As a category, software licensing is a key area of the Strategic Sourcing and Procurement workload. Even mid-sized companies will often have hundreds of applications in their information technology portfolio. While many of those systems will have been sourced with multi-year agreements up front, there are still numerous systems whose licenses will be up for renewal and that requires sourcing and procurement to review contracts, analyze the business need for those applications, and form a strategy for keeping licensing costs as low as possible.
Since the number of licensing agreements to be worked through can be significant, and because altering some licensing arrangements before the new license period takes effect can be upwards of two months, it’s very important to begin this work now so that you have the space needed to negotiate strong contracts.
The first thing to do is understand the types of licensing models for the typical software systems and applications. Please note that there are numerous types of license agreements, but the two noted below are the most common licensing arrangements that I come across.
Annual Subscription Agreements – As the name suggests, and subscription agreement gives the organization license to access an application for a set period of time, usually for a year. This is very common for cloud applications, such as a CRM tool, but extends too many other applications as well.
Annual License Support Agreement – Typically, these agreements come into play when a license for an application or software module was bought as either a perpetual processor based and/or named user license with the software provider tacking on a support agreement for maintenance, patching, and upgrading the software, depending on the terms and conditions in the agreement. The cost of support usually runs between 15 to 20% of the cost of the original cost of the license.
When reviewing contracts up for renewal, the first thing that should be looked at are the renewal terms. In some cases, if a business does not contact the software vendor early enough to inform them that they will require a lower number of licenses, or that perhaps the system is being decommissioned, the contract will automatically roll over into the next year with the existing license count and terms. If the licensing agreement is set up like this, a notification should be sent to the vendor you will be requesting changes to the agreement.
Doing this serves two purposes; it creates a paper trail that shows there will be discussions regarding that contract, but also often leads to reconnecting with the software supplier to understand what their product roadmap looks like, which is beneficial to the business stakeholders.
Upon review of the contracts, discussions should occur with the business partners to understand what the licensing requirements will be for the upcoming year. For example, if an organization’s sales force has significantly gone up or down, strategic sourcing will need to know this so that they can communicate the proper expectations to the CRM software provider.
With license support renewals, it is even more important to understand what the license requirements are in the upcoming year. If, for example, database servers were decommissioned, thereby making it so the processor based DB licenses are no longer needed. You will need to notify your supplier as early as possible so that the correct paperwork can be drafted.
Complicating matters is that the big, global software providers (think big blue and big red) have complex formulas for discounting their support based on an organization’s volume of modules and licenses. Removing licenses from the organization’s eco-system will not necessarily equal the amount of reduction in overall license support.
Because of this, sourcing professionals will need to be prepared for a prolonged round of negotiations with the supplier’s support team. If you have enough time and patience, you can wear down the supplier to retain as much of the previous year’s discount as possible.