Negotiating Software Contracts Key Initiative Overview


Archived Published: 18 June 2013 ID: G00251386

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Summary

This overview provides a high-level description of the Negotiating Software Contracts Key Initiative. CIOs and IT sourcing and procurement leaders can rely on this initiative to help them negotiate optimal software terms, particularly with entrenched suppliers or with new contracting models.

Analysis

Figure 1. Negotiating Software Contracts Key Initiative Overview
Research image courtesy of Gartner, Inc.

Source: Gartner (June 2013)

The ability to negotiate software vendor contracts effectively to get the right software and support at the right price and with the right terms is key to optimizing cost and mitigating risk.

Software is a complicated and expensive IT asset. Software licenses grant usage rights with specific, limited, and sometimes changing terms and conditions (T&Cs). In most software markets, buyers that make a competitive initial bid have significant negotiation leverage and power to create flexible deals. However, after implementation, high switching costs and lack of market competition shift a significant degree of power back to the vendor. Although market pressures on software costs are increasing and software business margins are high, your best possible protection against unexpected costs and risks is negotiating optimal T&Cs. This key initiative offers guidance for effective negotiating strategies with entrenched suppliers.

In addition, cloud software offerings are becoming more common, so IT procurement leaders must understand which terms they can negotiate to achieve equitable cloud contracts. This initiative also helps you negotiate contractual protections in cloud agreements.

Consider These Factors to Determine Your Readiness

What Negotiating Software Contracts Means to CIOs

CIOs are under pressure to optimize costs. To do this they must mobilize their IT procurement organizations to apply effective leverage, understand trends and apply contract negotiation best practices. CIOs should consider the following factors:

  • Software vendors are paying more attention to maintenance and other annuity revenue streams, so reducing maintenance on purchased, unused licenses is difficult. In cloud agreements, many contracts are not as usage-based as they appear, and fee reductions are unlikely. Demand management is critical to avoid overbuying and other liabilities.

  • Current trends are driving more IT spend outside the CIO's control. Trends such as cloud, Internet of Things and consumerization are increasing what the business spends on IT. More software contracts are now signed without IT procurement or CIO involvement. IT procurement governance is a priority. A targeted plan to review licensing, negotiate contract terms and manage internal processes can protect against audit risks and optimize investments.

What Negotiating Software Contracts Means to IT Leaders

IT leaders must understand trends altering the market, giving software procurement officers and contract negotiators more bargaining power. IT procurement leaders should consider these factors:

  • More and more software contracts are being signed without IT procurement's involvement. IT procurement leaders need to engage even more forcefully with new IT buyers to ensure the right financial and risk-related terms are incorporated, particularly in cloud contracts.

  • Effective demand management will ensure that you purchase only what the organization needs, and reduce reoccurring maintenance or subscription fees.

  • IT procurement leaders can optimize deal values when they understand which T&Cs are key to the negotiation, which terms are negotiable under certain conditions with certain suppliers and which points offer the most leverage.

  • Negotiations must address alternative delivery and acquisition models, such as cloud computing, and deal with any hidden costs or risks.

Conduct Your Negotiating Software Contracts Initiative Using This Structured Approach

Gartner recommends that CIOs and IT leaders take a three-stage approach to negotiating software contracts:

  • Strategize and Plan: Draft a charter to gain agreement on a vision and mandate behind the negotiation, aligned to business goals. Realize business needs and budgets, manage demand, and determine vendor relationship status and existing cost structures.

  • Select Solution: Analyze market intelligence about the software vendor's business and commercial practices. Evaluate software vendor delivery models and licensing options. Understand and choose commercial key terms and conditions to negotiate.

  • Operate and Evolve: Manage license entitlements. Revise procurement and negotiation approaches if entitlements were insufficient. Measure performance. Monitor use and compliance. Develop skills and define user best practices. Refine governance processes.

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