With sales in customer relationship management (CRM) software licensing peaking in about 2000, software vendors are seeking new ways to toughen up contractual terms and conditions in order to increase revenues.
Alexa Bona, research director at Gartner, says with worldwide CRM revenue sales dropping in the last three years by as much as 50% to between $250 000 to $500 000 per average deal, vendors are looking to find new ways to sustain revenues.
"When the software market was growing quickly, with vendors offering new and exciting products, vendors made their targets just on new sales. However, as the market began to slow, vendors become increasingly creative at mining revenue via unfavourable contractual terms (for enterprises) and conditions to achieve market growth rates required by the investment community."
Bona says the danger to enterprises often lies in the fact that they place so much emphasis on price lists and discounts that they forget to check the crucial software licensing terms.
"There is prevailing softness in market conditions and vendors are looking to cut costs. While this may lead to higher discounts initially, ongoing costs are higher in the long-term."
Bona says key areas of importance to check within contracts with vendors include the expansion of licensing to users not covered in the contract.
As the enterprise expands, if the software licensing contract specifies users as "employees only", then the company will have to buy new licences to cater for suppliers, business partners and customers as the need arises.
Vendors will also rebundle and repackage products. It is therefore important that the company purchasing the software has a clause comparing functionality of the product to determine whether the new product purchased has the same functionality or whether it is different and needs a new licence.
Because of the nature of bundles, Bona says vendors may ship a number of software products to the client, with the client only being licensed to use some of them. If the client wishes to use more of the products, they have to buy more licences.
A line in the contract stating that the vendor may not send them software they are not licensed to use will solve this problem.
Enterprises must also watch the stipulations on restrictions to prior version support. Many vendors will provide support only for one year or for the previous version of the product. In this way, they are able to cut down on maintenance costs and increase revenues. Clients should therefore stipulate support for the two previous versions and up to two years.
Clients should also ensure they are given full credit for investments even if the licence models are changed. They should negotiate the option to move to new licensing models, should the vendor introduce one, but should not be obliged to do so.
Bona says it is important for the client that if the need to outsource does arise, they are able to transfer the licences to the contractor or have a provision in the licence to allow the contracting firm to use the software for the business outsourced to them.
Lastly, it is important to check what parameters (if any) grant the vendor certain rights over the company`s intellectual property. If a client is not careful, the vendor may be entitled not only to own information, but also to sell it to one of the client`s competitors.
Bona says companies which fail to evaluate the impact of a vendor`s licensing model over a minimum of five years could well face increases in licence and maintenance fees of at least 10% per year.
"Licences must be simple and easy to understand and administrate. Costs must be predictable and usage must be able to be measured according to defined terms. There must be technology independence and a fair relationship of price to value."
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