Publication Date: February 14, 1997

Keeping Software Costs Under Control

By Sue Mellen

It's not a small budget item anymore, that sum your company expends annually on software. For even mid-size companies the figure easily runs into millions of dollars. One way to keep software costs under control is to negotiate license agreements that provide maximum usage and flexibility and include comprehensive maintenance arrangements.

"There's a lot of money at stake here. If you haven't thought the process through, you'll have a real horror show on your hands," says Michael Galaty, Jr., director of computer contracts and finance for Pitney Bowes, Inc.

Galaty, whose employer purchases between $5 million and $6 million worth of software annually, breaks the cost-control process into two parts:

• Initial contract negotiations prior to acquiring software.
• Management of ongoing software costs.

He points out that success in the second half of the process is dependent on what happens in the first. A well-negotiated contract will include maintenance terms that should translate to trouble-free, cost-effective software management, Galaty says.

The All-Important Negotiations

Most software vendors have standard licensing contracts. As a purchaser, however, you are probably best served by a contract of your own, one that addresses your company's individual needs. This is where negotiations come in. Galaty says it is critical -- specially at the initial stage -- to have someone in IT oversee the process, because a IT representative will bring to the table an intimate understanding of the company's software needs.

"The alternative is to put the process in the hands of Purchasing. That only works if you set up a separate division of Purchasing for technology purchases," he says.

The goal of negotiations, he says, should be to "converge the differences between your ideal terms and a vendor's wish list." Of course, as a purchaser, your focus should be to achieve your ideal terms. Galaty lists 10 issues to consider in contract formulation:

• Assignment Rights
• Cost Elements--No Surprises
• Warranty Terms
• Enhancements, Fixes, Upgrades
• Support and Training
• Year 2000 Compliance
• Renewal Options
• Limit on Right to Audit
• Portability
• Termination Provisions

Enhancements, Fixes and Upgrades

There is money to be saved in negotiating favorable terms in all of Galaty's categories. Assignment rights, which regulate a company's ability to transfer rights to another division or a subsidiary, are clearly important to any firm considering corporate restructuring or acquisitions. Flexibility in the area of portability, which dictates the cost to migrate applications to different computers or sites, can be critical to a growing company. But one area that deserves special consideration is enhancements, fixes and upgrades, which translates to maintenance.

"These days, software is generally pretty robust, so maintenance doesn't really focus on fixing bugs anymore. Instead, you have to be sure a vendor will keep up-to-date with operating system upgrades. This is especially important for integrated systems, where you should upgrade a series of linked applications at the same time," Galaty says.

All maintenance costs should be included in the annual maintenance charge, never sold separately, he advises. And that leads to an important point. The maintenance charge is set at anywhere from 10 to 15 percent of the product price, a figure that can rise appreciably in a constantly changing market. A price cap, perhaps based on the Consumer Price Index, should be set and included in the contract. Such a provision will pay dividends for years to come.

Keeping Your Options Open

Galaty points out that there are still gains to be made after an initial contract has been set. When it's time to renew the agreement, you should reassess your options, perhaps approaching your vendor in search of more favorable terms. Generally, a vendor will be willing to negotiate rather than risk losing your business, he says.

Although this ace card certainly works best for large companies that have millions of dollars of business to dole out, remember that every sale is important in the ultra-competitive software market.

"You are in the best possible position if the person with whom you are negotiating has an inherent risk. In this case, the inherent risk is the loss of your business," Galaty says.

Sue Mellen writes from Tyngsboro, Mass.

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Michael Galaty Jr. is a featured speaker at The DCI Client/Server Application Packages Conference. For more on client/server issues, please see DCI's Database & Client/Server World.

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