Recent Client Interactions Hint At Increasingly Aggressive Vendor Behavior
Conversations with 11 enterprise apps customers in the past two months indicate stricter enforcement of vendor “All or Nothing” maintenance policies. “All or Nothing” maintenance policies often require customers to put all licenses on maintenance or receive no maintenance from the vendor. These policies also prevent customers from reducing the number of licenses covered by maintenance. The rationale for these policies – customers could potentially apply the patches, bug fixes, and upgrades for covered licenses to the uncovered licenses. While this may seem reasonable, accounting for changes in revenue recognition appears to be the greater issue.
All Or Nothing Policies Impact Shelfware Reduction The Most
Traditionally, customers with declining revenues and employees sought provisions to reduce shelfware. Shelfware is software purchased but not deployed. While customers are not required to purchase maintenance with their new licenses, most modern software maintenance contracts include clauses that prevent flex down and invoke penalties for reducing the number of licenses during the maintenance period. These policies lock customers in to maintenance contracts to preserve the Total Account Value (TAV).
Purchasing Additional Licenses Challenge The Legality Of All or Nothing Policies
In recent contract negotiations, several customers sought to add additional licenses of a product they owned that was not on maintenance. Subsequently, the sales teams for both vendors told them to “true up” on maintenance or they could not purchase additional licenses. The customers found this to be contradictory as they did not have to buy maintenance to own the software to begin with. The tying of maintenance to purchases may, in fact, be illegal. Consequently, clients often face a Catch-22 in four typical scenarios (see Figure 1):
- Acquiring entity received new licenses in a merger. Acquired organization may not keep current on maintenance. Organization does not bundle the software contracts. Organization does not realize they need to be on maintenance to purchase new licenses for combined entity. Software vendor insists that the entire company pay back maintenance to buy new licenses.
- Divested entity inherited licenses from a divestiture. Divested organization keeps licenses from an unbundled contract. Organization seeks to purchase new licenses. Organization does not realize they need to be on maintenance to purchase new licenses for combined entity. Software vendor insists that the entire company pay back maintenance to buy new licenses. New customers would not have to pay for maintenance with new licenses.
- Regional units purchased separate licenses from other units. Some divisions drop maintenance contracts. Others keep maintenance. Organization does not realize they need to be on maintenance to purchase new licenses for combined entity. Software vendor insists that the entire company pay back maintenance to buy new licenses even though buying entity is on maintenance.
- Organization dropped maintenance on desupported products. Organization dropped maintenance on some products that were no longer being supported. Organization does not realize they need to be on maintenance to purchase new licenses for combined entity. Software vendor insists that the entire company pay back maintenance to buy new licenses even though buying entity is on maintenance.
Figure 1. Four Typical Scenarios Where All Or Nothing Fails Customers
The Bottom Line For Buyers – Organizations Can And Should Push Back On Unfair Policies
In 9 out of the 11 cases, clients pushed back hard during the negotiations process. Escalation to the legal team proved to be the best route to blow past the sales puffery. However, clients should use these key negotiations tips to gain leverage in the conversation:
- Do not bundle contracts, ever. If you bundle, you lose leverage. Period. Keep your contracts separated so you can flex up or flex down.
- Download the latest updates and bug fixes. Don’t get caught in a situation where your vendor blocks your access for not being on maintenance. Always download the latest patches and entitled upgrades as soon as they become available. Of course, do not apply these entitlements to software where you do not have maintenance rights!
- Decouple support from maintenance when possible. Seek customer friendly clauses in your contracts. Use the Microsoft Dynamics example as your guide in contract negotiations..
- Consider third party maintenance options. Third party maintenance options exist for many vendors. Cut the maintenance fees in half while receiving comparable or better levels of support for bug fixes, tax changes, and regulatory updates. Keep in mind, third party maintenance cuts off access to future upgrades.
Are you preparing for the 2011 maintenance contract renewal cycle? Have you faced this issue with your vendor? How did you resolve it? Ready to put the expertise of over 1000 software contract negotiations to work? Give us a call! You can post or send on to rwang0 at gmail dot com or r at softwaresinsider dot org and we’ll keep your anonymity.
Please let us know if you need help with your next gen apps strategy efforts. Here’s how we can help:
- Providing contract negotiations and software licensing support
- Evaluating SaaS/Cloud options
- Assessing apps strategies (e.g. single instance, two-tier ERP, upgrade, custom dev, packaged deployments”
- Designing end to end processes and systems
- Comparing SaaS/Cloud integration strategies
- Assisting with legacy ERP migration
- Engaging in an SCRM strategy
- Planning upgrades and migration
- Performing vendor selection
Resources And Related Research:
Reprints can be purchased through the Software Insider brand or Altimeter Group. To request official reprints in PDF format, please contact firstname.lastname@example.org.
Although we work closely with many mega software vendors, we want you to trust us. For the full disclosure policy please refer here.
Copyright © 2010 R Wang and Insider Associates, LLC. All rights reserved.