Optimizing your licensing thanks to (re)negotiation

SAM managers know how to count and use licenses in an efficient way. Software buyers and procurement managers know how to negotiate contractual terms and financial conditions. 

A good negotiation should be jointly led by both SAM managers & software buyers and procurement managers.

License counting, contractual terms & prices are even more valuable when these can immediately be processed to determine real financial benefits. Negotiating your software contract is then the third enabler you must activate, after smart license assignment & MACD, when you want to get the best value for money from your software licenses.

Each negotiation is different, and it depends on the customer context, software vendor strategy and products scorecard.

Let’s go through some negotiation areas you will always have to deal with:

Unit Prices

Of course, when we talk about software negotiation, the very first thing we have in mind is to obtain the best unit prices. A basic example is Office 365 subscriptions. If you have +15k users, and unit prices proposed for E3 plan are 18€/month, getting even -0.5€ on that price will immediately make you save ~100k€/year!

To know which price you should target, it is important to put prices into the perspective of the quantities you intend to buy, and a benchmark study can help determine the right objectives. External SAM consultancy companies can help. No need of course to try to negotiate all prices of all SKUs of your contract, because you will not get everything you want on every item, so let’s stay focused on what really weights a lot in your software spend.

If you negotiate a software contract that requires a preliminary migration or installation phase, you can either negotiate a quantity ramp up…. or a price ramp up. 

For example, you are about to enter into Enterprise Agreement Subscription with Office 365 as an Enterprise product, but it may take 12 to 24 months to really migrate the 15k laptops & users to that new workplace (7.5k during 1st year, and then +7.5k during second year). Microsoft says that you should immediately subscribe for 15k users, at the entrance into that contract. OK, let’s transform then the Office 365 adoption ramp up into a price ramp up => for example 8.5€/user during year 1 for 15k users, and then 13€/user during year 2, and finally 17.5€/user during year 3. 

The well-known “cancel & replace” option can also sometimes help you save money, especially when you have inherited expensive maintenance flows (directly indexed from an old expensive purchase), and you want to reduce your OPEX for the future. Let’s terminate some licenses, accept you will never use them again, and purchase whole new licenses with exact same usage rights as the former ones, but possibly -30% or -50% cheaper than before. That use case is particularly valid for Oracle. 

Licensing rules

Of course, negotiation is not only a matter of unit price. Because behind each license, you have a definition of usage rights, what you can do with that license, what you can’t, the associated metrics. It is sometimes possible for software vendors to negotiate these definitions, and the benefits for customers can be huge. What do you want to negotiate? The list can be very long, and different for each vendor, but let’s write down here some recent examples we have observed:

• Custom minima NUP rule for Oracle licenses,
• Ability to convert CPU into NUP and the other way around, 
• Ability to keep the benefit of an old metric, processor-based, for new SW version whereas these are supposed to be only sold in core-based metric (for Microsoft),
• Custom transformation ratio when re-calculating quantity of licenses from processor-based metrics into new core-based metrics (for Microsoft),
• Custom Core Multiplier factor when using core-based on prem licenses to cover new Azure VM with Azure Hybrid Benefits

Such discussions about “license definitions” are sometimes quite far from immediate financial revenue impact into sales executive’s mind, which explains why they may more easily accept such request whereas negotiation is more difficult on prices. If you know what you’re doing, such negotiated licensing rules can bring you even more savings than successful price negotiation. 

Contract type

Depending on your vendor relationship, and vendor management strategy, you may elect to go for different contract types, even if you will be able to purchase the same product licenses in the end. A classic example is Microsoft contract vehicles; you have many choices between Enterprise Agreement (perpetual or subscription), Server and Cloud Enrollment, Select+, MPSA… SPLA and now CSP. 

It is necessary that you measure characteristics of each contract type, given that beyond financial incentives, there are often stakes of scope / quantity / duration / revenue commitment behind that. 

A quick example is to determine whether you want to enter SCE to maintain, renew or refresh your Windows Server, CIS, Biztalk & SQL Server. It can bring you benefits, especially if you have very old licenses, not maintained, in your licensing estate. Subscription SCE is a way to start a SW refresh program, while re-covering under Software Assurance very old licenses that you would have never imagined re-using again (former Baseline). But if you own a heterogeneous estate of licenses, with some recent licenses voluntarily without S.A. (because you just don’t need it), entering SCE may imply to temporarily put these into stand by, not being able to use them at all during the full SCE period. Beyond the forecasted recurring expense, that choice may immediately bring you a non-compliance risk. In that case, keeping an old-fashioned Select+ contract through which you will choose what license you want to have S.A. on, and which others you prefer not to maintain, may look like an immediate higher expense, but it can prevent you from a non-compliance risk for the future.

 
Contractual clauses

Once you have chosen your contract type, of course you will need to adhere to the “spirit” of that contract vehicle, and what it has been designed for. Yet, you can try to review some specific clauses or default amendments that may be the real cons of these contracts.

You go for Enterprise Agreement Subscription? OK, one of the theoretical benefits of that contract, is that you can “True Down”, which is never possible with perpetual licenses purchased once for all. OK, but is this True Down capability still maintained in your context? Pay attention to amendments….

What about the audit clause? Is it well balanced between the software vendor and the customers? If you don’t think so, it is the only moment when you can review that clause, so let’s open the discussion.

And probably the most important, review and do not hesitate to revisit definitions. “This is our standard contract that has been signed by hundreds of customers” is not a reason to accept definitions that are too vague and subject to ambiguity (of course, for such a negotiation to be conducted in good faith, you should also make sure to discuss critical points only, not all small mistakes you may have discovered in standard contracts!)

Finally, there will always be a clause that describes which organisational scope that contract applies to. It is one of the most important clauses in that contract, and you must be 100% sure to understand whether this applies to the whole group (including sometimes affiliates that you do not really have control on….), what happens if there is a carve out, new companies being bought out…=> This is real business life, and you’d better anticipate it for the next contractual period. 

And what happens after?

It may be surprising to negotiate conditions about what would happen after the contract… given that this new contract has not even been agreed nor signed yet! Yes, but common disappointment may happen in 3 years, especially if the contract you are about to sign is a real change into your organization, that will include locking mechanism. Concretely, you are about to switch from classic Office standalone perpetual licenses to Office 365 subscriptions? Good if that fits your workplace modernization strategy, and if you get good prices for that change. But keep in mind that you may experience a large subscription price increase in 3 years, and you will not have many levers to escape it. 

So it is interesting then to negotiate your contract duration: 5 years, even with annual commitment is often more interesting than 3 years, because even if you may think you lose the flexibility to renegotiate prices in 3 years, just accept that it was only a very unlikely option that prices would decrease, whereas making sure you will get the same unit prices in Year 4 and Year 5 is something really concrete.

You can also negotiate a price hold after the contract period, or a price increase cap (even +10%, which can sometimes be seen as very large price increase, that the vendor will then apply by default, is sometimes much better than no figure in the contract…. and new discussion in 3 years from now starting with a +40% default increase!!)

Eventually, you can negotiate a buy-out clause which enables you to exit subscription-based contract while limiting the damage. Of course, prices will by default look too expensive, but again, let’s see that as a negotiation safeguard for the future.
By Damien Juillard, October 10, 2020

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