Start with fundamentals on negotiation.  Think outside the box.

Then go through the basics on firesales.  If you want more, buy the Firesale Concall Recording.

Understand pricing, and when it might pay to avoid maintenance costs.

Start your deals from good templates.

And, lastly, consider the reasons for agreeing to renegotiating deals.

To my faithful readers: Thank you for listening to me for another year.  I hope you have a very joyous holiday season and a happy New Year.  See you in 2010 (unless something really awesome in the licensing world happens between now and then).

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.  Follow me on Twitter if you want up-to-the-minute information on contracting, licensing, negotiation and the law.

I also realized that many of you might have no idea what you’re seeing below.  Sorry.  These are “tweets”, 140 maximum character messages sent via Twitter.  Within the Twitterverse individual users follow others and have followers (think of it like overlapping Venn diagram circles).  To read a tweet, you have to wade through a bit of jargon used to make the most of the 140 character limitation.  “RT” for example, is shorthand for “Re-tweet” and the @____ is the username of some other individual on Twitter.  Combined together, then, “RT @_____” means that someone else wrote a tweet that I found important and I now want to forward along to my followers.  The URL’s are then also shortened by shortening services like bit.ly to make the most of the character limitation, too.  Lastly, you might see “hash” identifiers “#______” which are ways to tag tweets of a particular flavor for easy searching later and “<” which means that I am commenting on what came before it.

• RT @rwang0 @dealarchitect: Don’t cry for me Germany. SAP had plenty of warnings. http://tinyurl.com/mclvbm < I can’t wait to see who’s next
• RT @richards1000: Tuunanen et al. on Automated Software License Analysis http://bit.ly/svjQR < Cool but irrelevant. FOSS license are nonneg.
• RT @rwang0: reading the new twitter terms of service. like the fact that you and only you own your content. < At least for now.
• RT @jimcalloway @ernieattorney Important safety tip for ‘would-be lawyer bloggers’: if you lack common sense don’t blog http://bit.ly/2fFcBH
• New blog post: Content, Value and Commoditization http://bit.ly/27HVx
• RT @btannebaum: Lawyers, do you care about transparency on twitter? http://mylawlicense.blogspo…
• Contract negotiation according to the Marx Brothers: http://bit.ly/12U7pY
• US Registrar of Copyrights opposes Google book deal: http://bit.ly/KhP83 … so do I. Unwarranted monopoly.
• … and then there was a whole discussion on what constitutes being an expert at something, sparked by one lawyer’s assertion that it takes 6 months’ of research and then a good SEO strategy to get yourself to the top of the Google rankings.  I, and others, disagreed.  (RT @nikiblack @Adrianos: “How To Become An “Expert” In Your Niche In 6 Months” http://bit.ly/pIj2Q < I really do NOT like this!)
• New blog post: On Acceptance Testing… http://bit.ly/s0zsV
• @JasonAnderman The author misses part of the value of the lawyer – understanding that a form isn’t 1sizefitsall. Available /= viable.
• @ferrusi @PeterKretzman When discussing vendors, not having them in the room usually leads to more openness. It can also reveal biases.
• @PeterKretzman @mckenziesa: RE: Find a way to get the salesmen out of our vendor discussions! < Um, Ask them to leave?
• RT @glambert: Blogging Lawyer Charged with Confidentiality Violations – http://bit.ly/mLcTj (Public Defender tells a little too much)
• RT @rwang0 Cloud computing model – IDC numbers show s that its … 1/2 the cost < How does that translate to customer fees?
• RT @PeterKretzman @testobsessed Source code, like invty, is a liability, not an asset. (PK: indeed. It’s why I laugh at source code escrow)
• RT @vpynchon @tamerabennett: Disney, Pixar Sued by Luxo Lamp Co: http://bit.ly/MO4X7 < Shouldn’t matter. Pixar’s not selling lamps.
• RT @fscavo: @negot8or thinks #saas providers should set up living trusts (my word) for their customers. Read comments: http://is.gd/34L65
• Kate Gonzalez’s Tom Ten Force Majeure Imposters (via @superbuyer): http://bit.ly/Ol4Wy
• Confessions of a Car Salesman: meeting, greeting and dealing: http://bit.ly/3nihk (via edmunds.com)
• Antitrust lawyer slams Google book pact: http://bit.ly/83Hqp (via All Things Digital)
• RT @LeighMonette: RT @PrivacyLaw: “’Anonymized’ data really isn’t—and here’s why not” http://tinyurl.com/ksxz8t
• RT @fscavo: Just blogged: SaaS contingency plans need more than software escrow http://bit.ly/r2cJn < Escrow is wasted money IMHO.
• RT @jimcalloway: Blogged about lawyers taking their laptops across the U.S. borders. http://tinyurl.com/n4bfms
• RT @BrettTrout “World Patent” good for M$, bad for most everyone else. http://bit.ly/o0rbZ
• Jeremy Telman, contracts prof @ my almamater, on why execution before performance is a good idea: http://bit.ly/1iJjY7
• RT @vpynchon: http://twurl.nl/tiuvp7 the negotiation analysis of the lessons of the Cove (which halted the killing of dolphins for one day)
• RT @bobambrogi: LawSites blog: Plaxo’s New Terms of Service http://bit.ly/1BNRy
• RT @bobambrogi @paulzink: You and your attorney colleagues (esp. those in copyright law) may get a chuckle from this: http://bit.ly/jJd6G
• … and then we had a long discussion on the tweeting of the play-by-play via twitter of a NFL game (the NFL likes to exert some extreme control over their content).  Some folks thought that twitter was a game-changing technology.  I argued that it was control-changing…. that they should tweet every game in their own words: @FlashFusion @julito77 @gtiadvisors It’s only a copyright issue if you tweet the actual broadcast wording/play-by-play. Make up your own.
• RT @doctorow: Another reason you can’t outsource your kids’ online safety to spyware companies: http://tinyurl.com/n934fh < Read the EULAs!!
• RT @gtiadvisors @GregBufithis @BrettTrout Proposed U.S. patent law reforms would stifle innovation and injure entrep’s http://is.gd/2ZXza
• RT @OmarHaRedeye: Blawg Review #228 is live http://bit.ly/11D50J/ < Thanks for the inclusion!
• Sometimes is pays to see how the software sausage is made: http://bit.ly/S3b5p

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.  Follow me on Twitter if you want up-to-the-minute information on contracting, licensing, negotiation and the law.

• RT @gtiadvisors: RT @AdvertisingLaw: Blog Post: Content Protection and Copyright http://bit.ly/1Q0CX
• New blog post: Confidentiality Exclusions versus Disclosures http://bit.ly/4qYdND
• Tech workaround could allow MS-Word sales to continue: http://bit.ly/haM2S
• If you buy/sell software, get your free copy of the Software License Risk Matrix: http://bit.ly/14AJ0E
• . @insurancecvg on Coverage Disputes over Data Breaches: http://bit.ly/zaK87
• RT @ManVsDebt: frugal misery… when people try to apply cost-cutting tactics in areas that have a high personal value: http://bit.ly/rUDJ3
• I have available time for a new client if anyone is looking for ways to save money on IT procurement-related spend. Give me a buzz for info
• You don’t get what you deserve, you get what you negotiate (@activegarage): http://bit.ly/vW2KU
• RE: @park3 Thanks Jay. I’m still not sure that the distinction you point out really changes the analysis. Even in a… http://disq.us/1szo
• Who do you think is the best negotiator? 10% say William Shatner. Seriously? http://bit.ly/tP1SA
• RE: @park3 I don’t know that there is a rule. In fact, after years of thinking about it, the only rule is that there i… http://disq.us/1sxz
• Microsoft software clampdown nets 11 firms (via ZDNetUK): http://bit.ly/fVRFs
• RT @gtiadvisors @taxgirl: http://bit.ly/rPlPd < Why I recommend negotiation experts over corporate lawyers.
• RT @skydiver: http://bit.ly/JetPass – all you can fly in one month on jet blue – $599. < Sourcing folks should watch how this plays out.
• RT @gtiadvisors @colleencunningh @CoreyVickers @BettyFeng CFOs ignoring supply chain risks http://bit.ly/qtgK8 < I knew it… crap.
• RT @drjimanderson: Classic Sales Negotiation Tactic – I’ve Got to Talk to My Boss: http://bit.ly/wYU4j < Power tactic, learn to respond
• RT @harrymccracken: Texas Judge tells Microsoft to quit selling Word: http://bit.ly/ybXzR < This doesn’t affect current owner/users of Word
• When describing calculations in contracts – SHOW AN EXAMPLE, it might save your butt later! (@ontechcontracts): http://bit.ly/NXrsr
• New blog post: Jeff Gordon Quoted on SpendMatters Today http://bit.ly/zPTbo
• Simon Cowell’s lessons in salary negotiation http://bit.ly/1Es4p
• Thanks to Jason Busch (@spendmatters) for an opportunity to talk about M&A wrt licensing deals: http://bit.ly/ANzzA
• RT @fscavo RT @rwang0 Hearing about how hard it is to leave some #saaS vendors. Automatic renewal may not be the way to go! < Same here
• Follow the Five Fundamental Skills for Effective Negotiation and this won’t ever be an issue: http://bit.ly/oKM7J
• RT @ontechcontracts 3-step way to ID contract contingencies: http://bit.ly/N7Ldu < I was just talking about this. Good article!
• RT @fscavo: Stupid contract clauses that hinder business partner relationships http://is.gd/2aOYc Good post by @Figliuolo
• RT @WieseLawFirm: Thoughts on developing leverage and why it’s important in negotiations: http://is.gd/2aE28 < I call it Power in the FFSfEN
• Privacy policies just got interesting in ME (and applicable to everyone doing anything online): http://bit.ly/FFtYn (HT to Deena Burgess)

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.  Follow me on Twitter if you want up-to-the-minute information on contracting, licensing, negotiation and the law.

In his post, he blatently advocates buying “lesser” versions of Microsoft products to take advantages of the discounts available to certain classes of users, regardless of whether you actually fall into that user class.  His cavalier attitude towards the vendor (telling his readers that Microsoft probably doesn’t check up on usage) and the user (suggesting that users who pay the appropriate price for their user class are “suckers”) is abhorent and I’m frankly disappointed that the editors at Cnet allowed this garbage to see daylight.

I’ve responded twice in the comments (as “negot8or” if you care to read them… once on page 1 and again on page 2).  The general gist of my response is that if you don’t like the pricing for a particular product, don’t buy it.  Vote with your pocketbook.  Vendors who don’t sell enough software will either drop their price or drop out of the market.  But buying something you’re not licensed to use and using it anyways is a form of theft (“software piracy” if you will).  Software has historically been sold on the basis of end-user value.  It’s the right of the vendor to charge whatever they want.  Stealing, in any form, isn’t justified because there exists a cheaper price somewhere else – or for someone other than you.

As much as I advocate for better software licensing terms and more transparency from vendors, I do not believe in taking what isn’t yours.  I hope you agree.

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.  Follow me on Twitter if you want up-to-the-minute information on contracting, licensing, negotiation and the law.

First, you need to go read Joel Spolsky’s excellent article: “Camels and Rubber Duckies“.  This will give you the starting point for understanding how pricing should be created.  Eric Sink uses a similar breakdown to understand the economics of how software is priced.  Next, you need to understand the four basic ways software is licensed.  This article by Erik Keller from 2007 in Manufacturing Business Technology is a bit dated, but hits the fundamentals.  And even within the SaaS model (and, in fact, the traditional model), there are different metrics upon which the licenses can be measured.  Check out this optional article by Jason Rothbart from January 17, 2009′s ReadWriteWeb.

So armed with an understanding of how software is priced, we then need to move onto maintenance and support.  Let’s start with the basics from this 2006 Information Week article (still relevant data).  What we’ve got these days is a system in which we expect to pay a base fee for the license plus an annual support fee… or we pay the leasing/SaaS model of “license renewals” for each year of use.  Regardless of how you slice it, there’s an annual fee component to the deal.

Forgetting about the tax implications of mandatory maintenance in many jurisdictions, I instead want to focus on a very specific pricing issue – the increase. Yup, all of this build-up and what I really want to talk about is the language in your various license agreements and maintenance documents that allow for increases in license and/or maintenance fees year after year (you need to understand how license fees are created to really dive into increase language).  This is a hidden gem for vendors and is often overlooked by licensees, simply because people don’t think about its effect on price (because it’s an increase on future pricing and not today’s pricing, it’s sometimes not deemed relevant or worrisome).  I believe that license and maintenance fee increase language is dangerous at best and disastrous at worst.  Here’s why.

Assume for the moment that you’ve paid $1,000,000 for your license and that you have a 20% annual maintenance fee.  There’s no more “warranty grace period” so, interestingly enough, the vendor actually wants $1,200,000 that first year.  Well, to start, Vinnie Mirchandani over at deal architect will tell you that maintenance is overpriced.  I agree.  For $200,000, I would expect at least 1/5th the value of the license to come back to me that first year in maintenance and support.  In other words, is the software SO BAD that it requires 4,000 hours of support by a $50/hour technician for that year?  I hope not.  Or, alternatively, are you getting a 20% increase in features and functionality in the next release of the software that year?  My guess is that the answer to both questions is “no”.

So 20%, on its face, seems pretty unreasonable from the get-go (you can also just think about it in terms of re-licensing costs… do you want to have effectively paid to re-license the software in 5 years?).  Now let’s factor in the increase.  These range from 3-15% in most license templates today.  Even at 3%, that would equal a $6,000 increase in the $200,000 fee from Year 1 to Year 2 (at 15%, that increase would be $30,000).  The most common rationale given for increases is a cost-of-living (economic) excuse for the support people.  The second most common is the same argument, only this time, it’s the cost of goods and/or materials.  (My personal favorite counter argument is to agree that pricing should be tied to the economy, and then re-write the language so that “the pricing changes based on the CPI-U All-Items percentage for the prior year”.  This allows it to actually go down.  A savvy vendor won’t ever allow this.  But then their excuse evaporates, too.)  Thus, I’ve had to concede increases in many cases.  I’ve even said before that for 3-5 year deals, I try to get increases removed for the term of the agreement (it’s the trade-off for a long-term deal).

But what about increases not tied to the economy, rather the simple cost of doing business?  Should customers be saddled with the expenses related to having to change a product because the vendor’s industry is regulated by the government?  Should the end-user, mid-term on a contract, be expected to pay for changes resulting from something completely outside of the customer’s control?  I’m thinking specifically in the telecom industry (and others) – where federal regulations that result in fees typically find themselves trickled down to the customer.  I’ve said it before and I’ll say it again… the telecom vendors don’t have to pass along the fees.  They could pay them themselves.  But they don’t.  If you’ve ever seen a line-item for cost-recovery fees, that’s what we’re talking about.

So the question is – should you accept these pass-through fees?  Or, more specifically, should you accept increases in these pass-through fees?  I can understand that there is an economic argument (as above)… that it’s an increase in cost for something you thought was fixed or sunk before the contract was signed.  But isn’t it just a risk of doing business in any particular industry?  Don’t we, as automobile owners, for example, take the risk that gas prices are going to increase or that we may lose our jobs tomorrow?  And that if we decide to buy a car today, we accept those risks and have to deal with the consequences if the situations change?  Why should I have to protect not only myself, but also my vendors, from the risks (and costs) of doing business in their industry?

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

Hmmm… the more I think about this, the more I think it would be really easy to convince my clients of this.  Anyone have a counter argument?

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

“For ten years, we’ve been driven by a simple vision: The End of Software.  Now it’s time to take on a new challenge: The End of Maintenance.

Let me tell you about a customer that I met on our Cloudforce tour. This customer currently uses Siebel software to run her call center.  She pays more than $15 million a year for the privilege of having to implement the updates that Siebel sends her.  That does not include backup. Or disaster recovery. And of course, it does not guarantee that she will be using the latest technology.  The maintenance agreement only assures her that her outdated software will continue to work.  She is paying tolls on a road to nowhere.

We can help her, and many other customers, and deliver much more for a fraction of what they currently pay in maintenance. It’s time to open up a new front in “The End of Software”– one that is long overdue.

It’s time for The End of Maintenance.

Every year, companies spend billions on maintenance fees and get relatively little in return. Maintenance fees cover updates that are mostly  patches and fixes, but they stop far short of the kind of innovation every that enterprise needs to survive.  Companies pay to keep the past working and they end up doubling down on technology that can never keep up with their needs.  The fees that companies pay have actually been rising, from something like 17% a few years ago to numbers more like 22% today. Every four or five years, companies are paying for their software all over again.

It’s time to set these businesses free and make them successful in the Sales Cloud,  Service Cloud and on our Force.com platform.

Our new mission begins at a critical time in the economy, when companies are questioning conventional wisdom as they never have before.  That, of course, extends to their IT budgets as well. The CIO is in a tough spot right now.  Corporate budgets are tightening.  And our rivals in the legacy client-server world are using this opportunities to extract more money from their customers by raising maintenance fees.  I call this phenomenon “the compression of IT” and it resonates with just about every CIO I speak with these days.

We have a better vision. We sell our customers a service and every customer is able to use the latest. Innovations are included. Upgrades are automatic and invisible. Customers’ intellectual property of customizations and extensions is rigorously preserved, and carried forward without disruption.

The service gets better, not just less buggy. That’s not what people are getting for all those fees that supposedly buy them “maintenance.”

It’s time to set these business people free: to give them the experience of being wildly successful in the Sales Cloud, the Service Cloud, and in their own unique applications that they can build on our Force.com platform. This is the time to do it, because this is when people need it: their IT budgets are tight, their business situations are critical, and their old-world software vendors are taking care of themselves instead of meeting the needs of their customers.

We’ve raised people’s expectations for better alignment of business value with IT cost. We’ve earned our leadership position in enterprise cloud computing. It’s time for us to set people free from paying more and more to get less and less. It’s time for The End of Maintenance.

Aloha,

Marc”

The current economic situation is encouraging many organizations to reconsider their current contractual relationships.  Contact me before your opponent does to find out how to make the most of your renegotiations.  The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

Of course, it’s never that simple.  Because your IT department usually also wants a development server for each database instance.  This makes sense – development should be done separately from production (you wouldn’t want some experiment in design to bring down your production server).  Oh, and what about testing?  This is the middle-of-the-road between development and production… where something that your developers believe is ready for production goes to receive significant QA attention.  That’s yet another set of databases.

So, now we’re talking about 15 licenses: 5 production + 5 QA/test + 5 development.  If 5 were expensive, imagine what 15 could become.

Database software developers understand this dilemma.  They know that if you’re really making use of their products, whatever you have in production has to be supported by nearly as many dev/test environments.  Back in the day, this was usually a pretty simple situation – you asked for, and usually received, “free” dev/test licenses.  I say “free” because they were never really free, they just didn’t separately price them.  You paid for them then, just as you pay for them now.  The difference is that the cost was built into the production licenses back then because the hardware wasn’t strong enough to support some of the tricks that can now be used to run multiple databases within a single hardware environment.  Once the hardware was strong enough (about 8 years ago), savvy licensees didn’t actually need 5+5+5 … they could find ways to do 5 + 3 + 2 or some other combination in something other than a 1:1 relationship.

The net result is that these same savvy licensees started asking for discounts on the initial 5 production licenses because they knew they were no longer needing the triple-play effort of that single license.  Instead, they argued, they only needed a few “extra” licenses (now really for free) because it was understood that to make use of the product, you needed these extra environments.  They just didn’t need them in the same quantities as before, so it had the appearance of being less of a freebie than before.

Software vendors reacted in the best way they could – through changes in language.  The phrase “internal busines purposes” became the expected response.  “Yes”, the vendors said, “you can have a few extra licenses – but only for internal business purposes.”  The meaning wasn’t always clear, of course, but the intent was to say that the licenses you purchased were the ones that could see the light of day (be used by regular users, etc), but that the extra licenses were only for back-room development and testing.  You were signing a license agreement confirming that you wouldn’t take these fully-functional licenses and put them into production.

No problem.

Until ASP/SaaS offerings came along.  Now you have databases that are serving data to the world 24/7/365.  Licensees still need dev/test environments… but these are now potentially available online, too.  And, in rare cases, serve as the backup production environment in the event that the usual production environment goes down.

Has this really created a problem?  No.  The case remains that licensees should have frank and honest conversations with their vendors about how they intend to use the products rather than try to sneak some form of unintended or unexplained use by the vendor.  If licensees want “free” licenses for dev/test, they should expect to see (and respect) “internal business purposes” language.  And they should discuss the possibility of needing to put a dev/test server into production in the event of a disaster.

Lastly, licensees should also remember that such licenses are never free.  Whether you have a line-item cost that shows you paying full-price, partial-price or no-price, the cost is still baked into the deal in some way.  However, one key advantage to calling out the pricing specifically for dev/test environments is the ability to get them excluded from maintenance costs – as there should be no need to pay for maintenance on a dev/test box needed to provide support for a production server.

The current economic situation is encouraging many organizations to reconsider their current contractual relationships.  Contact me before your opponent does to find out how to make the most of your renegotiations.  The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

Join the Licensinghandbook Blog on Thursday, November 20 at 5pm ET, when we will be hosting a procurement-related conference call session on how to negotiate through the typical end-of-year deals commonly seen (and the expected “extras” as a result of the current economic state).  Stephen Guth from the VMO Blog will get the topic rolling, but the remainder of the time is for discussion amongst the participants.  We’re expecting a great session and one filled with dozens of hints, tips, tricks and tactics.

For this reason, participation is by-request-only for buyers via the form below and will only be guaranteed to the first 25 registrants.  The session will be free to attend, but you are responsible for your own long-distance phone charges (the call is to a number within the continental US). Please make sure your e-mail and contact data entered below are correct, as this is where the participant details will be sent!

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

K-Mart had to come up with realistic ways, then, to satisfy the needs of its customers with respects to offering them the ability to buy when they didn’t have the means at hand.  Their response was lay-away.  This wasn’t a unique offering, department stores had offered similar programs for years.  But it was effective none-the-less.

For a small administrative fee, anyone (regardless of your background or history) could put one or more items into storage at your K-Mart (items actually came out of inventory).  On any periodic basis, prior to a scheduled end-date, you could pay against the remaining balance.  When the balance reached $0, you received your items.  The risk to K-Mart was your failure to pay and the restocking of the items into inventory after such item was obsolete.  But this was a simpler time and items weren’t replaced as quickly by the manufacturer.  Adjust the timing so that you can’t keep it in lay-away forever and K-Mart was at least assured that if you didn’t complete the transaction, they could sell it to someone else.

I’d forgotten about lay-away until I saw a K-Mart commercial the other day where it was the focus of their advertising.  The obvious assumption is that this is a result of the current economic state.  People don’t have (or want to use) available credit for purchasing.

I wonder if the same is true for businesses – ones who are concerned not only about credit (though most thing are purchased under contract or PO requiring payment like a charge card – at the time the invoice comes in) but moreso about the availability of a vendor to deliver long-term on the promise of providing services, since the traditional software model is pay-first-then-pray-it-works.  So, does the opportunity exist for creative vendors to come up with ways to spread payments out over time without creating real problems for the vendor or the customer?  I think so… but I’m not sure what they would be.  Models used by services providers (pay as services are delivered) only work if you can measure it that way… but what about standard software vendors?  What choices are available for them?  Leasing?

Your thoughts in the comments!

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

I’m not as convinced.

A few years ago, I was working for an organization that wanted to join a buying consortium.  The proposed result would be a buying entity that would supposedly garner savings as a result of larger purchases – thus passing along the cheaper per-unit costs to the consortium’s members… sorta’ like a Sam’s Club, Costco or BJ’s Warehouse – just at the large company level.  On its face, this sounds like a great idea.  Pay a small membership fee (someone has to get paid to manage the relationships), get large savings in a number of commodity purchases (paper products, general office supplies, etc).

Oh wait.  Did I say commodities?  Yes, yes I did.  Commodities are an excellent use for consortia buying.  They’re ubiquitous (everyone needs toilet paper and almost everyone’s buying the cheapest they can find), relatively easy to source (and hard to screw up), and bulk quantities clearly reduce overall expense.

But what if your consortia wants to offer something else… say, intellectual property?  Software, for example.  Now I think there’s a problem.  The member companies no longer have identical interests.  Your organization wants Exchange email… mine wants Groupwise.  You want an enterprise license … and I do, too, but my enterprise is 3x bigger than yours.  Consortia buying stumbles in the face of diversity of interests.

Another area where I personally had a lot of issues was the realm of cell phone and long-distance telephone plans.  The consortium wanted a cut of the plan revenue.  I didn’t want them to get money from me this way, as I would prefer to have more cost savings straight from the vendor.  Oh, and the consortium was buying a bulk group of “minutes” that were then allocated to the members.  If I didn’t meet my minimum usage requirements, I had to pony up (which is normal).  But the twist was that if any other member organization didn’t meet their minimum, I was also responsible for helping cover the shortfall.

So, how did I find out about all of these nits in the deal?  Well, me being me, I asked to negotiate the contract(s).  And what I got in return was a lot of static about how the contracts were already complete and that I simply needed to see/sign the Member Enrollment agreement to add us to the consortium.  I said no thanks – that I had specific needs and I wanted to have my own contract (where we could/would selectively incorporate terms from the consortium’s agreement).  Boy did that go over like a lead balloon.

What I learned by reading the consortium’s agreement (which they originally didn’t even want to give me) is that I’m ultimately paying for someone to negotiate a deal that’s good for them, not me.  When I wanted to change the terms with the vendors, they, of course, balked, too (they thought they had done-deals with the consortium and its members).

So the net result is that I’m not a huge fan of consortia buying.  Consortia are essentially negotiation and contracting outsourcers.  I don’t need help getting discounts or better deals… and I definitely don’t need “help” that only really benefits the consortium organization (and not the consortium members).  But I do see value in using a consortium to get the bulk-quantity ubiquitous products of everyday office living.  I suppose, as all else in life, the key is moderation and to read before you sign.

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

WHAT?!?

Do we expect this kind of treatment in any other area of our lives? Even in the business world where we TRY to get current price paid to apply to future deals, how many times are we actually successful?

The answer, of course, is not many. Why? Well, because a business that sells you something is hopefully selling it to you for the cost of good sold plus a good (but not gouging) margin. To give you a NEW product without further payment eliminates the margin, thus eliminating profit, thus eventually forcing bankruptcy. Not exactly the successful business model taught in school.

We don’t expect it with our homes or other personal property (try taking your computer back to Best Buy/Dell/Apple/etc for a “free upgrade” and see what they say). But somehow, folks expect it with phones.

Maybe its because we feel like we’re not getting the value out of the technology before it’s been upgraded on us. That in the past, there used to be some significant time period before a new version would be released (just like what we see in the software world). But the truth remains that we have the ability to refrain from purchasing at all. Inasmuch as I love new Apple laptops, I only get a new one every 5 years or so. And I try to schedule my purchase so that I feel like I’ve gotten value (by timing it so that I buy the latest one released, I hopefully ensure that a new one isn’t coming out tomorrow).

But I still feel a pang of regret when the new ones come out. The same is true for cars. When do you buy a new car? When should you buy? Well… if you like the best features, the most advanced tech, the latest and greatest… you buy in August/September, when the new model year comes out. If you like the best price and are willing to sacrifice the lastest-and-greatest, guess what, you buy at the end of the same time… September/October, when the new model year comes out and you get the most recent old one at a significant discount.

Live with your purchase decision, though. Plan it well and then cope with it. But don’t expect your vendors to give you a free upgrade if you’re not paying for it (maintenance fees, anyone?). They won’t be around long to support it if they do.

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

The reality is a little more tricky – and a lot less “clean” in terms of where offers come in relative to what their opponent has proposed. It’s hard work to predict the future, even if you’ve done all of the Information Gathering and Strategic Thinking in the world. And when you have a feeling that you’re really far apart from the start, it can even be worse. So, I’m going to suggest a tactic that you may have considered but never used – one designed to help bridge the initial gap to get both sides thinking about “real” numbers (while I’m a huge fan of negotiating the language of a contract and spend a lot of time doing it, this is really a tactic regarding money).

Let’s set up the problem. First, we have two parties; Buyer and Seller. Buyer wants to potentially purchase a set quantity of licenses. Seller, of course, wants to sell Buyer a much larger quantity of licenses. Thus, there will be two numbers that factor into how much the Buyer pays the Seller: the number of licenses and the cost per license. Buyer believes that they need X quantity of product at Y cost per item. Seller thinks it’s M quantity of product at N cost per item.

To get the negotiation started, Buyer could do one of two things: make an initial offer, or request the Seller to make an initial offer. Most negotiators suggest that you always let the other side go first. In this case, it might be better for the Buyer to go first based on the strategy I’m going to propose. So the Buyer needs to come up with the first offer. Lowballing (or coming up with a ridiculously low offer) isn’t the goal in this strategy. Rather, come up with a “reasonable” offer – one that is based on logic and some consideration to the other party’s beliefs. In our problem, this would mean calculating a dollar value based, perhaps, upon the X quantity but somewhere closer to the N cost. In other words, you already concede a point. (This, by the way, would initial have the appearance of a win-win strategy. In fact, it has the side-effect of testing to see if the other side is going to play that way, too.) So the Buyer’s first offer is $P. (X times N).

$P isn’t a great first offer from the Seller’s perspective. In this particular example, the quantity numbers are where the “real” action is – so the Seller is most likely going to respond with a calculated offer based on the M quantity (regardless of the cost per item). And, in fact, the Seller even thinks that the cost per item is probably too low, too, as it’s based on some discounted amount, not the current retail cost of the item. So from the Seller’s perspective, they have a few choices: 1. They can accept the offer. 2. They can counter with a new calculation by using M times N (their preferred numbers). 3. They can counter some other combination of quantity/cost with numbers between X – M and Y – N.

Or they can try to gain leverage and choose option 4: They can try to highball (take their preferred quantity M times the retail cost). This would create their highest calculable dollar amount and is probably an order of magnitude (add a zero) higher than the M times N number. Remember when I was talking about win-win? If the Seller believes that the Buyer’s first offer was completely unreasonable, there’s a good likelihood that they’re going to respond in kind – and this is the flip-side of that coin. If, however, the Seller believes that the Buyer’s first offer was made in good faith, they’ll mostly likely start with M times N.

So as a negotiator who is properly doing Strategic Thinking, you’re hoping that M times N is the Seller’s highest choice. But what if they come back with M times 10N? How do you respond? You do the unthinkable and LOWER your next offer.

Yeah, you heard me. LOWER it. Your next offer will be X times Y (your preferred numbers from both categories).

But wait! you say. Isn’t that being unethical? uncooperative? unproductive?

No. It’s not any of those things. As I said before, you tried acting in a win-win model. You calculated your price based on part of your preferred position and part of your opponents (based on a reasonable estimation of what that position would be). You presented an offer that, while lower than what the other side would want, was reasonably calculated. But the response you got back was not. Thus, to reset expectations and bust through the unreasonable highball offer, you have to lower your current offer to your best-case position.

The likely result is that the other side will panic. It’s quite rare for a second offer to go DOWN. They’ll accuse you of being uncooperative and unreasonable. They might even say that you’re not operating in good faith (ignore the comment). But a highball offer is a ploy, just as much as your actions are tactics (for a discussion on ploys versus tactics, see The VMO-Blog). You simply need a way to get to the real numbers and doing the unthinkable will help.

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

If you’re one of the attendees, please look me up… Deck 11, second room from the bow, starboard side – we don’t have to talk about software licensing… I swear.

Additionally, for those people interested in either purchasing a copy of the Software License Risk Matrix or in redeeming my special offer for a FREE copy for those people who own the Software Licensing Handbook… I’m sorry to say that I’ll be slightly delayed in getting your Matrix out to you as I will not have internet access on the ship.  But I will fulfill all orders/redemptions by Saturday at noon (ET)!

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

As a service provider, I expect that you want 60 minutes of time.  Not 59 and not 61 – otherwise you’d ask it of me.  On the flip side, I expect to be paid my hourly rate for those 60 minutes.  Not one penny more or less.  I also believe that if I give you consistently sub-standard service (there’s always some level of fluctuation you give on individual performances and average out over time), you shouldn’t owe me my full rate.  And perhaps, if I really over-perform – somehow give you WAY more than you were expecting – that you’d perhaps give me some kind of “tip” or bonus for the over-performance.

But do you want to give me a bonus for only doing what I said I was going to do?

This is known as an incentive payment.  Over at 360° Vendor Management, Tony started the conversation by talking about how to use incentives.  Except for some specific things like requirements contracts, though, I don’t believe in them.  Contract for what you want and what you can deliver.  If you can’t deliver (or want more), discuss the situation up-front and create a tiered performance structure.  But don’t pay (or expect) extra for just meeting the terms of the agreement.

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering licensing topics on a regular basis, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

I call it Christmas (well, actually, I call it Hanukkah).

Discounts range from 30-75% off (there’s a rare 80%’er). Add-ins include free products/training/conference tickets, discounted maintenance and even better contract terms. That means that a deal for which you’d normally pay $300,000 can be had for $150,000 or less.

But you can’t just sign random deals as they’re offered. Risk is still a concern, as is purchasing something you don’t really need. I always think about a Dennis Miller comedy sketch when discussing sales. He talks about buying lime-green leisure suits… 2 for the price of 1. And he says that if they really want to screw you, they’ll give you three of them. So it pays to be prepared and know what you want and plan for how to get it.

More important, however, is whether you can get these deals on the off-months. The answer, of course, is yes – so most people just want to know the trick. But there is no trick.

Proper prior planning prevents poor performance!

Yep, that’s all there is to it. If you take your time, perform thorough research, use proper sourcing methods (RFPs, solid team-based negotiation techniques and well-written contracts), and relentlessly manage your vendors, you can successfully obtain solid discounts on ALL of your deals. Because here comes the surprise: a single (or even a few) deals with a great discount won’t overshadow dozens (or hundreds) of deals with poor discounts.

Assume for the moment that you do a modest number of significant deals during the course of a year (say 30 to make it “statistically significant”). Of those 30 deals, let’s also assume that they’re each of modest financial value for a decent sized organization, about $100,000 to $500,000. So, on average, each deal would be worth about $300,000 and your total spend for the year would be $9,000,000 (which adds up about right for such an organization).

Now assume that these 30 deals are equally spread out through the year – and that you’re able to close 4 of them (1 per quarter) with a spectacular discount of 65% off. $300,000 – 65% = $105,000. Four deals * $105,000 = $420,000. Now assume that you only get 10% off all of the other 26 deals ($270,000 * 26 = $7,020,000). Together, your annual spend is $420,000 + $7,020,000, which is: $7,440,000, a 17.4% discount for the year. Not bad.

But assume now that instead of a few spectacular deals, you were able to consistently save 25-30% on every deal. Let’s split it up equally, 15 deals at 25% and 15 at 30%. You know what I’m going to show you, but let me do the math anyways. (15 * $225,000) + (15 * $210,000) = ($3,375,000 + $3,150,000) = $6,525,000, a 27.5% discount for the year.

Thus, consistent “average” savings of 25-30% on each deal will net you almost a million dollars in savings ($909,000) more compared to a few really large savings. Not bad at all. Especially if you live in an organization that measures spend versus savings.

Oh, and I’m not even considering the idea that you can get your 25-30% on every deal in addition to the 4+ quarterly blowouts. Which is why I call it Hanukkah.

So let me repeat the advice:

• Take your time. Don’t get pressured into something you’re not ready for. Make each step of the negotiation worth something. Rushing to close a deal virtually never is beneficial to you.
• Perform thorough research. In business school, they teach the “Three C’s” for understanding the basics of marketing research and you can use the 3C’s for your deals, too. Company: learn all that you can about the organization you’re working against. Competition: know your adversaries competitors in the marketplace and the ins and outs of their solutions in comparison. Customers: are you gonna’ be their biggest deal? are you going to offer access to an industry they want inroads to?
• Use proper sourcing methods (RFPs, solid team-based negotiation techniques and well-written contracts). This is the easiest to say and the hardest to accomplish. It requires significant effort (templates, time, resources), a lot of organization, cooperation and skill. But of the various pieces of the puzzle, this is the easiest piece to “do” as well.
• Relentlessly manage your vendors. Know who they’re talking to in your organization, what products they’re pushing, deadlines they need to meet, etc.

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering a licensing topic every week, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.

Well, there’s at least one buyer. Wal-Mart. Their purchasing power is the stuff legends are made of… and here they go again. Only this time, the power is being used against another historical pricing powerhouse: the music industry.

Wow.

I wonder how this is going to play out.

The Licensing Handbook Blog is the companion site to the Software Licensing Handbook. Covering a licensing topic every week, Jeffrey Gordon attempts to offer advice, add humor and sometimes even a bit of wit to a practice that most people find abhorrent – namely, reading a contract from start to finish.