June 20, 2011
by Phil Downe
PURCHASINGB2B MAGAZINE: MAY 2011
All-you-can-eat software buffet: isn’t that a catchy title for a software offer? Doesn’t it stir up a warm, cozy feeling you’re going to be able to satisfy even the most hearty appetites and rest assured the check at the end of the meal is going to be that low, low advertised price?
Anyone who has ever worked on a major enterprise agreement knows that the glib “all-you-can-eat” description is in most cases a misstatement of how the deal works. The buffet only has the set items on offer—not the entire menu—especially the more expensive offerings. In the world of business where requirements can change quickly, “all you can eat” may very well not be what you want to eat.
In fairness, you can negotiate anything. A client recently requested me to work the final table on a deal that was down to two short-listed vendors. It was fairly late in the game and yet it was still unclear how the two disparate offers compared, and how many user licenses of each type were needed for the required functionality.
One vendor was offering a concurrent-user model, which was indifferent to each user’s degree of interaction. The other vendor had a more complicated license model based on user types and modules accessed with everything from power-users to read-only users—all at different price points.
Neither vendor could give a definitive answer to the question, “how many licenses will we eventually need?” The non-specific answer was along the lines of “it depends on how much value you intend to get out of the software”. It didn’t take long to determine that neither alternative, with the quantities of licenses proposed, would cover anything more than a sandbox solution. The total cost of ownership (TCO) was an open-ended question, so the project was facing total collapse.
This engagement was successfully turned around, but only after an aggressive restructuring of the proposed deal. The end result was a customized, site-specific enterprise license allowing every employee to access every module of the software. Only the buyer could impose access restrictions at various levels depending on the user’s authority within the organization.
The revised deal was simple and transparent: there would never be a need for a “true-up” for additional processors or additional user licenses. The license was immune to environmental change, opening the door to a virtualized server-farm alternative without penalty. There was also a fixed fee for annual software support charges and a cap to restrict recurring escalations in operating expense.
Wouldn’t it be nice if the ubiquitous software giants like Oracle with their unlimited license agreement (ULA) and Microsoft with their enterprise license agreement (ELA) also had similar, simple offers?
The key attraction of the all-you-can-eat software buffet is it appears to provide the buyer with a high degree of predictability of future cost streams. Many enter into these negotiations thinking that everything needed is covered, when in fact it isn’t. The vendor, however, wants to maximize its future revenue stream by limiting the enterprise model to only the core products, knowing that additional products, when added, incur much higher incremental charges.
Avoid unpleasant surprises
The buyer’s assumption that the enterprise license fixes future costs often leads to unpleasant surprises during the life of the contract. A more accurate picture is that the enterprise deal is dependent on the total number of users and a select group of products being used over a specific period. It’s a term-based, volume-purchase agreement that could have far-reaching effects if left unchecked.
ELA agreements can be economical, but require careful due diligence both before entering the agreement and at its maturity. Vendors normally have audit access to the buyer’s network to true-up their user agreements, which inevitably includes a search for all vendor products installed at the customer.
Here’s where you find out that you ate a little more than you intended, or made a few extra trips for specialty dishes and to the dessert table. Clients may find they have purchased flagship products that never get installed, or get installed over previous versions of the software that have already been paid for. Some find out they bought a little short in core areas and have to pay triple the price for the additional licenses.
Anyone familiar with the business practices of the major software vendors knows that the license modules change over time. The names change and expanded products are split into separate modules. As well, license metrics change regularly and that may result in layers of contracts with different entitlements for different departments. This results in difficulty for vendors interpreting the results of their software audits but can provide an opportunity for the buyer to challenge the vendor interpretation.
A good enterprise deal also requires the equivalent of a prenuptial agreement. This agreement should define the financial outcome of any decision to terminate all or any part of the enterprise agreement. Without such an agreement, there may be expensive consequences to a change in direction.
An enterprise deal promises simplicity but often hides complexity. It’s critical to understand all aspects of the vendor’s pricing model so your decision to visit the buffet doesn’t turn out to be a visit to the Ritz. b2b
Phil Downe is an IT negotiations contractor and president of Relations Management Group Inc., based in Toronto. He can be reached at 416-920-2228 or Phil.Downe@ITnegotiations.com.