Relations Management Group - A Primer for ERP Aquisitions

Strategic Negotiations | IT Outsourcing | Licensing Software | SW Implementation | Print Outsourcing | Computer Leasing | IT Pre-Nup's

IN TODAY’S DEPRESSED technology markets you have never been in a stronger position to negotiate a great deal on software. The recent drought of major software transactions is in its sixth consecutive quarter, license revenue is down and stock evaluations have been on a long trek south from their lofty 2000 highs. The independent software vendors (ISVs) are bending over backwards to cut deals and you should be prepared to exploit this situation, while staying clear of the pitfalls that have befallen others.

The main areas to be negotiated prior to your final ISV selection are initial software license fees and annual maintenance charges.

Initial Software License Fees

This initial fee is based on either the total number and type of users (“Seat License”) who will have access to the software, or the size (total number of employees, annual revenue) of the organization using it (“Site License”).

Maintain leverage by keeping a viable alternative ISV in the running until the final price is agreed upon. Typically the ISV will base its price on closing the deal prior to the end of the next reporting period, so time negotiations to coincide with the ISV’s financial reporting period to your advantage.

Think beyond the initial purchase. These ISVs sell integrated operations applications combining logistics, production, distribution, forecasting, financial and human resources modules. The chances of another ISV being able to compete for new or add-on modules will be remote at best. So even if you’re not planning on buying it all up-front, get competitive pricing for the other modules that interest you.

In a particularly competitive negotiation involving SAP and PeopleSoft, both had reduced their prices to half of the original quotes. These were unprecedented levels of discounting, according to both ISVs. When the victor was declared, number two was back with an unsuccessful attempt to cut another million dollars off the price. The ISVs will go as far as they have to go to win. Although the initial sale is profitable to the ISV, the annual maintenance charges and follow-on sales, to a now-captive user, are more so.

Software Maintenance Charges

The Annual Maintenance Charge (AMC) is the yearly payment to the ISV that gives you access to help desk services, bug fixes and new releases. The AMC list price is typically ten to twenty per cent of the list price of the software. You’re not going to replace the ISV, so count on paying AMC forever. Say you negotiate a 50 per cent discount on $2M worth of software. The AMC is 15 per cent of the list price or $300K - to be paid annually in advance. That’s 30 per cent over what you thought you were paying up-front, for software that will take over a year to install. Assume a five per cent annual uplift to the AMC. You’ll find that at the beginning of year four you will have paid more in AMC than you did for the original software. At the beginning of year six the cumulative AMC charges will be beyond twice the original SW costs and the trend continues at an accelerated pace. The 50 per cent discount on initial software no longer seems as significant a saving.

These AMC estimates also exclude any of the additional license fees you may have added, as well as any increase to the ISV’s list price since the original purchase, so the costs can escalate quickly in an area where you have absolutely no control.

Negotiate the AMC while the competition is still in the picture. If the software license fees are negotiable, then any fees tied to the price of the software are negotiable. Base the AMC on a percentage of the “net” price versus the “list” price. Don’t fall into the trap of a temporary set-off of the fees only to return to full price at some time in the future. Set the annual fee and cap the annual uplifts.

Finally, don’t forget to work in some free consulting services and education or training credits. Consultants can get you through the tougher implementation areas a lot faster than your implementation partner. The free or discounted rates for instructors to train your staff on the application tools used in configuring the software or on the software modules themselves are also an often overlooked opportunity.

RELATIONS MANAGEMENT GROUP
50 Prince Arthur Ave., Suite 1603
Toronto, ON, M5R 1B5
Phone: (416) 920-2228
Email: phil.downe@itnegotiations.com

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