MAKING SMART

Software DECISIONS
safeguard your contract negotiation

2003 SoftResources LLC. All pages in this document are copyrighted by SoftResources LLC of Seattle, Washington, even if each page is not
specifically marked. Except as specifically permitted by SoftResources LLC, no part of this document may be reproduced or distributed in any form
or by any means, or stored in a database or retrieval system, without prior written permission by SoftResources LLC.

Safeguard Your Contract Negotiation

Overview
This guide will serve as a primer providing you with an overview on how to proceed through the contract
review and negotiation process. The information provided is not intended to replace a legal review of your
contracts. 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 have
determined your Differentiating Criteria or requirements for new software, and narrowed a Long-List of all
possible software vendors to a Short-List of solutions. Next, you should have conducted Software Demos
utilizing a predefined Demo Script, performed the necessary Due Diligence Review of each of the vendors,
and selected a final software application.
What Is Included

Inevitably, you will be faced with challenges and issues during your software implementation project. If you
have a complete contract in place with each vendor involved, these challenges will become less of an
obstacle to the success of your project. This guide provides an overview of the contract review and
negotiation process. The primary objective of the review process is to ensure that clear expectations are
identified, agreed to and documented. The contracts should also include effective issue resolution
procedures and remedies for the potential challenges faced over the life of your contracts. Some of the
most 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

Contracts Overview
Contract Types
You may end up with several contracts as part of your software selection and implementation project. The
following 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 data
conversion.
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 associated
maintenance agreements.
Your challenge will be to thoroughly review all of the contracts involved. This section will provide an overview
of the principles behind a successful contract review. You may choose to solicit the assistance of an
external consultant and attorney to help with your contract review process. Look for a consultant and
attorney who has specific experience in the area of reviewing and negotiating software and implementation
contracts. This type of consultant and attorney better understands the technology marketplace.
Guiding Principles

There are three specific guiding principles that work best for the contract review and negotiation process. The
three 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. The
process 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.

The Partnership

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 that
the partnership will be an unhappy one and possibly result in failure. All parties should come out of the
negotiations believing that they received a fair deal. Using this as an underlying tone to your contract review
process 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. The
vendor should continue to develop the application towards current technology and enhance the
software with new functionality that may be required by your organization. In addition, the vendor should
offer training that is relevant to the application and helpful to your users.

Contract Review Pointers

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

The first contract typically covers the licensing of the software. Keep the following in mind while reviewing
and 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 the
balance 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 of
implementation? How will issues be resolved? In actuality, few refunds are given to a customer
once the software vendor has their money unless an arbitrator or judge rules such.

Maintenance Agreement
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 the
latest 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 of
software 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 the
software, 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 over
several years? Are you required to pay now for these modules or their maintenance on these
modules? 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 the
hours support the operations of your organization? Is beeper service available to provide
coverage outside of normal service hours?
Escalation. Are there escalation and varied response times based on the severity of the
problem? When a system is down, a typical response time would be 30 minutes to 2
hours. For a non-critical question or issue, the response time may be three days to one
week 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.

Contract Review Pointers

Implementation and
Training Services

Many implementation service agreements are poorly written and take the approach of You need us, give
us a series of blank checks, and sign here. This is not the best type of arrangement given the amount of
resources (time and money) your organization will be investing in this project. Consider the following key
elements 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 identified
issues (e.g., customization, implementation, standard reports).
Integration, Data Conversion, Testing. Define in general terms the process for integrating
the software with each key system. Data conversion defines the amount of data that will be
moved into your new system. You also need to define who will be responsible for the
conversion: the vendor, customer or both. Testing refers to the creation of a test plan for
each phase of the implementation.
Administration of Open Issues. A defined process to document and monitor the progress of
open issues regarding the implementation project.
Project Control. Define a reporting format for the vendors Project Manager to provide
updates or summary reports regarding the project status, accomplishments, work planned
for future periods and issues requiring management attention. Create a plan to meet weekly
with the consulting Project Manager and your Project Team to facilitate issue resolution and
escalation, and to monitor and direct day-to-day project activities.
Professional Standards. A warranty that ensures services will be performed by competent
personnel suitable for the tasks, in accordance with applicable professional standards.
Review of Personnel. A statement retaining your right to review and approve all personnel
assigned to the project.
Quality Assurance Process. A quality review plan. The plan should include who will perform
the 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 provided
so 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 your
site, 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 be
described in a chart format.
Change Control. A defined process for all requested changes to the scope of the project to
ensure the project focus remains as originally identified.
Issue Resolution and Escalation. An issue resolution and escalation process throughout
various 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.

Contract Review Pointers

Application and
Hosting Services

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 are
given 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 to
your account? What is the procedure to report a service or application problem? What are
the 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 of
business, what happens during the transition and how does the ASP vendor assist you with
the transfer to another service provider?
Service Quality Measurements. Define service quality by the following: 1) service availability
time; 2) system response time; 3) equipment repair, restore, failure and fix time; 4) problem
response time; and 5) problem circumvention or resolution time.

Conclusion

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

Contract Price Review

Overview
Price is a nebulous thing. There are so many places that costs can boil over. If the vendors feel taken at
the beginning of the partnership, they may take advantage over time of any opportunity to rectify the
situation. In other words, they might look for areas where they can earn additional revenues for products
or services not specifically included in the initial contracts. The following statements define the framework
for 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.
Best Price

There is a sum of money available with every contract that the vendors can use to close a contract. This
sum of money can be distributed as software discounts, maintenance discounts, payment terms or in
many other ways. If you seek the lowest price in every area, you will exceed the funds available, and
although the vendor may agree to a price under the pressure of making a sale, they may have second
thoughts about it once the ink is dry. You do not want a vendor to feel taken, nor do you want to feel
taken. Why not? Because you are buying into a long-term relationship with a vendor, rather than making a
one-time commodity purchase.
Typically, the software vendor has a predefined pricing structure. This pricing structure may also dictate how
much 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, or
they 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 something
better than list price in your final contracts. This is a good reason why you should consider using an
external consultant for the review and negotiation of your contracts. Experienced consultants typically are
keenly aware of the current market and understand the type of negotiations that are possible with many of
the software vendors or VARs at the present time.

Contract Review Process

Overview
The contract review and negotiation process is an important part of your selection project because it can
add to, or detract from, the long-term relationship developed with the vendors. The objective here is to
negotiate the contracts in such a way as to protect your interests while preserving the relationship with
the vendors. Neither side should feel like they have been taken or had to give in to the other sides
demands. 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.
Review Initial Proposals
This is a complex and important step. Use the guidelines provided in the previous section. Also, obtain
assistance from an attorney or consultant who has experience in technology contract review, preferably
from a customers perspective. When a software consulting firm assists companies with contract
negotiations, they routinely find 2560 items that require modification or clarification. These modifications
fall primarily into two categories: items that need to be changed and clauses that need to be added. Keep
in mind that the contract is probably written to support the seller; therefore, the terms and conditions are
probably not in your favor.
Identify Your Interests

Now that the contracts have been reviewed, it is time to prepare for negotiations. This is an important
step 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 will
be 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 the
terms and conditions in other technology contracts in the current marketplace?
Alternatives. What is your best available alternative if you cannot reach an agreement and do
not sign this contract? What is their best alternative? You will have significant power in your
negotiation 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 you
have 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?

Conduct Negotiation
Meetings

Determine whom you want to be involved in the contract negotiation meetings, when you want to hold
them and where you want them to be held. These are some of the preparatory questions to address
before entering into negotiation meetings. We find it best not to jump into contract language right away
during the initial sessions, but instead we suggest that you establish an agenda and demonstrate that
you 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 and
buying into a long-term partnership with your vendors.

Contract Review Process

Obtain Approval
and Sign Contracts

Obtaining approval may be as simple as asking the President or CEO, or as extensive as presenting a
complex 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, any
of 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 necessary
financing early on, so you have the funds available when needed. We suggest a that safe amount is 100% of
the software costs, plus one year of maintenance fees and three months of consulting costs.

About SoftResources LLC

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

For additional information on the software selection process, please contact

SoftResources LLC or visit our Web site.

www.softresources.com

SoftResources LLC
2517 Eastlake Avenue East, Suite 100
Seattle, WA 98102-3278
206-860-2400
www.softresources.com
ewatson@softresources.com

Sponsored by Microsoft Business Solutions

MAKING SMART
Software DECISIONS
safeguard your contract negotiation

2003 SoftResources LLC. All pages in this document are copyrighted by SoftResources LLC of Seattle, Washington, even if each page is not
specifically marked. Except as specifically permitted by SoftResources LLC, no part of this document may be reproduced or distributed in any form
or by any means, or stored in a database or retrieval system, without prior written permission by SoftResources LLC.