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Quick Guide to Licensing Agreements: The Software Maintenance Game (Part 3/3)

the-software-maintenance-gaTimothy Nuckles is a technology lawyer from Madison, Wisconsin. He runs Nuckles Law , a technology law firm specializing in helping companies do better deals with IT Procurement.

In this series Tim gives us a quick guide to negotiating more favourable licensing agreements.

•    Part One – Tipping the Balance of Agreements towards Clients
•    Part Two – Future Proofing Contracts by Maximising Flexibility
•    Part Three – The Software Maintenance Game

PART THREE – The Software Maintenance Game

As we all know, there’s a lot of buzz these days about inflated maintenance charges. Frankly, I think users of commercial software are moving beyond frustration and on to anger, and reading articles about the 85% profit margin that Oracle enjoys on its maintenance fees, for example, only fuels the fire.

In addition to introducing flexibility on maintenance terms (Part 2), software buyers should keep the following points in mind when negotiating maintenance terms and options.

  1. There’s the notion that a chunk of software may be entirely new to a buying organization, but the software itself may be old. Buyers need to gauge where a software product is in its lifecycle, and react to maintenance options accordingly. Naturally, if the software has a grey beard, there probably won’t be another major release. So, why pay for something that you’re never going to receive?
  2. Second, most of my clients pay maintenance on most of their applications, but they rarely install updates (everything works fine for them and they don’t want to risk an adverse event that might result from installing an update). This makes no sense to me (the paying for maintenance part). If your organization never installs updates, then why ever sign on for maintenance at time of acquisition? The same is true if you updated for some time period, but haven’t in recent years. Drop the maintenance! You may not be eligible for support at some point after going naked on maintenance, but that is not an issue for many organizations, especially for mature deployments.
  3. Third, software buyers need to stop being angry about maintenance costs and doing nothing about it, in my opinion. Some new concepts are gaining traction and may eventually change the nature of software maintenance permanently. But software buyers must start demanding alternative maintenance options in order for these new concepts to take hold.

One new concept is “reverse maintenance”, and the notion is this. Instead of paying up front for something that I may never receive (or not want if I do receive it), why can’t I pay later for the something; that is, when I receive it and if I want it? Seems fairer to me, and it would actually incent software vendors to create and improve their products. Under the current model, software vendors take in the same amount of maintenance fees regardless of whether they deliver anything (of value) in return.

The other new concept is “pay for performance”, and one version of it works like this. You pay your maintenance fees up front, but you are entitled to reimbursement depending on what your vendor actually produced during the prior maintenance revenue period. One obvious shortcoming of this approach is that it incents your software vendor to produce something during a maintenance revenue period, but not necessarily something that is of value to users. Should the reimbursement metric be based on volume of stuff produced, value of stuff produced, or both? If value figures into the equation, how are we to measure value?

In all events, software buyers want and deserve better (more realistic) maintenance options. If software vendors don’t respond with a better maintenance model, more and more software buyers will opt for no maintenance—whether at time of acquisition, or perhaps sooner in an application’s lifecycle.

Just to clarify, when a software buyer chooses not to buy maintenance at time of acquisition, or should a buyer attempt a reverse maintenance or similar concept, the buyer can expect to pay a higher license fee. This is to be expected, and it will vary across acquisitions, but the hike in the license fee will usually be much less than the sum of (normal) annual maintenance fees paid out over the life of the application.

Timothy Nuckles is a technology lawyer and runs Nuckles Law.

About Martin Thompson

Martin is owner and founder of The ITAM Review, an online resource for worldwide ITAM professionals. The ITAM Review is best known for its weekly newsletter of all the latest industry updates, LISA training platform, Excellence Awards and conferences in UK, USA and Australia.

Martin is also the founder of ITAM Forum, a not-for-profit trade body for the ITAM industry created to raise the profile of the profession and bring an organisational certification to market. On a voluntary basis Martin is a contributor to ISO WG21 which develops the ITAM International Standard ISO/IEC 19770.

He is also the author of the book "Practical ITAM - The essential guide for IT Asset Managers", a book that describes how to get started and make a difference in the field of IT Asset Management. In addition, Martin developed the PITAM training course and certification.

Prior to founding the ITAM Review in 2008 Martin worked for Centennial Software (Ivanti), Silicon Graphics, CA Technologies and Computer 2000 (Tech Data).

When not working, Martin likes to Ski, Hike, Motorbike and spend time with his young family.

Connect with Martin on LinkedIn.

2 Comments

  1. Dennis Diamond says:

    I think a new approach needs to be tried by commericial software consumers in regards to the composition of maintenance

    fees. SW vendors are pushing maintenance to rates north of 18%, sometimes as high as 25%. The impetus behind this is the client’s

    belief that they need 24×7 support. IT procurement or corporate purchasing is not in a position to challange this view successfully,

    so signing up for such coverage is moving towards a standard in some IT shops. Since it seems “all about support” these days and

    not code fixes or upgrades as Tim’s article addresses, consumers should start demanding an unbundled approach to maintenance (code

    updates) and support (phone, email etc). By decomposing these two deliverables, clients can then pay for the upgrade to 24×7 for

    support by not buying maintenance or in future renewals not renewing maintnenance and keeping support. This decompositon has sales tax

    implications in some states where code changes are taxable and support would not be (since it is a service and not a tangible good).

    One can argue about what the breakout should be (an analysis of some vendors’ 10Ks might help reveal the breakout), but choose a number:

    50/50 60/40 75/25 … whatever. Just start pressing for the right to buy one without the other. Then when the vendor demands a

    premium for 24×7 it will only be on the support fee and not the maintenance which should not have been impacted by the number of hours of

    coverage in the first place. Run the numbers and you will see that each time you add 3-5% for 24×7 most of it is pure profit. I won’t

    even address the issue of whether anyone really calls and gets material help at 2AM local time, but try testing that one before you sign

    up for it. Support ain’t pizza, guys. It rarely comes hot at 2am! it r

  2. charlie says:

    Actually I am trying a bit of a twist on pay for performance , which is to pay for a portion of the maintenance

    at a reduced rate up front and a scaled performance incentative when they perform to satisfaction .. so Instead of whatever their

    standard overing is .. the discussion is that my experience that unless I receive real tangible benefit in what I receive and due to

    economic times they get to get rated on their performance for the year and every year there after, scorecarded.. It’s not just the

    origainal deal but subsequent renewals and what value they bring.. It’s simply not a recurring rate with some caps or flatlined..

    depending on size of the vendor and other criteria these can actually work to buyers benefit.. I get graded they should to.. Whether

    they get futher business opportunities to expand their product use is tempered by what they have delivered both in service sla s and any

    other effiecent reductions in some other area..

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