A clause for alarm
Published: 17 Jul 2002 08:50 BST
One of the biggest dangers in negotiating a software contract is not understanding a product's upgrade schedule, said Selwyn Goldberg, a partner with Palo Alto, Calif.-based law firm Wilson Sonsini Goodrich & Rosati, who represents clients on both sides of the negotiating table in corporate software contracts.
"A customer needs to know how many versions of the software will be supported and for how long," Goldberg said. "The biggest danger is (that) a customer may buy version 2.0 and spend a lot of (time and) money adapting the software to a particular environment. But then the vendor says they're moving to version 3.0 and won't support 2.0 in the next six months."
* "Perpetual licenses" allow customers to use the software for the life of the product, providing they continue to pay the contract fees. Yet suppliers will often discontinue maintenance and support of the product after several newer versions have been released -- rendering the software useless.
Industry experts say customers need to know whether these licenses apply to specific individuals or computers and whether they include maintenance fees that cover support and upgrades to the purchased product. These fees can often cost far more than the original price of the product.
"People can get suckered by that," Goldberg said. "They'll spend millions of dollars on software, and it takes three years to get it where they want it, and then the support for their version is about to change."
* "Entity based" pricing or "right of use" clauses are used by most software providers and restrict software usage to a computer at a specific company or governmental agency. A license may apply to a customer's headquarters but not its subsidiaries, consultants or acquired companies.
"Back in the late 1980s and early 1990s, Computer Associates International received a lot of adverse publicity for springing things on its customers," Davidson said. Although "right of use" clauses were written into the contracts, he said, a number of the company's customers weren't aware of those terms or ended up in court to dispute their meaning.
That was the case with National Car Rental System, which signed an agreement in 1990 to use CA's software for internal operations and processing its own data. But after National used the software to also process data of such companies as Lend Lease Trucks as part of its business operations, CA threatened to sue the company and the two parties became embroiled in a lawsuit with multiple counterclaims before eventually reaching a settlement.
Stephen Richards, executive vice president in charge of Computer Associates' global sales, said much has changed over the years in the way customers work with CA and other industry players.
"Today, people have a much greater understanding about the way license agreements work and do a better job with communicating and knowing how to better align their software needs with their business objectives," Richards said.
* "Compliance or mandatory audit" clauses should be avoided at all costs. Suppliers will use these clauses to audit your systems -- often finding customers out of compliance and maneuvering them to upgrade their current contract or pay hefty fees. In this weak spending environment, you have the edge in getting this clause waived.
Companies and governments tell countless stories of suppliers auditing their systems and finding them "out of compliance" with their original software licenses, sometimes years later -- then requiring customers to pay more accordingly.
"You want to exclude all mandatory or forced audits," said John Meyer, an analyst at Giga Information Group. "It forces you to renegotiate on their terms."
* "Named users" usually means the software is licensed to a specific customer's computer. But analysts caution that the term is ambiguous and must be clearly defined by the supplier in terms of a contract.
"'Named user.' What is that? A named user can be anything. It could be a power user, it could be an individual, or it could be a machine that's loaded with the software," DeSalvo said. "And what is 'concurrent user?' It could mean using the same logon with different computers at the same time or using the same computer by more than one person at the same time."
* "Concurrent users" encompasses a set number of people allowed to access the software, without regard to who they are. Like the term "named users," analysts note there is much ambiguity and make similar recommendations.
* "CPU based," or "per processor," licensing is based on the number of microprocessors that power the computers using their software. A number of large software makers have switched to this pricing policy in an effort to avoid the ambiguity of named or concurrent users.
* "Warranty disclaimers," "remedy limitations" and "liability limits" need special attention. A contract should call for a timely correction of defects, not merely attempting or making a good-faith effort to correct them to meet the required standards of performance. If a business suffers as a result of this problematic software, then the supplier should be accountable for reimbursement up to the amount paid under the contract.
* "Estimated pricing" and "projected completion dates" are virtually useless, given projects rarely come in at or below original estimate. Cost and timing should be specified.
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