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Negotiating the software pact maze

Faced with increasingly complicated licenses, technology buyers are turning to third-party negotiators to squeeze the best deal out of software makers--and to avoid the contract tender traps.

Budget-conscious technology buyers are turning to a new ally to help them squeeze the best deal out of software makers: third-party negotiators.

Companies are increasingly hiring consultants to take inventory of their current software needs and then negotiate--or renegotiate--deals with key vendors such as Oracle, Microsoft and IBM. Industry research firms such as Gartner help clients with negotiations, as do a slew of smaller specialty consultants.

As software makers struggle to meet their quarterly numbers, and their customers resist buying all but essential new software, the haggling is likely to intensify, said analysts.

"Years ago companies would come to negotiations with just the CIO and tech support, but now most organizations are giving deals more scrutiny," said Jane Disbrow, an analyst at Gartner."If it's just tech support against a whole team from the software company, you're at a big disadvantage."

Although the haggling over software licensing takes place out of the public eye, stories about the deals do come through from negotiators, who report business began picking up right as the economy slowed down. Why? Companies have to cut costs and know that software vendors don't want to give up market share. Meanwhile, software vendors are increasingly trying to squeeze every penny of revenue out of existing customers.

Toss in the fact that software deal-making is increasingly complicated as vendors switch to new licensing models, and you have quite a tug-of-war.

The latest round in the negotiation game is likely to be played through the end of September, analysts say. For instance, Oracle's fiscal first quarter ends Aug. 31 and other software giants wrap up their quarters at the end of September.

"Oracle's August quarter results will be an important bellwether for the broader software sector," said Goldman Sachs analyst Rick Sherlund in a research note. "Since business typically closes late in the quarter, we believe there is the normal degree of end-of-quarter uncertainty."

Software vendors say they are aware that customers are getting outside help, but many companies that use negotiators like to keep it quiet--after all, it could affect the contract talks.

"Compared to three years ago, it's a different economic climate," said Jacqueline Woods, vice president of global pricing and licensing strategy at Oracle. "In terms of due diligence customers are more stringent now. Before, customers were expanding and sales were just easier."

Avoiding gotchas
Software contract experts say that any given software deal can have a series of "gotchas"--small-print clauses that can come back to hurt a buyer, if they're not careful.

Tales of gotchas are rampant. One company couldn't move headquarters because its contract didn't allow its software license to be relocated. As a result, the company had to pay for a new license.

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Other companies wind up paying for unwanted components or services they don't need. "You have to be very clear on what you need and don't need," said Andy Efstathiou, an analyst at the Yankee Group.

And warranties can come back to haunt a company, said Brenda McDermott, principal of MiscaTek, a Connecticut-based consulting firm. "Warranties are shrinking from one year to 90 days to 30 days, and some of that starts as soon as it is delivered," said McDermott. "Then it's an additional maintenance fee. Most companies aren't testing as soon as it's delivered."

Disbrow said rights to transfer software from one operating system or hardware platform to another, outsourcing rights, upgrade fees and support and maintenance issues are some of the issues that have to be addressed during negotiations.

If those items aren't tackled early, the customer could get squeezed later. Negotiators say that many licenses negotiated back in the booming 1990s and in 2000 were large and full of loopholes. As the economy slowed, deals diminished in size, sometimes shrinking from $8 million or so to $500,000. That's when software vendors went for the squeeze.

Analysts say that some software deals, such as those for desktop operating systems, are straightforward, but complications can arise over enterprise resource planning (ERP), supply chain management and e-business deals.

"Software companies are moving from licensing to rental models, and that changes all the contract terms," said Efstathiou. "And if you don't work through the implications you can get burned."

Other dealmakers agree.

"The biggest problem is when companies do deals and don't look at the future," said Dick Nauer of Information Technology Contract Solutions, based in Great Falls, Va.

Target: Oracle?
Among negotiators, stories of haggling with Oracle are legendary. Although companies such as Computer Associates, SAP and others surface in horror stories, Oracle has been known to be especially difficult.

One consultant noted that Oracle redid terms of a deal in the 11th hour just to get leverage. Others noted that the software maker's maintenance fees and extra components can be an issue if a company doesn't negotiate correctly.

"Oracle has its own nuances," said Pat Cicala, of Cicala & Associates, a consulting firm based in Hoboken, N.J. "The terms and conditions can change, and there's more confusion over the different licensing models."

Oracle executive Woods said the company's main goal is to give customers a lot of flexibility and deals ranging from two years to four years.

"Any time there are negotiations, everyone wants to get the best deal they can," said Woods. "But I reject the notion that we don't treat our customers well. You can't have 150,000 customers and not treat them well."

Oracle's nuances aside, Cicala said many software vendors have their quirks.

Microsoft doesn't change terms and conditions, she said. IBM's terms can be onerous too, but Big Blue tends to be more flexible because the company "wants to keep the customer relationship" to sell hardware and services, said Cicala.

Changing the game
Both vendors and negotiators agree that an informed buyer is a better one. For starters, companies doing advance planning to get the right contract terms will be less likely to circulate horror stories.

On the other side, consultants said they have noticed a change in tone from most software vendors, including the ones people have complained about.

Part of the reason the change in tone is that customers have more leverage these days. Depending on the situation, customers may be willing to change vendors completely if the deal is right and the switching costs are low.

"There's a lot of opportunity for consolidation," said Paul Janssen, director of sales best practices for BMC Software. "A lot more customers are interested in swapping vendors in some areas--it depends on how ingrained the infrastructure software is."

Cicala said open standards are leading to the inevitable commoditization of the software industry, a trend that makes retaining market share all the more important.

"Vendors are scurrying in 2002, and the two magic words are 'market share,'" said Cicala. "The bottom line is, all these companies want, is to not lose market share. They will practically give you the stuff."

Woods said Oracle has walked away from deals if customers are unreasonable. "Customers sometimes ask for more than we can give them," she said.

Software vendors such as Oracle have also moved to change compensation for sales representatives, eliminating the incentives to ink last-minute deals that can lead to tough negotiations.

And as a result, negotiators are easing off from advising companies to wait until the last week of a quarter to talk contracts.

Simply put, the economy is changing the game--at least for now.

"Most companies will work with you," said Nauer. "But you have to be prepared. These software vendors are like gladiators."