The renewal of major software licence agreements is the number one area where enterprise organisations can save money on their software spendsave money on their software spend. Most software licensing agreements with major vendors such as Microsoft, IBM and Oracle are renewed after a set period, either annually or over a three-to-five-year period. During the period of the agreement, even with mature Software Asset Management processes in place, there is usually little room to significantly reduce costs as the customer is contractually bound to the software licences it has procured as part of the existing agreement.
At renewal time however, businesses who choose to be proactive over their software control can reap the benefits of a well-managed software licensing strategy, ensuring their future agreements are right-sized to their business requirements, take advantage of advantageous licensing terms and are suitable for future growth plans.
By understanding the usage of software deployed within a business across the desktop, virtual and cloud networks, enterprise customers can build an accurate picture of their requirements to begin contract renewal negotiations on a firm footing. This is combined with a good understanding of the licensing options made available by the software vendors, a firm vision of the customer’s future licensing requirements based on growth and digital transformation plans and a strong negotiation strategy.
Many companies do not have a good level of control over their software licensing, and do not plan sufficiently to understand their current and future software requirements. In these businesses, when a software licensing renewal alert arrives 30 days before contract expiry, the IT and Procurement stakeholders do not know exactly what and how much they should renew, cancel, or purchase extra.
Furthermore, a customer who is seriously under-prepared for a major software contract renewal is signalling to their vendor that they do not have control over their software governance, risking a licence compliance audit being triggered – a potentially costly and disruptive scenario that most customers wish to avoid.
To effectively renew a software licence agreement on the best terms for the customer organisation, a reliable Bill of Material (BOM) must be produced. This should reflect not only the latest usage but also factor in changes in the coming year – growth or reduction. It takes time to produce the BOM correctly and it must be able to stand up in a vendor audit.
If the customer renews too much, they are wasting money. If they renew too little, the customer will either get caught out in an audit and pay a substantial and unbudgeted settlement fee, or the customer must buy transactionally mid-year to top up licences at a much higher cost. Many vendors will also charge a “re-instatement” fee for lapsed renewals, which can be three to five times higher than “normal” renewal costs.
For major software renewals, customers should always prepare in advance, in fact, the optimum time to begin preparing for a renewal is on the first day the previous contract was signed. In reality, the time organisations should give themselves depends on which vendor and the size of the customer company. It is advised to allow three to six months minimum to produce a reliable BOM in an enterprise organisation for tier one vendors – Microsoft, IBM, Oracle, SAP.
It is important for a customer organisation to compile their BOM themselves, or at least with an independent licensing advisory partner, using facts rather than the vendor reseller’s sales team. This will allow the customer to shop around and get competitive quotes and undergo commercial benchmarking of the agreement.
A reliable BOM is not the only important factor in software optimisation and contract negotiations, but it is the beginning of a more effective negotiation strategy and will significantly strengthen an organisation’s position when negotiating a major software contract renewal.
Eric Chiu is the Co-Founder and Managing Director of FisherITS and shares his expertise in software licensing with organisations to help protect their investments and operations in IT. A veteran of software licence compliance, Eric is experienced in the design and management of software licence compliance programmes for many top 10 software publishers and has led hundreds of enterprise-level licence audits. In recent years, Eric’s focus has been on giving strategic and tactical advice in establishing Software Asset Management to a diverse range of clients, from SMEs to large enterprises.