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Presented by:
Rich [email protected]
Let’s Make a Software Deal:
Negotiating Best Practices in the Economic Downturn
Presentation to: SIM Central Connecticut
Hartford, ConnecticutFebruary 17, 2009
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What we’ll talk about
• Negotiating flexible license rights to drive fee reductions
• Negotiating fully aligned warranty and support terms to save up to 12 months of support fees
• Negotiating better financial risk sharing in implementation
• Avoiding common price traps in SaaS, ASP and hosted transactions
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Some Basic Deal Anatomy
Product AgreementImplementation/Integration
Agreement Support Agreement Hosting Agreement
Service Level Agreements
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The Product Agreement
1. scope of legal rights for using the software
2. metrics by which use and thus pricing are measured
3. warranty rights and duration
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Scope of Rights and Use Metrics
Named Users
Concurrent Users
Transactions / throughput
Sites / Locations
Enterprise revenues
Perpetual
Term
Subscription
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Scope of Rights and Use Metrics
Pros and Cons to all models
Keys to negotiating pricing:
1. Information
2. Timing
3. Alignment
4. Alternatives
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The Microsoft Example
Scope of Rights and Use Metrics
Information – about actual usage helps decision to renew EA or go Select as well as whether to
buy SA versus by-incident Support
Timing – sufficient advance negotiation lets you demonstrate willingness to wait for OS upgrade
or hardware refresh
Alignment – of products licensed to actual business use can save thousands of dollars
Alternatives – Microsoft believes you won’t walk away, make sure they know, or at least think,
you can (Linux, MySQL etc.)
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The Product Agreement
Warranty rights, timing and duration can be used to save up to 1
year’s worth of support fees.
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Timing Warranty and Maintenance to Drive Savings
Agreement signing through Month 12
End of Month 12
Months 13–24Go-Live / Production Use
End of Month 24
Months 25-36
End of Month 36
Months 37-60
Vendor Approach
Warranty / Support
Commence
Warranty Expires
Defects Remedied as Part of Paid-For Support
Support Ends unless
Renewed
Option 1 Defects Remediated at No Cost as Part of Implementation
Warranty Commences
Warranty Expires
Support Commences / Defects Remedied as Part of Paid-For Support
Option 2 Warranty Commences Warranty Expires
Support Commences / Defects Remedied as Part of Paid-For Support
Key
Green = No Fees Charged
Red = Fees Charged
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The Implementation Agreement
1. scope of vendors services
2. metrics by which success is measured and payments made
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The Implementation Agreement
fixed fee
time and materials
not-to-exceed
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Pricing Models in Implementation Agreement
Pros and Cons to all models
Keys to negotiating:
1. Realistic balance of risk
2. Both vendor and customer protected
3. Realistic management mechanism
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Typical Problems with Vendor’s StandardRisk Sharing Proposals
• “At Risk” money linked only to delivery dates with no consideration for quality of Deliverables.
• No incentive to stay within T&M estimates.
• No consideration for the magnitude of a missed deadline, e.g., the same credit applied whether Vendor is late by a day, or a month.
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Key Features of Alternative Approach
• is milestone based
• provides for monthly T&M payments
• gives Vendor incentives to stick to estimates
• is not punitive/will not send Vendor to $0
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Key Terms
Implementation Fee Estimate: Not a fixed amount
Milestone Cost: The portion of the Implementation Fee Estimate allocable to each Milestone Event. Is proportionate to the Milestone Event. Calculated as:
Estimated Hours of Effort to Achieve Milestone Event x T&M Rates
Milestone Event: A naturally occurring project event that does not require separate administration or special oversight (e.g., Entry into UAT and Exit from UAT). No fewer than 4 or more than 12 Milestone Events.
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Example Scenario: Terms
• Implementation Fee Estimate = $1 million • Milestone Events = 5
• Milestone Cost = $200k per milestone (for ease of calculation assume the Implementation Fee Estimate is equally divided among Milestone Events).
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Example Scenario: Monthly Invoicing
Invoicing Activity
• Each month Customer is invoiced for and makes the Ongoing T&M Payments
• Ongoing T&M Payments measured against the Milestone Cost (i.e., the amount of effort x dollars that Vendor estimated to achieve the Milestone Event) • If aggregate Ongoing T&M Payments for a Milestone Event exceed the Milestone Cost for that Milestone Event . . . .
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Example Scenario: Rate Reduction
. . . . then the T&M rates from that point until the applicable Milestone Event occurs, are reduced:
Ex. Milestone Event 1
Milestone Cost = $200k Milestone Date = April 30.
In January 10 resources work 100 hours each at $100 per hour. In February, Customer is invoiced $100,000 (10FTEs * 100Hrs * $100).
Same resources / level of effort in February such that Customer is invoiced for and paid, total Ongoing T&M Payments of $200,000 (i.e., the amount equal to Milestone Cost) even though that Milestone Event is not yet achieved.
Consequently . . .
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Example Scenario: Rate Reduction (continued)
. . . . the work performed by Vendor in March and April will be at reduced T&M rates as follows:
Dollar Overage Percent Fee Discount
0 – 9%0%10% - 19% 10%20% - 29% 20%30% - 39% 30%40% - 49% 40%50% - 59% 50%60% - 69% 60%70% - 79% 70%80% - 89% 80%90% >90%
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Example Scenario: Rate Reduction (continued)
In March, 10 Vendor resources work 50 hours at $100 per hour. Without rate reduction, Customer would be invoiced $50,000. This would be a 25% Milestone Cost overage, so the actual invoice will be calculated using 20% discount from the table:
[((10 resources) x (50 hours)) x ($80)] = Invoice for Ongoing T&M Payments of $40,000
• Progressive discounting continues until Milestone Event 1 is achieved• Subject to timely Change Management – dates can be moved / Milestone Costs increased on mutual agreed terms in advance.
Once the Milestone Event is achieved . . .
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Example Scenario: Rate Reset
. . . the discount structure resets and Vendor goes back to full rates for the next Milestone Event unless/until
Ongoing T&M Payments again exceed the Milestone Cost for Milestone Event 2 at which time the discount is again triggered,
except that . . .
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Example Scenario: Continued. . . if prior to project completion, total Ongoing T&M
Payments for all Milestone Events reach 100% of original Implementation Fee Estimate then:
1. Recovery of Success Payment / Holdback will be lost; and
2. the rate reset for the next immediate Milestone Event will only be at 75% of Vendor’s original rates.
One additional safeguard: If Vendor refuses to complete project / reallocates key, identified resources:
• will be deemed abandonment subject to liquidated damages
• will relieve Customer of restrictions against using Vendor competitors
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Support / Hosting and Service Level Agreements
1. scope of support
2. metrics by which operation of software and quality of service
are measured
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Support / Hosting and Service Level Agreements
Avoid Hidden Charges
storage feesadministrative fees for telco
backup / DR fees“premium” offering fees
cancellation fees / conversion fees
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Questions?
Feedback
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Is a registered trademark of Hatos/Hall Productions and Stone-Stanley Productions and all visual and audio works related to “Let’s Make A Deal” that are used in this presentation are owned by them. All other contents of this presentation are Copyright 2000 – 2009 Richard L. Green and may not be used or reproduced without his permission.