As we approach the end of the calendar year, many organisations will experience the ritual of software licence renewal demands from their software providers. In many cases these may be expected, but in some cases not.
For both these scenarios, it’s worth having a gameplan to hand. In this article we’ll take you through a systematic approach that will ensure you understand your organisational requirements, are cognisant with the current state-of-play and know what best-in-class looks like, to facilitate a successful renegotiation of your IT software contracts.
1. Check software usage
Check if the software is still used or if it is something that has been superseded since the last renewal. If it is still used, what are the licensing metrics (e.g. number of users, number of transactions) and what is the current count of those metrics?
Looking forward, consider if the count of the licensing metrics is likely to go up or down. Understanding these things will enable you to decide if the renewal is required and if any true-ups or true-downs need to be negotiated.
2. Determine planned future use of software
Check with IT if this software forms part of a solution that will require review in the next 1 – 3 years. You may need to consider this at a software component level if the renewal is for multiple products.
If the software will be used over a longer period then, in some cases, longer periods of renewal will yield either additional discounts or periods of extended price-hold. For longer periods of renewal, it may also be possible to negotiate staged annual payments. If the software is deemed as a potential divest technology, then a shorter renewal term with pre-negotiated extensions may be a consideration.
3. Review the terms of your software licence agreement
The licence agreement may be on-premise or SaaS where a renewed subscription is required.
The licence agreement should be scrutinised for terms such as discount protection. Future renewals may have a guaranteed level of discount or a maximum level of increase. If there is discount protection in the licence agreement then this may be linked to a limited number of renewals after initial signing.
In this case it may be worth considering a longer period of renewal to take advantage of this.
4. Ensure you are issued with line-level renewal quotes
When negotiating software agreements, pushing for commercial transparency is key to a successful negotiation. Renewal quotes are often summarised making it difficult to check pricing, benchmark and negotiate. Software providers will supply line-level quotes if requested, although not always willingly.
5. Benchmarking
Once you have a line-level quote, this should be benchmarked. Benchmarking a line-level quote for most popular software products is not as complicated or as expensive as often perceived. In a single source negotiation, with the absence of competitive tension from a competing supplier, the benchmarking insights will provide a firm and credible basis for the negotiation of the renewal amount.
6. Negotiation
Your company is now ready to negotiate. You know what metrics you have consumed and what the likely usage is going forward. You know how long the software will be used for, and any special renewal terms in your licensing agreement. Lastly you have a benchmarked line-level quote which will enable a credible basis of negotiation with the supplier.
Through skilful use of these different levers, you will now be able to negotiate the best possible renewal deal for your business.
