Presented by:

Rich Greenrgreen@rc.com860.275.8325

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.