Tuesday’s Tip: 3 Approaches To Return Shelfware

Published on July 21, 2009 by R "Ray" Wang

Declining demand and diminishing output increase the pressure for enterprises to reduce their software license maintenance costs.  As part of a larger enterprise apps strategy, shelfware reduction provides an area for significant cost savings.   However, shelfware reduction is often hard to achieve because many vendors impose:

  • Enterprise wide agreements. These “all you can eat” agreements incentivize customers to buy more than they need at a “good” discount.  Yet, the end result is the payment of maintenance on non deployed apps (a.k.a. shelfware”).
  • Repricing clauses. Many contracts contain language that impose list price recalculations when users choose to return their licenses to the vendor.
  • Bundled contracts. Contractual language often prevents clients from unbundling their software as needed.  In addition, vendors have initiated focused programs to bundle licenses.

The bottom line – apply three shelfware maintenance fee reduction techniques

Craft a win-win strategy based on your product adoption requirements and overall contract negotiations strategy.  Three proven techniques in order of improving win-win  shelfware reduction scenarios:

  • Return unused licenses. Vendors agree to take back licenses and proportionately reduce maintenance costs.  Customers lose future rights to those licenses.
  • Park unused licenses. Vendors agree to hold unsued licenses and not charge maintenance.  Customers still have rights to the licenses and will pay for maintenance when licenses are deployed
  • Apply credit to purchase of new licenses. Vendors agree to assign a value to shelfware.  Credit on used licenses will be applied to future purchses.  Customers lose rights to the original software but gain rights to new software and functionality.

Your POV.

Having issues with returning shelf ware?  Which approach have you tried?  Ready to share with us your experiences to date?  If you need help with your SAP, Oracle, Infor, Lawson, Microsoft Dynamics, or other enterprise software contract, send me a private mail and we can assist with a contract negotiations strategy that aligns with your apps adoption strategy.   You can post here or send me a private email to rwang0 at gmail dot com.

Copyright © 2009 R Wang. All rights reserved.

  • Vendors and customers may have a different view of the price paid for these unused licenses. Customers may be thinking of “average price” = total license paid divided by the number of seats. Vendors, on the other hand, may be thinking of “marginal price” – not an easily formulated number (e.g. “X” for the first 1/2 of the seats, “X/2” for the next 40%, and “X/10” for the last 10%). Often a vendor will offer additional seats or products rather than a discount on the number of seats or products a customer needs right now. This is more like a customer buying a “futures” investment on seats or products it may need. Customers are aware of the offered price from the vendor for a lesser number of seats or products, and aware that the last few seats are offered at a substantially lower “per seat” price, so they should not expect to be offered credit on the “average price” when seeking to return licenses. In fact, given that commissions are notoriously hard to claw back, the customer should expect to receive the marginal price paid for the additional seats, less the commission paid to the salesperson, less the costs of the return transaction (e.g. like a “restocking fee” paid for returns of items that lose value over time)

    Why do buyers purchase more seats or products than they end up needing? Of course, sometimes there are project failures, but that is the risk taken by the client when the software is licensed, and is factored into the price offered.

    More often, additional seats or products are purchased to satisfy some future possibility of demand by the customer. The present value of those marginal seats (or products) is lower for the buyer and the seller – both will have to spend money to do a transaction in the future, and there is some probability that those seats will never be needed, so a discount needs to be applied to their value (on top of the effective interest rate used in a regular net present value calculation) to reflect their present value. Vendors prefer to offer more product rather than a lower price for many reasons, including improved financial results, ability to block future competition, and lower transaction costs – plus the salesperson is incented to make the deal as large as possible to achieve higher incentive commissions.

    Customers are free to negotiate on the price of the desired number of seats, as well as to do so on additional seats or products; those that choose the latter approach prefer to do so because they expect to grow their number of employees or their penetration of deployment – plus the purchasing department often receives incentives on percentage discount realized, so they are incented to achieve the highest possible discount, not the lowest possible price.

  • Jeff – good stuff as usual. Agree that returning shelfware is the least desirable idea, but in some cases, it may be that or no reduction in maintenance. A sad way to kill your perpetual license rights and more of a last resort – worst case option. Thanks for adding more details to the discussion! – R

  • Good tip, Ray. But customers should NEVER have to return shelfware unless they’re going to get financial credit for doing so. Payment for those (probably perpetual) licenses was for the right to use them indefinitely.

    Using the other two options, however, can provide significant value to customers and should be negotiated up front. Parking the license is going to be the least “costly” for either party… but tracking costs will go up as a good audit will need to be completed on a regular basis. I’ve seen very few licensee’s have the time or willingness to submit to such scrutiny.

    Credits are a good idea, too… but customers will lose some value in the transaction (there will have to be some account for the benefit of the software for the length of time you’ve used it). Usually this is done by a year count. The problem is that no one took the time to break down the annual cost in the original license, so you end up negotiating it from a position of weakness later. One way to solve this discretely is to insert a depreciation time into the agreement itself. In fact, when vendors push back on a full refund in the event that they can’t solve an IP issue, they typically want to get this depreciation schedule into the agreement themselves. Just make sure the time frame for full depreciation matches your company’s depreciation schedule and then apply it to all facets of the license.

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