Monthly Archives: May 2007

How Much for that Maintenance in the Window?

[The following is an excerpt from the Software Licensing Handbook. If Google never gets around to allowing you to “view inside” the book, I guess I’ll have to do it here over time.]

Maintenance and support comes at a price, usually expressed as a percentage of the license fees paid in the license agreement. This should encourage two things from the customer’s side:

  • Negotiate the initial license fees down to the greatest possible discount. If this is a perpetual license, these fees will not recur.
  • Negotiate the maintenance and support fee percentage down to the greatest possible discount. Industry average is between 8 and 12 percent for 8-5 M-F support (allowing for a 3-5% increase for 24×7 support), while most providers initially request 20 to 25 percent.

Additionally, maintenance and support fees act in a similar manner to other fees in that they can increase over time simply due to provider choice. Therefore, negotiating a cap on the increase in any fees is always advisable and almost always accepted by the provider, even if not included in their initial language. As with future orders in a license agreement, an increase of 3% per year is almost always acceptable, with the possibility of tying the increase percentage to the Consumer Price Index.

Providers will sometimes have difficulty in accepting a perpetual cap on the maintenance fee. This is usually either based on a future income concern or as a result of revenue recognition. With respects to maintenance fees, revenue recognition is not applicable. However, it is not unreasonable for the customer to need to realize that a provider who locks in maintenance perpetually might not be able to afford to provide services in the future as a result of lowered income. Compromise can sometimes be found in setting a time limit for the cap, but then stating that the parties will return to the negotiation table to discuss the next year’s fees.

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Strategic Sourcing

You read a contract because you are either buying or selling something. On the purchasing side of the transaction, many organizations have a procurement group (called “Purchasing” or “Procurement”, sometimes “Sourcing”) and many also have a contracting group (almost always just “Contracts”). And, within larger organizations, most believe that the combination of the two groups automatically bestows upon the organization the coveted concept of “Strategic Sourcing”.

The mere existence of Purchasing and Contracting teams, even if they’re working together (which isn’t always the case), doesn’t mean that an organization is doing any sourcing, nor does it mean that they’re doing it strategically. The plain truth is that it takes a dedicated effort, above and beyond having the groups working together.

The creation of a strategic sourcing team for your organization (and a strategic sourcing plan) starts with a recognition of the end goal: making purchase decisions based on significant data analysis and always with the best interests of the entire organization in mind. Sounds simple, of course.

Let’s talk about strategy first.

Information alone isn’t helpful. Most organizations’ contracts files are filled with millions of words in thousands of contracts. The information itself is already there – the key is to be able to sift through the data to get exactly (and only) what you need when you need it. This is the primary argument for a good contract management tool (Procuri, Emptoris, Nextance, etc). Once such a system is in place, much of the ground work has been laid – the trick then, of course, is being able to keep the information updated and to be able to mine it.

Your digging and mining is to discover not only where you’re spending your money – but what vendors are doing which types of work, where there are overlaps in skills, even where you have multiple pieces of software doing similar tasks. Again, this isn’t difficult. From the point where you decide to start looking at this information to the point where you have good research results can take as little as six months for an average sized organization. And unfortunately, this is where most organizations stop. They have “a system” – people are even using it faithfully. They know who is doing what, when, and for how much.

Which is why, to get to true Strategic Sourcing, you have to worry about the sourcing side of the phrase.

What’s lacking in most places is this next step: where decisions on purchases change as a result of the data in the system and where some vendors are even eliminated as a result of consolidation and house cleaning (ie: “sourcing” a solution rather than just buying one). This is admittedly a difficult task. Culling through your records (and staying on top of them at all times) to diligently maintain the discipline needed is a full-time task beyond the scope of most contracts and procurement people (who are usually just trying to keep up with demand). Thus, taking a strategic sourcing direction requires additional staff.

And remember when I said “vendor are eliminated”? As you might imagine, this isn’t always a popular decision. Selecting the downsized vendor(s) involves a painstaking process and requires political savvy within the organization. In fact, it might even add additional expense (contract termination fees, replacement systems on other vendor’s platforms, etcetera). No two organizations are identical, each one has to decide what is the right option – but at the end of the day, if strategic sourcing is the goal, the price to get there for an organization that hasn’t been doing it from the start is going to be significant.

On the reverse side of the coin, cost savings from moving to a strategic sourcing model are high. Volume discounts alone, via one or two vendors who do “x” task rather than 30 vendors each doing 1/30th of “x”, can net substantially-reduced expenses. Ask any organization that has done this exercise with their HR staffing contracts – the consolidation consultants themselves promise millions.

But it’s not just cost savings that makes strategic sourcing valuable. The real benefit is in reduced time to contract, fewer agreements/relationships to manage, and the overall reduction in risk from having so many different relationships.

Regardless of where your organization sits on the path, however, the ultimate goal should be Strategic Sourcing. It will take time, effort and cooperation – well worth it for the end result.

NDAs

I don’t know why, but I’ve had a spate of NDAs cross my desk in the last week. Seemingly innocuous little documents, Non-Disclosure Agreements (sometimes also known as Confidentiality Agreements) are usually the starting point for all new contract negotiators.

Perhaps it’s because they’re generally short in length (usually no more than a page or two)… or perhaps it’s because they’re usually not very contentious (both parties desire to keep some set of secrets). But whatever the reason, all of the ones that I’ve done in the last week have had some sort of difficulty factor that just seemed out of the ordinary. So, let’s see if we can address common NDA concerns.

Starting with the basics, NDAs should clearly state the purpose for which the NDA is going to apply. You usually don’t want a generic NDA – it simply becomes difficult to manage the obligation over time… and since they’re usually easy to negotiate, doing another one for a future obligation isn’t seen as too problematic. Additionally, once you create a contract based on the purpose (ie: the NDA was the precursor agreement to a bigger, more involved relationship), you also usually have confidentiality language in the bigger “master” agreement anyways.

A NDA should also clearly define what is being kept confidential. This would seem to be a simple task – what you bring to the table is yours, what the other party brings to the table is theirs. This, of course, is too generic (too simple, I suppose). So get more specific… “documents, templates, source code, plans, drawings” etc. And if your business involves the capturing or use of information from your customers (such as via a financial institution, an insurance organization, a health-care company or any other business, too), you will want to detail that your customer information is confidential.

But then you have to carve away those bits of knowledge that are generally known in the world/industry. And you need to remove from obligations of confidentiality those bits that you learned from somewhere else (who provided it to you “lawfully” and not while they were under an obligation to keep it secret). Getting confused yet? What you end up with is a list of things that are confidential… and a list of exclusions for ways in which you obtained information and don’t have to keep it confidential.

Then you need to add a list of reasons why, even for information that is confidential, you can disclose it anyways. This would include a valid court order, for example. (But wait! You usually first have to tell the other party that you’re being compelled to disclose the information so that they have the time to try to fight the order.)

Of course, you also need to list who can see the Confidential Information and for what purpose they may use the information. You don’t want your new business partner to take your information and develop something based on it without your permission, for example.

Next, don’t forget remedies in the event that your Confidential Information is disclosed in a way not allowed under the agreement. The usual analogy here is to Pandora’s Box and the inability to put the secrets back in the box once released. It’s simply impossible. Legally, you’ll want to file an injunction to prevent further disclosure… but you also may have monetary damages as a result of the disclosure (for example, if another company steals your great idea for a new product, you can attempt to sue for lost profits). So I generally like to use a conversational phrase with my counterparts when discussing this section… just in case there’s any confusion.

“If you disclose my Confidential Information, I am going to own your company.”

In other words, the penalty for disclosing my information is going to cost you so much, that you’re going to go bankrupt in the process of trying to put the lid back on the box. This is especially true if you’re in one of the aforementioned Customer Information industries… and REALLY REALLY true if you’re dealing with Protected Health Information or Financial Information – which are both protected by various federal and state laws as well. Which, by the way, means that if you’re the recipient of this kind of information – of any Confidential Information for that matter – you need to take the obligations very seriously.

Lastly with respects to NDA basics, you need to know what to do with Confidential Information once the NDA terminates. Usually it’s “return or destroy”. Some organizations want one over the other. And some also want “certification from an officer” of the other party that destruction, if the chosen option, has been completed in a timely manner.

OK. So let’s review:

  • Definition of Purpose
  • Description of Confidential Information
  • Exclusions from stuff that’s otherwise Confidential Information
  • Reasons why you could disclose Confidential Information
  • Who can use the Confidential Information (and for what reason)
  • Remedies in the event of disclosure.
  • Return or Destruction of Confidential Information after NDA ends

“Are we there yet?”

“No.”

What’s left, of course, is the boilerplate contract language that you find in many other agreements. Sections on assignment, governing law, severability, term (again, how long should this thing go on?), party relationship and even a section on signature counterparts all get included, too.

Phew, maybe NDA’s aren’t that simple, eh?

Demo/Eval Agreements

Almost every large software purchase is predicated on the ability of the end user to review the product. When you’re buying something of that magnitude, it’s not unreasonable to have that testing time.

But vendors don’t just deposit software at even their most favorite customer’s facility without assurance that the software is going to have some sort of contractual fence protecting it from release, abuse or misuse. So the typical pattern for a customer to test software is a one-two contractual punch of a non-disclosure agreement (NDA) in addition to, or part of, an evaluation agreement.

We’ll talk NDA’s in the near future – today is about the eval.

Evaluation agreements (also called Demo Agreements) are used for GA software, not just software still in development or otherwise limited or restricted in some way. So invariably, the contract presented is a repurposed software license… which does, actually, have the right type of terms and conditions necessary to effect the temporary relationship desired.

The problem, however, is that temporary relationships have a tendency to become permanent simply by inattentiveness. And a contract that’s designed to be temporary has probably been given less review attention at the outset of the relationship. Which means that a long-term eval/demo agreement is essentially a possible perpetual license agreement. Combining the lesser review attention with the possibility of perpetuality, and you get a bad deal from the customer perspective.

The fix, of course, is diligence. Remember that each interaction between vendor and customer has the chance to last much longer than originally intended… the chance to apply to things never initially considered. And it is for this reason that many contract professionals have a negative visceral reaction to eval or demo agreements. The business people believe that it’s “just a demo”, and the contracts folks know that it can become so much more.

When reviewing an eval agreement, the most effective solution is to place a termination date in the agreement itself. This will cut short the demo/evaluation process (which the business folks must be aware of), but it will at least prevent the eval from becoming the more permanent software license for the purchased product. Of course, this doesn’t stop someone from amending the agreement to make it last longer, but at least there’s the chance that the someone will also at least ask the question of why there was termination for the eval in the first place.

If you have the time or wherewithal, evals should be reviewed in as much depth as any other normal software license agreement. This allows you the flexibility to slip into a longer term relationship without worry about the terms and conditions of the underlying agreement (and without additional review/negotiation time/expense). But it does require a more extensive up-front investment of time, which is often problematic for organizations that don’t have a lot of contract reviewing staff or are paying outside counsel for time to review agreements that might never lead to a purchase.

Oh, and by the way, NEVER accept any type of eval agreement without the same IP Indemnification clause you would get in any other software license. If you’re going to install the software at your organization, you need the same protections that you’d need from purchased software. Arguments from the vendor that the customer is not paying for the software and is thus not eligible for protection should not be paid any attention.

Whatever the solution that is right for you, just remember that the eval is just as binding as any other agreement… the term “eval” isn’t meant to describe the agreement.

Copyright reform

Jonathan Lethem would like to see a world where each artist can decide, at the time of their creation’s release, the rights their customers/fans/etc will have with respects to using, copying, recycling, etc that creation. As part of this, he’s going to release certain film rights and other derivative work rights to his next creation, You Don’t Love Me Yet.

He claims “The point is, it ought to be up to the artists.” And as the article on Wired states: “Listening to Lethem, one imagines a world where every artist crafts an idiosyncratic copyright notice, with its own strange rules, to adorn the front page or liner notes or gallery notice fronting her creations.”

What I find troubling about this push for copyright reform is that the “reform” that Jonathan (and others) are asking for already exists. The truth is that even since the beginning of copyright protection, the artist has ALWAYS had the ability to dispense of their given rights in any way in which they feel comfortable.

So, if you write a poem, craft a sculpture, paint a painting or make a movie, you can give away your rights in any form or fashion you choose. You want to allow people unlimited copying ability? You can. You want to restrict copying so that they have to BUY your work, but then they can create something new based on your work? You can. You want 100% restriction? You can do that, too. There’s nothing in the current copyright laws that would prevent anything that Jonathan is talking about wanting to do now.

In all, copyright doesn’t need reforming. Consumers (and artists) need education. Artists need to understand that if they use certain distribution organizations (publishers, printers, distributors, etc), they’re going to give up some of their rights to those organizations in exchange for the services those organizations provide. There are alternatives, of course. For publishing, there’s your own personal PC + Lulu (my favorite); for movies, again there’s your PC + YouTube.

But don’t claim that the current laws need to be changed. Know your rights. Use them.