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Understanding Software Contracts

How to Go Through Your Software Contracts Before a Negotiation

You’ve been handed a software contract in the wake of a negotiation with your software vendor, and it’s an inch thick with tiny font and a lot of words you’ll need a dictionary to look up. Now what? How can you tell if there are any saving opportunities that can be utilized in this agreement? Or (in the case of a software audit) how can you tell if you’re as far outside of compliance as the auditors say you are? The answer lies in understanding software contracts and how they function.

The preparation right before conducting software negotiations is a very important step that shouldn’t be taken lightly. Even if you have a strong relationship with your vendor, you need to ensure that you’re not placing the fate of your software environment into their hands. No matter how nice they are, their goal is to have you buy more licenses, regardless of what is best for you. Don’t rely on the software vendor to tell you what you need, only you can do that. So, how do you scan your contract to see if there is room for savings? To the untrained eye, it can seem like a daunting task consisting of hours on hours of mindlessly flipping through seemingly useless information. If you know what you are looking for and depending on how organized your software environment is, it may only take you an afternoon.

At MetrixData 360, we have ripped into contracts that we’ve never laid eyes on before and have been able to pull out hundreds of thousands of dollars in savings. So, in this blog post, we’ll show you some of our methods.

Details, Goals, and Additional Documents

When reviewing your contract, take the time to highlight any date or specific numbers (when does this contract begin? If you have a discount, how much is it for and how long will that discount last? etc.). Next, make sure that you have at least a basic understanding of what your contract is trying to accomplish. Is it a new count to your software environment? Are you trying to reduce the licenses? What will you have after the license is enacted as far as new software licenses? Are there any additional documents that you need to have with you to fully understand the document, such as a Product Use Terms document. Knowing what you’re looking at and the details surrounding it will be the foundation of your understanding.

Related: Dealing with a specific Microsoft software contract? Check out our articles for more tailored details: Microsoft SPLA Contracts Explained and Getting Ready for a Microsoft True-Up

Check Your Software Contract for Fees and Additional Expenses

Now that you have the basic outline of the contract, what it is trying to do, and what other documents you’ll need to consult to understand it, the next thing to do is find any mentions of fees, costs, or price increases over time. Find anything relating to the schedule of payment; is the contract asking for a lump-sum payment or installments? If so, what will your annual payments look like? Make sure you have a clear distinction between your purchase of the software and any payments needed to maintain the software. Make sure you consider all these additional costs to the software, as sometimes the software vendors can add on additional fees that make the overall product cost more than it’s worth.

However, it’s important to remember that your goal is to cut costs, not to shoot yourself in the foot and take away from value through undermining services. Maintenance is a good example of this, since most software companies charge 20% for maintenance which means over the course of five years, you can very easily end up paying for the software twice. Maintenance is the bread and butter for software companies, so they will be keen for you to simply passively renew your maintenance, but it is important you challenge this to weigh costs against benefits.

Look up the Definitions

Your goal is to reduce what you don’t need but before you can do that, you will need to examine the definitions of the contract since this entire process may involve a lot of slogging through the intricate and confusing language of the software contracts. Just remember though, you’re not looking at this from a legal perspective, so there are whole paragraphs in this contract that will be of little value to you. While it might be useful to know definitions like ‘Confidential Information’, and ‘Documentation’; and paragraphs like ‘Representatives/Services’, it doesn’t serve the purpose of this exercise, so it will just be extra homework for you. What you’re looking for is anything to do with:

  • How you count your licenses
  • How you pay
  • When you pay
  • What you pay


So, terms like ‘System’, ‘User,’ ‘Disaster Recovery,’ ‘Dev/test licensing,’ and ‘Invocation’; and paragraphs like ‘License Fee, Taxes and Expenses’, ‘Hardware’, ‘Master Software Support and Maintenance,’ and ‘Audit Rights/Compliance’ should be things that catch your eye. As you read, make note of any terms with similar definitions. For example, let’s say you notice ‘Web Users’ and ‘Occasional Users’ have strikingly similar definitions when it comes to the number of hours your users have to run the software and the privileges they need in order to qualify. If that is the case, investigate if it is cheaper to be considered a Web User or an Occasional User, and see if your company’s Users could be counted exclusively as the cheaper option.

The good news is that within the contract you will find whole pages filled with nothing but legal jargon that you can just briefly skim over to see if you can find any words like ‘license’, ‘user’, or ‘price’. While the document may be over 50 pages, skimming in this high manner should result in you spending maybe an hour reading.

Consider Next Steps

Alright, you’ve read through your contract and you’ve pulled out all the necessary information, so what do you do with it now? There are a few things that you can do with this data:


    • Compare Your Deployment Data:

      Now that you have a clear understanding of what you have and what you’re signed up for, compare it with what you have in your software licensing environment. You may find usage that doesn’t match what you’ve paid for; it may be either too high or too low. You may also notice a consistent pattern in the usage, for example maybe there is a spike in usage for the last half of the year and so you have purchased licenses to account for that spike, but you are paying all year round. Data patterns like this would suggest that investigating a licensing type to accommodate for this fluctuating usage (for our example, a subscription license would be perfect) would be well worth the effort.


    • Check Your Ammendments:

      Make sure you also consult any amendments your company has made to the contract in the relevant years. Just like with the definitions, you are looking for things revolving around payments and licenses, examples of relevant amendments would include increasing or decreasing licenses or maintenance. You will also want to look for any amendments that alter the definitions of the contract, especially if the definition is involved with users or licensing types.


    • Holes in Your Contracts:

      With all this careful scrutinizing and confusing legal jargon, you may find that you have questions that your contract doesn‘t answer. Is there a term missing? Are there grey areas around what you can and can’t do with this license? Are there True-ups and have they been clearly defined? Seek clarification in any areas where the rules are not laid out clearly. If you are in the middle of a software audit, grey areas might prove useful to you. Depending on the exact wording of the section in question, you may be able to make the case for ‘it’s open to interpretation and this is how we have interpreted this’.


  • Start Prepping for Your Negotiation:

    Now that your investigation has concluded, you can compile the information you need to conduct a successful contract negotiation. You understand your software contract, its amendments, its supporting documents, and you can point out any grey areas. You know what is deployed in your software licensing environment, you can see what you’re using and how it compares with what you’re paying for, which will allow you to spot cost-saving opportunities. Create a list of questions and talking points based on the facts. You can now focus your attention and budget on what you need instead of guiding yourself by guesswork and good intentions.

Still Confused?

It’s not like these contracts are the stuff you curl up with on a rainy Sunday afternoon to read with a cup of tea, but if you want to cut costs in your software environment, if you want to be prepared for an audit or a software contract negotiation, you’ll need to understand what makes your software contracts tick. At MetrixData 360, we provide our clients with all the heavy lifting when it comes to understanding their software contracts, we usually act as our client’s secret weapon, telling you what you need to say to the software vendors and how you need to say it. If you’d like to learn more about how MetrixData 360 can help you get the best software contracts for your company, you can check out our Contract Negotiation Page.

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