Clifford Chance

As the tech industry transitions to a subscription model, both in hardware and software, companies that have relied on long-term licenses are facing aggressive efforts to convert.  These may come as licenses expire or through interim interactions such as audits or upgrades, any of which give vendors with deeply embedded products an opportunity to pressure their customers to “upgrade,” often at significant price increases for substantially similar products or services.

Companies that license hardware or software should prepare for these pressures by ensuring they are familiar with their vendor agreements, and that they are aware of agreements coming to an end.  Companies should also prepare for seemingly routine interactions, such as license audits or negotiations, to become adversarial, and should understand and prepare to assert their own rights in the process.

Companies also should prepare proactive strategies of their own.  Under pressure to seek revenue, vendors have taken to tactics such as retiring contracted-for services early, unilateral updates to terms, and bundling unwanted and core services.  Companies can improve their negotiating positions by being prepared to assert their own rights, including through the threat of litigation if necessary.

THE TEN KEY ISSUES

1. Expect Vendors to Exert Leverage

Assume vendors will push for product upgrades at higher prices. Vendors often use negotiations and audits as tools to push for product upgrades or additional purchases, at significantly higher prices. Be prepared for this tactic and engage in negotiations with a clear understanding of your requirements and limits. 

2. Know Your Contracts

Conduct an inventory of your agreements to help avoid surprise. The pressure situation of an active negotiation is too late to begin pulling together your historical agreements.  Conduct an inventory of your business-critical agreements, including contracts, addenda, and purchase orders, and identify key trigger dates including expiration dates, renewal notice or termination periods.

3. Understand Key Provisions

Familiarize yourself with the critical clauses in your license agreements. Refresh your knowledge of renewal terms, breach definitions, termination clauses, audit provisions, and dispute resolution mechanisms, and carefully review and understand the terms of all software license agreements.

4. Centralize Your License Management Processes

Implement a centralized system to manage all software and hardware licenses, track usage, and ensure compliance.  This system will help you monitor license expirations, renewals, and any discrepancies in usage, alerting you to potential issues before they escalate. To limit these potential issues further, educate employees about the importance of compliance with “use” limitations and other license terms.

5. Clarify Company Goals

As you enter negotiations, clearly define your company’s objectives for the negotiation process. Identify a single point of contact for negotiations to ensure consistency and clarity.

Define and understand your company’s negotiation objectives. Having a clear set of goals will guide your strategy and help you stay focused during negotiations.

6. Prepare a Defense Plan

Develop a plan to respond to any audit notice or negotiation as soon as the scenario presents itself. This plan should outline the steps to take, including who to involve, how to respond to communications from the other side, and desired outcomes.

7. Involve the Legal Department Early

Determine which department will handle negotiations. Often the business will view negotiations as a technical task and involve the Legal Department only as the agreements need finalizing.  The negotiators may realize too late that a negotiation has become strategic or adversarial.  It is important to involve Legal at the outset of negotiations to avoid being surprised by adversarial tactics. Planning the negotiation and the escalation process can help ensure that communications are strategic and aligned with your goals.

8. Scrutinize Informal Inquiries

Treat informal queries from vendors with caution, as they can be precursors to formal audits or tools used to gain concessions before the company’s defenses are in place.  Always respond with care to queries from vendors, ensuring answers are accurate, and avoiding any concessions or admissions of wrongdoing.

9. Avoid Concessions

During negotiations, audits, and other interactions, avoid conceding positions that may be used against you.  This is especially important in the context of license audits, where vendors may attempt to allege license breaches to create leverage in negotiations.  Maintain a firm stance and ensure that any agreements made are in your company’s best interest.

10. Plan for Alternatives

Identify alternative software providers as a back-up. Identify alternative vendors in advance, to reduce the leverage legacy vendors may exert as business-critical licenses expire.  Determine if an alternative provider is available, the cost, and lead time for switching. Understanding your alternatives provides leverage in negotiations and ensures continuity in case of a dispute.