2003 SoftResources LLC. All pages in this document are copyrighted by SoftResources LLC of Seattle, Washington, even if each page is notspecifically marked. Except as specifically permitted by SoftResources LLC, no part of this document may be reproduced or distributed in any formor by any means, or stored in a database or retrieval system, without prior written permission by SoftResources LLC.

MAKING SMARTSoftware DECISIONS

safeguard your contract negotiation

1

Safeguard Your Contract Negotiation

Overview

What Is Included

This guide will serve as a primer providing you with an overview on how to proceed through the contractreview and negotiation process. The information provided is not intended to replace a legal review of yourcontracts. We recommend that you obtain assistance from external advisers to help you with the content,legal review and negotiation of all contracts. To get to this point in the selection process, you should havedetermined your Differentiating Criteria or requirements for new software, and narrowed a Long-List of allpossible software vendors to a Short-List of solutions. Next, you should have conducted Software Demosutilizing a predefined Demo Script, performed the necessary Due Diligence Review of each of the vendors,and selected a final software application.

Inevitably, you will be faced with challenges and issues during your software implementation project. If youhave a complete contract in place with each vendor involved, these challenges will become less of anobstacle to the success of your project. This guide provides an overview of the contract review andnegotiation process. The primary objective of the review process is to ensure that clear expectations areidentified, agreed to and documented. The contracts should also include effective issue resolutionprocedures and remedies for the potential challenges faced over the life of your contracts. Some of themost common oversights made during the contract review and negotiation process include the following:

Expectations are not specifically identified and documented.

The contract is one-sided and does not provide for a sound business working relationship between parties.

Buyers negotiate for the lowest price, not the best price.

Payment terms are not defined to support the expectations and deliverables for the project.

Mutually agreed-to issue resolution processes and remedies are not defined.

The contract is drafted in such a way that either the buyer or the seller believes they have not received a fair deal.

This guide contains the following sections:

Contracts Overview

Contract Types

Guiding Principles

The Partnership

Contract Review Pointers

Software License

Maintenance Agreement

Implementation and Training Services

Application and Hosting Services

Contract Price Review

Overview

Best Price

Contract Review Process

Review Initial Proposals

Identify Your Interests

Conduct Negotiation Meetings

Obtain Approval and Sign Contracts

Conclusion

Measures of Success

Summary

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Contracts Overview

Contract Types

Guiding Principles

The Partnership

You may end up with several contracts as part of your software selection and implementation project. Thefollowing list identifies the types of contracts you may receive from vendors:

Primary Software Vendor Software License and Software Maintenance Agreement (or combined as one document). These contracts may include the cost of the software,database and operating systems required for your implementation.

Implementation Vendor Services agreement for implementation, training and dataconversion.

Application Service Provider (ASP) Hosting Services Agreement if you select a third-party vendor to act as a hosting site for your implementation.

Third-Party Software Vendor Software License and Software Maintenance Agreement for ancillary applications purchased to augment the core suite of modules purchased from the primary software vendor.

Hardware Vendor Hardware purchases required for implementation with associatedmaintenance agreements.

Your challenge will be to thoroughly review all of the contracts involved. This section will provide an overviewof the principles behind a successful contract review. You may choose to solicit the assistance of anexternal consultant and attorney to help with your contract review process. Look for a consultant andattorney who has specific experience in the area of reviewing and negotiating software and implementationcontracts. This type of consultant and attorney better understands the technology marketplace.

There are three specific guiding principles that work best for the contract review and negotiation process. Thethree major principles to keep in mind and use to guide you through this process include the following:

The purchase price should not be the only focus of your review and negotiation process;there are other factors that should be considered.

The process used for negotiations is critical to the relationships with the vendors. Theprocess defines the tone of the business relationship created out of the negotiations.

The measures of success to contract review and negotiations include efficiency, relationship,interests and commitment.

All of these principles will be reviewed in more detail later throughout this guide.

A good analogy for the partnership that is being created between your organization and the vendor is that of a marriage. If either you or the vendor feels taken in the negotiation process, the chances are great thatthe partnership will be an unhappy one and possibly result in failure. All parties should come out of thenegotiations believing that they received a fair deal. Using this as an underlying tone to your contract reviewprocess will foster stronger working relationships between your organization and the vendors involved.

Ultimately, one of your organizations goals should be to have influence with the software vendor. Thevendor should continue to develop the application towards current technology and enhance thesoftware with new functionality that may be required by your organization. In addition, the vendor shouldoffer training that is relevant to the application and helpful to your users.

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Contract Review Pointers

The purpose of this section is to provide a guide for each type of contract you may be reviewing as part ofyour organizations project.

The first contract typically covers the licensing of the software. Keep the following in mind while reviewingand negotiating this contract:

Licensed Organization. Who is the licensee? Is it the division, the operating entity,related entities or the holding organization? Typically, the highest organizational unit or parent is the licensee.

Modules. Which modules are you purchasing? Do you need all of them now? Can others be purchased later as an option? Will you receive special discounts if you buy now or commit to buying more in the future?

Software Pricing. The three main components of software pricing are module, user and revenue-based.

Terms of Payment. There are wide variances in the terms offered in this agreement. Most license agreements start with 50% due upon signature of the contract with thebalance due upon installation, acceptance or some other identifiable event. Gone are the days when you pay for software after successful implementation.

Warranties. Most contracts have limited warranties and state that the software will perform substantially in accordance with documentation for a period of 90180 days. They also generally state that there is no fitness of purpose guarantee.

Refunds and Remedies. What is the process to document and monitor the progress ofimplementation? How will issues be resolved? In actuality, few refunds are given to a customeronce the software vendor has their money unless an arbitrator or judge rules such.

The primary items that should be reviewed in your Maintenance Agreement include the following:

Start Date. When does maintenance start and when do you start paying for it? You will see a wide variance here. Immediate coverage is important but delaying the cost to thelatest possible date will save you money.

Payment Terms. Is payment expected at the beginning or end of the defined period, or can terms be arranged?

Rate. What is the maintenance rate? The rates vary between 1530% of the cost ofsoftware and are not usually negotiable. You may be able to negotiate the rate at which they can increase over time as rates are based on the then current list price of thesoftware, which will inevitably increase.

Multiplication Price Used. What price is the maintenance rate applied to? The full price in effect now? Full list price on date of purchase? Discounted price?

Uninstalled Modules. What if you purchased modules but expect a phased implementation overseveral years? Are you required to pay now for these modules or their maintenance on thesemodules? Can you delay the maintenance coverage and payment for uninstalled modules?

Hours of Support. What are the workweek, weekend and holiday hours of support? Do thehours support the operations of your organization? Is beeper service available to providecoverage outside of normal service hours?

Escalation. Are there escalation and varied response times based on the severity of theproblem? When a system is down, a typical response time would be 30 minutes to 2hours. For a non-critical question or issue, the response time may be three days to oneweek or more.

Coverage. What is provided as part of the maintenance plan? Some options include product upgrades, version releases, patches, and telephone or online support.

Overview

Software License

Maintenance Agreement

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Contract Review Pointers

Many implementation service agreements are poorly written and take the approach of You need us, giveus a series of blank checks, and sign here. This is not the best type of arrangement given the amount ofresources (time and money) your organization will be investing in this project. Consider the following keyelements or (components) of a sound implementation agreement:

Clear Statement. Include a clear statement of what services the consultants will provide to you.

Deliverables. Define the deliverables of the project including the format (written, oral, etc.)and the amount of details to be included.

Hours Estimate by Phase. An estimate of the time required to work through identifiedissues (e.g., customization, implementation, standard reports).

Integration, Data Conversion, Testing. Define in general terms the process for integratingthe software with each key system. Data conversion defines the amount of data that will bemoved into your new system. You also need to define who will be responsible for theconversion: the vendor, customer or both. Testing refers to the creation of a test plan foreach phase of the implementation.

Administration of Open Issues. A defined process to document and monitor the progress ofopen issues regarding the implementation project.

Project Control. Define a reporting format for the vendors Project Manager to provideupdates or summary reports regarding the project status, accomplishments, work plannedfor future periods and issues requiring management attention. Create a plan to meet weeklywith the consulting Project Manager and your Project Team to facilitate issue resolution andescalation, and to monitor and direct day-to-day project activities.

Professional Standards. A warranty that ensures services will be performed by competentpersonnel suitable for the tasks, in accordance with applicable professional standards.

Review of Personnel. A statement retaining your right to review and approve all personnelassigned to the project.

Quality Assurance Process. A quality review plan. The plan should include who will performthe reviews at which specific milestones, and what will be reviewed to ensure a timely,quality project.

Training and Documentation. Understand what training and documentation will be providedso users can utilize the new software as a tool to help them with their job responsibilities.

Travel Time and Costs. Determine the allowable costs for consultants who travel to yoursite, as well as a definition of what travel time is chargeable to the project.

Roles and Responsibilities. The roles and responsibilities of both Project Teams should bedescribed in a chart format.

Change Control. A defined process for all requested changes to the scope of the project toensure the project focus remains as originally identified.

Issue Resolution and Escalation. An issue resolution and escalation process throughoutvarious levels of management that explains what to do when issues arise.

Rates by Consultant Type. A rate chart defining consultant fees by level or role in the project.

Payment Terms. Expected payment terms and available discounts.

Implementation andTraining Services

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Contract Review Pointers

This agreement will be relevant if you elect to have your software managed offsite by a third-party vendor.Consider the following in your review of this contract:

Security and Disaster Recovery. What descriptions of security and disaster recovery aregiven in the agreement? Do they meet your concerns?

Performance Review. How often do you meet to review Application Service Provider (ASP)performance? Do you have the ability to revise the contract accordingly?

Third-Party Applications and Customizations. Is your ASP able to host third-party solutions,as well as fulfill any customizations you may request?

Dispute Resolution. Will the vendor assign a customer advocate and technical liaison toyour account? What is the procedure to report a service or application problem? What arethe escalation procedures if the dispute cannot be resolved by the parties (e.g., mediation,arbitration, legal)?

Transition Assistance. If you terminate the agreement, or the ASP defaults or goes out ofbusiness, what happens during the transition and how does the ASP vendor assist you withthe transfer to another service provider?

Service Quality Measurements. Define service quality by the following: 1) service availabilitytime; 2) system response time; 3) equipment repair, restore, failure and fix time; 4) problemresponse time; and 5) problem circumvention or resolution time.

Although we have reviewed a number of the more common business issues that should be consideredduring contract review and negotiation, we have not identified the legal issues. We strongly recommendthat you use an attorney to ensure the completeness of the legal review of your contract. Additionally, ifyou do not have the experience or resources available internally, we recommend that you obtain theassistance from a consultant who has technology contract review experience.

Application andHosting Services

Conclusion

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Contract Price Review

Price is a nebulous thing. There are so many places that costs can boil over. If the vendors feel taken atthe beginning of the partnership, they may take advantage over time of any opportunity to rectify thesituation. In other words, they might look for areas where they can earn additional revenues for productsor services not specifically included in the initial contracts. The following statements define the frameworkfor your negotiation process in relation to price:

There is more to contract review than negotiating the initial purchase price.

You should always seek the best price, which is not necessarily the lowest price.

Your measure of success for contract negotiations should be more than total cost.

There is a sum of money available with every contract that the vendors can use to close a contract. Thissum of money can be distributed as software discounts, maintenance discounts, payment terms or inmany other ways. If you seek the lowest price in every area, you will exceed the funds available, andalthough the vendor may agree to a price under the pressure of making a sale, they may have secondthoughts about it once the ink is dry. You do not want a vendor to feel taken, nor do you want to feeltaken. Why not? Because you are buying into a long-term relationship with a vendor, rather than making aone-time commodity purchase.

Typically, the software vendor has a predefined pricing structure. This pricing structure may also dictate howmuch leeway the vendor has for negotiating your contract. The pricing structure may be further impacted if a Value Added Reseller (VAR) is involved in the final agreement. The VAR may be bound to a fixed price, orthey may have the option of negotiating a reduced price or a special deal for a specific customer.

Software pricing is usually negotiable, however. You will generally have the ability to negotiate somethingbetter than list price in your final contracts. This is a good reason why you should consider using anexternal consultant for the review and negotiation of your contracts. Experienced consultants typically arekeenly aware of the current market and understand the type of negotiations that are possible with many ofthe software vendors or VARs at the present time.

Overview

Best Price

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Contract Review Process

Overview

Review Initial Proposals

Identify Your Interests

Conduct NegotiationMeetings

The contract review and negotiation process is an important part of your selection project because it canadd to, or detract from, the long-term relationship developed with the vendors. The objective here is tonegotiate the contracts in such a way as to protect your interests while preserving the relationship withthe vendors. Neither side should feel like they have been taken or had to give in to the other sidesdemands. This can be accomplished using the following steps:

Review initial proposals.

Lay out your interests.

Hold negotiation meetings.

Obtain approval.

Sign contracts and issue checks.

This is a complex and important step. Use the guidelines provided in the previous section. Also, obtainassistance from an attorney or consultant who has experience in technology contract review, preferablyfrom a customers perspective. When a software consulting firm assists companies with contractnegotiations, they routinely find 2560 items that require modification or clarification. These modificationsfall primarily into two categories: items that need to be changed and clauses that need to be added. Keepin mind that the contract is probably written to support the seller; therefore, the terms and conditions areprobably not in your favor.

Now that the contracts have been reviewed, it is time to prepare for negotiations. This is an importantstep and your preparation should include identification of the following:

Interests. What are your interests and what are the vendors interests? Are they compatible?

Options. What are the different options you can create to satisfy both parties interests? You willbe pleased at how much value can be created for both parties with this underlying philosophy.

Standards. What external information exists to determine what is fair? Are you aware of theterms and conditions in other technology contracts in the current marketplace?

Alternatives. What is your best available alternative if you cannot reach an agreement and donot sign this contract? What is their best alternative? You will have significant power in yournegotiation if you have identified the alternatives before starting the negotiation process. This is why we do not recommend that you exclude the other vendors from your Short-List until youhave completed contract review and negotiations with your preferred vendors.

Offers. Discuss the following scenarios internally and identify your options.

1. What are the best price and terms you could hope for in an optimal contract?

2. What are the price and terms you would be content to settle with in the contracts?

3. If you had to, what are the worst price and terms that you would accept from a vendor?

Determine whom you want to be involved in the contract negotiation meetings, when you want to holdthem and where you want them to be held. These are some of the preparatory questions to addressbefore entering into negotiation meetings. We find it best not to jump into contract language right awayduring the initial sessions, but instead we suggest that you establish an agenda and demonstrate thatyou are flexible. Balance assertions for what you want with empathy for what the vendor needs.Remember that the process itself can add or detract from your relationship. You are establishing andbuying into a long-term partnership with your vendors.

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Obtaining approval may be as simple as asking the President or CEO, or as extensive as presenting acomplex Return on Investment (ROI) analysis to an Executive Steering Committee or Board of Directors.You may choose to use a consultant to support you with the preparation for, and presentation at, anyof the meetings required for this step in the process. Do not use the approval process as a gimmick to reopen negotiations with the vendors unless required.

With almost every contract a down payment or deposit will be due. Make sure you arrange for any necessaryfinancing early on, so you have the funds available when needed. We suggest a that safe amount is 100% ofthe software costs, plus one year of maintenance fees and three months of consulting costs.

Contract Review Process

Obtain Approval and Sign Contracts

www.softresources.com

About SoftResources LLC

SoftResources LLC is a consulting firm dedicated to providing unbiased andinnovative software selection services to public, private, governmental, andnon-profit organizations throughout the world. Our clients range from smallorganizations to multinational Fortune 500 companies. What differentiatesSoftResources from other consulting firms is that we purposely do not develop,write, sell or implement software in order to maintain our objectivity andunbiased methodology. This allows us to objectively evaluate software for ourclients because we have no vested interest in the final software selectionoutcome, other than to provide a value-added service for our clients.

For additional information on the software selection process, please contactSoftResources LLC or visit our Web site.

SoftResources LLC2517 Eastlake Avenue East, Suite 100Seattle, WA 98102-3278206-860-2400www.softresources.comewatson@softresources.com

Sponsored by Microsoft Business Solutions

2003 SoftResources LLC. All pages in this document are copyrighted by SoftResources LLC of Seattle, Washington, even if each page is notspecifically marked. Except as specifically permitted by SoftResources LLC, no part of this document may be reproduced or distributed in any formor by any means, or stored in a database or retrieval system, without prior written permission by SoftResources LLC.

MAKING SMARTSoftware DECISIONS

safeguard your contract negotiation