Top 10 Software Contract Negotiation Tips


No one ever said that software contract negotiation was fun…or easy. Follow these 10 key negotiating points to give your organization the upper hand.

  1. Initial/One Time Cost: This is the most obvious negotiating point. We all want to minimize the initial cash outlay for our software acquisition. Understanding the current demand for the product, how the vendor is currently doing financially and how much of a backlog, if any, the vendor currently has will give you a feel for how much wiggle room there might be in the initial cost. You can also consider negotiating down the cost of ongoing maintenance, as opposed to the initial cost, as it is often the annual maintenance that adds up steeply over time.
  2. Ongoing Maintenance Costs: These are inevitable and important in that they will entitle you to upgrades and support. However, most vendor contracts stipulate the ability to raise the annual rate with no limit. Make sure you limit the vendor’s ability to do that by at least tying the increase to something, such as the consumer price index (CPI) or a specific percentage cap. Try to negotiate no increases for the first two or three renewals, then cap increases after that.
  3. Implementation Costs: These can often be multiples of the initial cost of the software for packaged applications requiring customization and/or configuration. The better your specific requirements are defined at the onset, the better your chances of getting these costs right. Whenever possible, attempt to negotiate some cap along with a formal process in the contract to deal with scope creep.
  4. Term: Most software maintenance agreements are written such that the annual maintenance renews automatically unless the customer gives formal written notice to the contrary. It is a good idea to try to negotiate automatic renewals out of the agreement. Negotiating terms under which maintenance can be canceled should also be addressed. The most optimal scenario would be the ability to cancel for convenience, but short of that, specific circumstances that allow for cancellation for non-performance should be defined. Whenever possible, an option to use the software without a requirement for annual maintenance at all should be negotiated. Under most circumstances, annual maintenance on important application software is the prudent thing to do, but there are situations where companies have stopped taking annual releases on legacy software and never call for support. Under those circumstances, why pay for an annual support contract?
  5. Throw-Ins:  Depending on how badly the vendor wants the business, often they can be convinced to throw in such things as first year maintenance, additional functional modules or other perks that could come in handy and help reduce costs down the road.
  6. Service Levels:  Whenever possible, service level agreements should be specifically negotiated into the contract, including consequences for non-performance. This will minimize misunderstanding down the road and create appropriate incentive for the vendor to perform.
  7. Incentives/Penalties:  Particularly when hitting a certain implementation date is mission critical, negotiating some consequence for late delivery if the vendor is at fault—such as a reduced final payment—can be helpful. Withholding some portion of the initial license fee until production delivery can also be effective. On very rare occasions, depending on how critical a go-live date is, some financial incentive can be offered.
  8. Payment Terms: Such things as delayed payments or timed payments with no finance charge can be negotiated once the actual price has reached what is considered to be the best and final number.
  9. Specific Performance: The more specific we can get in the actual contract about the expected functionality and timing of the delivery, the better our chances of not being disappointed.
  10. Warranties, Limits of Liability: In almost every contract, the vendor will severely limit, or even eliminate, any liability for damages caused by the non-performance or malfunction of their software. While the event of damages actually occurring is rare, try to ensure that your organization is protected from this by negotiating into the contract specific financial liability for the vendor, usually tied to some multiple of the initial license fee.

Could you use help preparing for your next software selection or contract negotiation? Contact Hartman today for a free consultation to learn more about how our strategic IT advisors can help you negotiate the best deal.  

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