the future implications in the software ownership life cycle and the Software Licensee Bill of Rights .

Here’s three modified examples with both the client’s name and the vendor’s name masked to protect both the innocent and guilty:

  1. “Licensee confirms that maintenance will be provided by VENDOR X and only authorized and certified individuals may make modifications to the software code. “
  2. “Except as otherwise expressly set out herein or as otherwise expressly permitted by law, Licensee may not: (d) reverse assemble, reverse compile, or otherwise reverse engineer, de-compile , or disassemble the whole or any part of the VENDOR Y’s Program or the Documentation or permit a retained Third Party or any other part to do so without VENDOR Y’s express written consent.  This includes for purposes of maintaining the software”
  3. “Licensee hereby confirms as per the effective date of the schedule licensee has obtained all licenses for the license solutions and only the support/and or maintenance services received by licensee for SOFTWARE PROGRAM NAME Z are VENDOR Z’S including other support maintenance services provided by and separately priced and charged for VENDOR Z which are in addition to VENDOR Z’S

Not knowing what that legal gobbledygook meant, one of our clients sent an email seeking clarification for Example 3 and got this in response from VENDOR Z:

“This requires CLIENT 1 to confirm third party licenses to protect CLIENT 1′s liability. Grants CLIENT 1 rights to use third party software. Requires company to confirm they are not receiving support services except from VENDOR Z

Now, this could be from a rogue sales person with some legal background or part of a new program, but the clarification is clear.  Vendor Z is explicitly asking the client to sign away third party maintenance rights in example 3.

(Added Feb 13, 2009:  Good news!  Without naming a vendor here, since the general publicity surrounding this issue, the client has managed to have the software vendor retract the interpretation of the above statement)

Recommendations – sure its caveat emptor but talk about anti competitive!

With more examples coming from other clients about other restrictive vendor practices, well in true colloquial terms, “Houston, we have a problem!”  During the current economic downturn, customers find these new “official” and “unofficial” programs to be outrageous.  In defense of the vendors, these programs protect their maintenance streams from the third party maintenance options .  While this may help their revenue stream, actions such as this, give software vendors a bad name and lessen their credibility in being a true partner for IT solutions.  In fact, vendors need to restore the vendor client trust if they plan to keep their customers by choice.  Here are a few things you can do to make sure the leverage in contracts remains on the end user side*:

  • Review your contracts with your legal team for such similar anti competitive language
  • Validate any suspicious terminology with the vendor
  • Eliminate gag rule clauses in your contracts
  • Apply the five steps to a recession proof apps strategy
  • Work with the user groups to force the issue for the need for third party maintenance
  • Consider other governmental or legislative recourse to petition for third party maintenance options

The bottom line – business process revolution and cloud computing stifled by the innovator’s dilemma

In fact, this whole issue of third party maintenance rights is akin to what happened in the early 80’s when hardware vendors tried to keep customers from going to third party support.  At the time, many of the hardware vendors poorly invested and under funded innovation in software.  This stranglehold of maintenance dollars by many hardware players, with margins as high as 70%, delayed today’s enterprise software revolution.  Once the log jam on third party maintenance was broken, users had additional funds to invest in enterprise software.  New vendors entered the market.  Today, the business process revolution is being stifled by many software vendors who were the beneficiaries of the last revolution.  In fact, these vendors also have margins as high as 80% on maintenance.  Today’s new turks are the third party maintenance providers like Rimini Street and SaaS vendors waiting for this impasse to break.  While they are chipping away at the market by providing new levels of innovation at optimal price points for adoption, many of the on premise vendors have not adapted and are stalling. Until market forces change or governmental action is taken, customers must fight for third party maintenance rights and band together to reduce the overall cost of ownership.

Now, in fairness to vendors, heavy upfront discounting may require higher maintenance fees on net prices to create an optimal revenue stream over the life of the product.  We do want the software vendors to reinvest in new products, remain financially viable, and of course deliver more innovation!  However, the overall process must be made transparent to customers, especially how this revenue stream is being reinvested.  Until this happens, a true partnership between the vendor and client will be quite difficult to achieve and customers will be left receiving minimal value for the maintenance they pay.

In a few weeks, read up on the third party maintenance market from my colleague Paul D. Hamerman who will have a report on the Forrester website.  And please send your suggestions to the new 2009 Enterprise Software Licensee Bill of Rights.

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

Your POV.

Have you been seeing such anti-competitive behaviour in the past 3 months?  If so, send me a copy of your contract language or feel free to post here.  If you are a Forrester client, please set up an inquiry.  Post your thoughts 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!

*Caveats are as follows:  1) This does not constitute legal advice.  Please consult your legal counsel for an official opinion and wording.  2) This does not consider any procurement or vendor management rules that must be applied to your enterprise.  Please work with your vendor management teams for compliance.  3)  Contract negotiation support provides insight into overall trends and price points.  Benchmarks are not provided as each user scenario is unique.

Copyright © 2009 R Wang. All rights reserved.

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