How to Negotiate Software Agreements

Oct 01, 2011 9:30 PM  By

Let’s face it: Getting to the point of signing an agreement for a new order management, warehouse management or website system requires a massive amount of work and time.

The systems research and selection process can take four months or longer. In fact, by the time buyers have gone through defining all of the user requirements, writing an RFP and assessing the proposals, watching vendor demos, negotiating price and other points and making a final selection, they’re often so fatigued that they enter the crucial, clinch-the-deal stage with a dangerous, “Let’s just get this agreement signed” mindset.

But buyer fatigue is just a small part of the problem when it comes to ensuring a project’s success. A root cause of failures is focusing too much on “negotiation,” in the sense of simply trying to get a price cut or better deal. Many merchants don’t put enough emphasis on thoroughly researching user needs, internal planning, understanding the vendor’s and buyer’s responsibilities, estimating total cost of ownership, and reviewing agreement specifics prior to signing.

After a successful vendor search, companies often fail to follow through with an agreement that’s equally detailed and thought-out. How can you avoid such pitfalls?

Before I go further, keep in mind these two critical points. First, the information in this article should in no way be construed as legal advice. Consult a qualified, intellectual property (IP) attorney for that purpose.

Second, I have great respect for the many honest and reputable vendors supplying solutions in these spaces. They are crucial to our industry and continue to bring innovative applications to the multichannel marketplace.

That said, here are some points that you may want to consider as background and discuss with your counsel.

UNDERSTAND THE TYPES OF AGREEMENTS

Two overarching aspects need to be taken into account as you review and potentially negotiate vendor agreements. One consists of the basic legalities of the documents.

The second, of equal importance, consists of the “business aspects” of the agreement. These include the total cost of ownership, project planning, capital requirements and payment schedules, modifications to be delivered as required, the vendor’s estimates and sign-offs, and more.

Here are the types of agreements that you and your legal counsel should scrutinize before signing, so that you’re fully aware of their effects on the costs and schedule:

  • License agreement

With some vendors, the license agreement falls under a master agreement that generally governs a host of terms and conditions. These include the use of the application software, ownership, confidential information, publicity, termination of the agreement, limited liability, indemnification, right to assignment, governing law, dispute resolution and employee hiring — all things that the buyer may need to change from time to time. Your lawyer’s main concern should be reviewing these, and ensuring that you understand them and that they are fair and even-handed.

  • Services agreement

This agreement includes the terms of modifications and integrations/interfaces, training, conversion, project management, and so forth. These services will amount to 30% to 50% of the costs of the total implementation. This is where the buyer can realize the greatest effects in terms of the nature of conversion planning, project management, and coming to an understanding with the vendor.

Understand that modifications and interfaces will constitute a major portion of the services agreement costs. Fully document all modifications and interfaces in sufficient detail to allow for a reasonably accurate estimate — one that you and the vendor can agree upon.

I like to see both parties sign off on the scope and estimate of these costs, with the intent of keeping the costs within that estimate. I also recommend that this agreement be made an addendum to the services agreement.

Thoroughly think through and document which files are going to be converted. Many buyers erroneously assume that such conversions will be quite broad when, in reality, the vendor is committing to converting only a limited number of files (e.g., orders and returns, customers).

There may well be hundreds of tables and files in an order management system. While some vendors may be willing to convert these as part of the agreement/price, my point is that it is unwise to make this assumption. All file conversion specifics — including the possibility that older systems have problematic files that lack data integrity — need to be discussed and agreed upon prior to signing a contract.

If the scope of the vendor’s file conversion will be limited, determine how you will create back orders, purchase orders, item master files, promotional history files, marketing files and other needed files. With many types of files, rekeying or keying them for the new season is actually faster and cheaper than attempting to convert them.

Another key area to consider: How much training is recommended in the basic agreement, and how much more do you think you’ll require? I’ve found that training needs are often underestimated.

Also, companies often assume that “services” in a services agreement include user documentation. In reality, a vendor is responsible for providing documentation describing the application system, but training materials and standard operating procedures are the buyer’s responsibility.

  • Annual support agreement

Investigate the vendor’s committed release version schedule, and how much this company has increased its support on an annual basis. Ask if you can review some past release notices to see how they have enhanced the app.

Also review how many hours of 800-number telephone support you will be entitled to on a monthly basis. Realize that, unless your company provides for internally supporting the 800-number service, it will get expensive. Vendor costs for such support range from 18% to 22% of annual license agreement costs.

  • Third-party software licenses

If the provider is a major software company (IBM, Microsoft, etc.), there is little chance of adjusting their standard agreements. Nevertheless, your lawyer should review these carefully. With application programs from other vendors, there may be some language that can and should be modified.

  • Hardware

The hardware for the license and third-party applications is now largely outsourced or purchased from other providers. Many application vendors have ceased selling hardware because it can be obtained cheaper elsewhere, so their knowledge base in this respect may be limited. But the vendor should provide specifications and some assistance in helping you understand what you need.

TYPICAL BUYER MISSTEPS

Software buyers often make some common missteps leading up to and during the actual negotiation and agreement-signing stages. These include:

  • Inadequately thought-out major decisions about project management
  • Lack of detailed planning before committing to a project plan, including defining the buyer’s and vendor’s responsibilities
  • Failure to use legal counsel specializing in intellectual property (IP) law
  • Not understanding what is and is not negotiable (and what might be negotiable)
  • Failure to document modifications as part of the services agreements, leading to misunderstandings about desired features and unexpected costs
  • Signing agreements prematurely, without completing due diligence, in order to get a discount

WHAT YOU CAN CONTROL/BEST PRACTICES

Every misstep listed on page 2 represents an opportunity to take charge and apply best practices that will help ensure successful selection, negotiation and agreement processes. Here are more detailed observations about key best practices.

  • Find an experienced IP attorney.

Software contracting comes under intellectual property law. This is a complex legal specialty requiring an extensive body of knowledge, including precedents and generally accepted practices.

Company management frequently wants to work with corporate counsels, real estate lawyers or other types of attorneys with whom they have existing, trusting relationships. This results in a slower and more frustrating process because these attorneys do not have the IP specialization required. So hire an experienced IP lawyer.

  • Keep two finalists during negotiation

You should continue to work with two finalists (or teams of vendor finalists) during the negotiation and due diligence stages of the selection process, so that there are two options to assess based on final plans and costs.

Many companies make the mistake of communicating a preference for one vendor prematurely — at which point, negotiations essentially stop. Once due diligence has been completed, a vendor that may have been viewed internally as having the edge may not emerge as the true best choice.

  • Be certain that you have a complete picture of the total cost of ownership

This goes back to having and assessing final plans and costs. Are you sure that you have a thorough grasp of all licensing, implementation and ongoing costs?

  • Finish vendor due diligence before signing

Have you made site visits to see the application at work and get user feedback from a business similar to yours?

Have you visited the finalists’ headquarters and talked to the management and staff in development and support? If the vendor resists having you interview the implementation team until you are ready to sign, insist on it.

Do you feel that you can truly trust this vendor? Have you checked long-term references, and also references from new customers to see how their conversions went?

  • Achieve agreement on details of the project plan and all other key aspects before signing

Too often, companies sign boilerplate license and service agreements without a sufficiently detailed written agreement with the prospective vendor about the project plan and management, including the detailed specifics of each party’s responsibilities and what the vendor will provide.

Devoting particular focus and thought to these areas will pay off. It will clarify what you need to manage and prepare for, which obviously is critical to implementation and post-implementation success.

A few cautionary words: Vendors often offer incentive discounts for signing by the end of a quarter or year. These are tempting, but don’t sign just to get discounts before having all of the details in place and being certain that this is the right vendor and software.

And don’t agree to suggestions that you can sign the license agreement and work out the details of the services agreement and modifications later. Most licenses require a sizable deposit (generally 50% of the licence cost), which is not refundable if you determine later in the planning process that you have reservations or have made a mistake.

  • Commit your company to solid project management principles

How experienced is your company at managing a conversion and installation of this magnitude? Many companies think that they can look to the vendor to do the project management, but the buyer needs a strong internal manager.

This manager will ensure on-schedule completion of tasks and responsibilities; report progress and problems to senior management; monitor the quality of what’s being done by both parties; and work with the senior management team to decide changes to enable the new system’s implementation and optimize ongoing usage.

Understand the skillsets that your staff will require. Many companies take on technology that requires higher levels of knowledge and experience than their existing system requires. Will you hire these resources, or train internally?

  • Nail down the project plan and schedule

Vendors will give you a general chart of how the implementation should proceed. This should in no way be considered a true project plan.

A project plan spells out all aspects in detail, including each party’s requirements; conversion, including testing and quality assurance; modifications; all standard and nonstandard operating procedures; the activities involved in “go live,” and the specifics of all other stages.

The plan should include the website, call center, distribution, marketing, merchandising, inventory control, accounting and all other functions that come into play. The details should include estimates, elapsed days, start and stop dates for all tasks, task dependencies, who is responsible for each, and the percent completion expectations for each task.

Establish and put down on paper the specific requirements that will determine your company’s sign-off with the vendor on key milestones within the implementation process, that allow the next stage to proceed. All requirements, including testing, file conversion testing, and what constitutes readiness for “go live,” should be spelled out in detail.

A vendor may be reluctant to work through and agree on all of this before you have signed basic agreements. But insist on having a fully detailed project plan (which can be 10 to 20 pages in length) prior to signing.

Make sure that all of your staff members understand the details of this plan, including their responsibilities and management’s. The project plan should be updated at least bimonthly — weekly when close to the conversion date. Status reports should be distributed to all stakeholders.

Investing your time and energy upfront to research and detail all aspects of vendor selection, conversion procedures and ongoing support, and use of a new vendor/system is a lot or work, but well worth the effort. It will go a long way toward ensuring a workable agreement and solid relationship with your new vendor, and a positive overall outcome.

Curt Barry (
cbarry@fcbco.com) is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consulting firm.