CIO's Guide To Creating Sound Software Contracts

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Writing a comprehensive software contract is challenging, especially when you're dealing with a large, complex deployment. As a CIO or other IT leader, you'll find yourself on the front lines of such contract negotiations. Let's face it, if you wanted to spend your days negotiating contracts, you would have gone to law school instead of pursuing a career in IT.

Still, the details of your contract can make or break the success of a software deployment for your company. Crafting comprehensive requirement documents, monitoring the licensing terms, and being aware of potential gotchas will help ensure a contract works for you, your business, and the vendor with which you've chosen to engage.

It's important for you to start the procurement process by outlining the desired features of a software system in a requirements document. Knowing which features are important to your business, and which are not, is vital to the process.

"The lines of communication between IT and the business units need to be open, so the CIO has a clear picture of what the individuals that will use the system need," said January Paulk, senior ERP consultant with Panorama Consulting Solutions, in an interview with InformationWeek.

The document needs breadth (identifying requirements covering specific functional areas), as well as depth (detailing requirements in each area). The contract should include stipulations for new requirements that may surface during an implementation, and as the client you need to be sure that such workarounds do not cause lengthy delays or cost overruns.

Get Ready to Negotiate

Striking a deal with a software supplier requires negotiation. While not every item in the deal is negotiable, many are. Increasingly, vendors focus on free trials, and provide free special features. However, it's important that you're not swayed by the free stuff. Such items are sometimes ploys to prop up a vendor's underperforming product. "With free items, the customer needs to be clear how long they can use the item, as well as what modifications they can make to it," said Joe Galuszka, vice president and principal consultant at Forrester Research, in an interview.

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Licensing is a complex area. Many CIOs and other IT leaders end up buying too many licenses in unnecessary modules, ordering seats for too many users, or ending up with shelfware -- features purchased but never used. Adding to your software licensing purchase over time is easier than trying to scale back on licenses to which your company has already committed. In the latter scenario, the vendor will try to ensure the contract's original terms are met, and this could end up costing you unnecessary fees.

It's important for you to understand any add-on costs. According to Panorama Consulting, software itself accounts for less than 25% of the average TCO (Total Cost of Ownership) for most implementations. The remaining 75% is found in items such as training, consulting, and maintenance.

Nowadays, professional services represent a key part of a deployment. Such services typically start at the beginning -- when the client works with the supplier to determine how to connect the new system to the company's existing applications. They extend throughout the life of a product as new releases are delivered. You need to be clear on which enhancements are covered by the contract, and which ones represent extra charges.

Remaining Up-to-Date

Training is an important area. Here, the vendor transfers its knowledge to you and your IT staff, and sometimes to your end-users as well. Product updates arrive regularly, so it becomes vital for your employees to understand how to use new features. Make sure your vendor is clear about how long any education is available, how many employees will be trained, and how the training will be conducted.

Knowledge transfers also occur at conferences and other special events. Vendor- or industry-specific trade shows, such as Microsoft's TechEd and VMworld, offer a wealth of implementation information. But attending these shows can be costly, with conference passes ranging from $2,000 to $4,000. Including a number of free passes to such events in your contact lowers your overall system costs.

If funding for your project is tight, you can volunteer to be a reference case, which usually means receiving a discount. Once the vendor accepts your business as a reference case, the terms (how much time, how many vendor phone calls you'll need to take) need to be outlined in the contract. But before taking this step, you'll want to consult with your company's legal team, and make sure you're clear about any broader ramifications to your business that could result from acting as reference case with a specific vendor.

Be Prepared for an Unexpected Change

Finally, watch the contract wording closely. An "Evergreen Clause" is a renewal that is automatically invoked after the initial negotiated term expires. These clauses should be avoided because your business, not your software vendor, should control the renewal process.

In today's highly competitive high tech industry, vendor reorganizations, failures, mergers, and acquisitions are common. By 2020, market research firm International Data Corp. estimates that 30% of today's tech suppliers will not exist in their current form -- having been acquired, being dramatically altered, or having failed.

Whenever vendor companies merge, some solutions are dead-ended. Contracts typically include a maintenance period during which the vendor will be required to provide support and, ideally, updates, but the supplier may try an end-run around such agreements.

"The vendor may change the name of the product, which impacts the contract terms," said Liz Herbert, vice president and principal analyst at Forrester Research, in an interview. Companies need to include language in agreements that safeguards against such ruses.

When you're negotiating a cloud-based deployment, system downtime becomes a key contract issue. Many Service Level Agreements (SLAs) include provisions compensating the client for downtime. CIOs need to be specific, but also fair, about which problems require a payback and how much compensation is appropriate. "Businesses do not have 100% uptime when running their own systems, so expecting such performance from their vendor is unfair," said Forrester's Hebert.

Software negotiations often pit a customer against a supplier, each focused on their own best interests. To craft a sound deal, CIOs need to understand where potential contract potholes lie, and then make sure that they skirt them.

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