One of the biggest mistakes we see clients make when they are negotiating ERP software license agreements is focusing on pricing and discounts to the exclusion of other important issues in the software license. Failing to focus on key provisions in an ERP software license could result in a software license agreement that: (i) contains unnecessary restrictions on your ability to use the software; (ii) increases the likelihood of breaching the software license; and (iii) increases the fees you will pay to the ERP vendor over time.
For example, securing a large discount off of ERP vendor’s list price but agreeing to an overly restrictive default license grant that prevents you from allowing any third parties (including your affiliates, independent contractors and subsidiaries) to access the software increases the chances you will breach the scope of the license grant. Be assured that any discount you were successful in negotiating will be minimal when compared to the fees the ERP vendor will charge you to expand the scope of the license grant that you failed to negotiate.
Further, discounts are not always a good deal. If you purchase additional software licenses simply because you received a volume discount, but don’t intend to use them for some time, you are paying maintenance fees on that unused software. Over time, these increased maintenance fees could exceed the amount of any discount you negotiated.
By negotiating an ERP vendor software license agreement that accurately represents the way you will use and access the software and anticipates future growth and future needs, you decrease the likelihood of breaching the SAP software license agreement, increase your ability to comply with the software license agreement and reduce your costs over the lifecycle of the license agreement.
In addition to paying license fees, you will also pay support fees and maintenance fees. Support fees and maintenance fees may seem duplicative, but they are not. Support is typically priced on an hourly basis and is associated with resolving issues with the software itself or the ability to use the software. Maintenance is typically priced as a percentage of the license fee and can range anywhere from 10% to 30% of the total license fee. Most license agreements allow for that percentage to go up over time. There are a number of strategies for dealing with the high cost of maintenance and maintenance fee increases.
In our experience most ERP vendors are generally agreeable to capping maintenance increases at an agreed upon metric. One common metric is the consumer price index.
Another strategy we have successfully employed for our clients wishing to reduce their
maintenance cost is to include language in the ERP software license agreement that allows the licensee to “suspend” unused user licenses. “Suspending” users involves suspending the use rights and maintenance fees associated with unused users for a period of time that is mutually agreed upon by the licensee and the ERP vendor. In our experience, ERP vendors are usually agreeable to suspending maintenance fees for user licenses for a period of time ranging anywhere from a few months to a couple of years provided that the use rights for those user licenses is temporarily revoked.
The “revoked” user licenses may be reinstated upon payment of a negotiated reinstatement fee and the payment of back maintenance fees. Alternatively, if the license rights associated with the “suspended users” are no longer needed the licenses can simply be allowed to lapse.
Dealing With Revenue Recognition Issues:
When negotiating against a software company of any size you are likely to encounter the issue of revenue recognition. The primary authority for software revenue recognition is the AICPA’s Statement of Position (SOP) No. 97-2. While the SOP No. 97-2 requirements for when software companies may recognize revenue appear straightforward, the application of these rules is anything but straightforward. There is also a component to this called Vendor Specific Objective Evidence which can make understanding revenue recognition for the typical customer even more difficult.
You are most likely to encounter revenue recognition issues when seeking discounts and future options. Generally, an ERP vendor will push back on any concession that prevents it from recognizing revenue in the particular quarter within which the software license is being negotiated. As a customer it is difficult to determine the validity of a software vendor’s claim that revenue recognition prevents it from providing a discount or other concession.
If you suspect a vendor is using revenue recognition as a ploy to avoid providing a discount or concession, asking the vendor’s accounting department to explain specifically how the particular issue is impacting revenue recognition may help. If the vendor remains unwilling to provide a certain discount or concession because of a revenue recognition issue, you may have to forego the requested concession or discount. However, keep in mind that the vendor may be more willing to concede other business or legal issues to get the deal done. Pursuing these other legal or business issues more vigorously and using the vendor’s inability to concede the original point because of the vendor’s revenue recognition problem may result in additional cost savings or risk reduction.