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Issue of September 2002 
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Cover Story - Licensing Policy
A customer-centric software contract

Software vendors offer enterprises various software licensing options. Still, IS managers feel software contracts have certain shortcomings, and vendors aren't paying too much attention to customer considerations. by Brian Pereira

If you've read through the previous story, you're probably convinced that vendors are flexible when it comes to software contracts. We talked to IS managers to find out their side of the story. It was soon clear that these managers are generally unhappy about the way software contracts are formulated. Fluctuating license fees, arm-twisting tactics, poor tech support and hazy AMC conditions are just some of their woes. These managers also told us what a contract should ideally include (See 'What makes a good software contract').

Basically, there are three types of software used in enterprises: packaged products, partially customizable, and tailor-made software. Managers experience problems and uncertainties with all three when it comes to signing software contracts.

Packaged products are bought off the shelf and cater to general business automation functions such as messaging, word processing, spreadsheets, databases, presentations etc. In this case the customer has very little control on the licensing policy and the vendor is in a position to dictate terms. In certain software categories, there are few or no competing products in the market, and one has no choice but to deploy what everyone else is using. In such instances, the vendor enjoys a monopoly, and may resort to arm-twisting tactics.

Neeraj Bhai, CTO, IDBI Bank cites an example. "A certain software company recently imposed a two-year advance upgrade policy on organizations that use its software. According to this scheme one has to pay up for software that is yet to be launched, or be forced to use the outdated version. The cost of the two-year upgrade license works out to as high as 55 percent of the cost of the product. As a customer I want the freedom to upgrade as and when new software is available, and also in accordance with my business requirements."

Another issue with packaged software is pricing. Many feel it is unfair to impose international pricing here. Like other commodity products such as cell phones or sports shoes, there has to be special pricing for local markets. "The price of a popular office automation suite is almost equivalent to the price of an assembled Pentium 4 PC," says Neeraj.

"How can an end-user afford this? That explains why software piracy is so common here. The vendor should offer pricing suitable for the Indian market."

Then there is software which is generic but can be tailored to an organization's requirement. Such software is usually specific to a vertical (such as Banking and Finance) or core business functions (like ERP or CRM). In this case, IS managers feel there is no uniformity and transparency in pricing. Since the customer can negotiate the price, one cannot be sure if one is getting the best deal. The vendor could have sold the same software to another customer at a lower rate.

"I want the vendor to be transparent in pricing, and they should not only publish the price but also adhere to it," says Neeraj.

And if the software is completely tailored for a particular business, support becomes a problem and future upgrades are uncertain. There is no guarantee that the developer will be around later when one wants to make changes in the software. "In this case, the software should be completely documented and I must have full IPR (Intellectual Property Rights). With this in hand I can train my own team to maintain the software or outsource maintenance," says Neeraj.

Besides, there are other problems that IS managers face when purchasing new software or upgrades.

What makes a good software contract
  • Flexibility & choice - The option to upgrade when new versions/updates arrive and if they really need it. Also, user licenses should be available in smaller units.
  • Pricing - The vendor should offer pricing suitable for the Indian market.
  • Pricing - The vendor should offer a transparent price for the product and also publish it and keep it consistent.
  • Sales - Vendors should sell directly to customers especially for a large number of licenses.
  • Sales - Distributors, retailers and sales representatives must be trained well to sell and support the product.
  • Support - Vendors should offer stronger commitment through customer-favorable SLAs.
  • Support - AMC costs should be fixed upfront at the time of purchase. The terms of the AMC should be clear. AMC may include cost of upgrades. Also, AMC costs should not fluctuate every year.
  • Support - Vendors must be more responsible in protecting organizations against unforeseen problems, such as software interoperability. They should forewarn IS mangers about possible problems, so that decisions can be taken to avert unnecessary expenditure and downtime.
  • Training - Vendors should offer customers product training and orientation.
  • Documentation - Good documentation is essential in the case of tailor-made software. The developer should give the customer Intellectual Property Rights for future maintenance.

A majority of the complaints are centered on pricing and support. Apart from the imposition of international pricing, there is also inconsistency in both product pricing and support.

The product is sold through a two- or three-tier distribution model (vendor, distributor, and retailer). "At each tier the company is paying a price," complains Harsh Kumar, Advisor-IT, HPCL. "The purchase should be directly from the vendor, particularly where the number of licenses is large."

S.R. Balasubramanium, VP-Information Systems, Hero Honda Motors Ltd., feels sales representatives lack knowledge about the product and are unsure about support and licensing fees.

"In many cases, especially for high-end products like ERP, Enterprise Management Software, or other large packages, the list price has practically no meaning and the final price is entirely dependent on our negotiation skills. Vendors cannot be trusted and we have to call in competing quotes in order to get some realistic pricing," says Balasubramanium. "Some of the software comes with down-to-earth licensing and upgrade costs. But in many cases this is not clear. In areas where there is a monopoly, things are worse."

There are pot holes on the support front too. In many instances the distributor or retailer is inadequately trained to provide support for the product.

"The distributor or retailer does not know how to provide support for the product, and if we go directly to the vendor, he refuses support because we did not sign a contract with them," says HPCL's Kumar.

Hero Honda's Balasubramanium says in many cases support is either not available nor is necessary. Moreover, he feels there is very little commitment on paper as regards the SLA (Service Level Agreement).

Some feel the vendor isn't providing adequate training for the product. "The software vendor should check what percentage of the product features are actually being used. You may check in any organization about this aspect for the package they use. You will find that most of the users use only 20 - 25 percent of the capability of the package. Therefore, the question that arises is: 'Is the customer using the new features?' This is very important to evaluate the performance of the Tech support team. They should explain how the customer can leverage on the new features. Unless this is done, the product is underutilized and money is wasted," says HPCL's Kumar.

While an AMC ensures support, the terms of payment are inconsistent or unclear at the time of purchase. AMC cost also fluctuates every year due to three variables.

AMC cost is a percentage of list price. The vendor changes this percentage every year. The list price also changes. And to make matters worse, there is fluctuation in the dollar conversion rate.

"Because of this we are paying different AMC costs each year. Ideally, the AMC cost should be fixed upfront, before the purchase order comes along," says Mani B. Mulki, General Manager (Information Systems), Godrej Industries Ltd.

There are other problems that surface through experience and one of these is software interoperability. One IT manager was alarmed to discover that a key application turned problematic after he upgraded the operating system and office automation software across his enterprise.

"We use a solution for centralized management of applications. But we faced a problem with the software when we migrated to Windows XP and Office XP—the platforms we chose to standardize on. When we approached the vendor, they said we had to purchase an upgrade (which costs between Rs 4 - 5 lakh)," says Godrej's Mulki.

Some do not subscribe to the idea of selling licenses per desktop. They feel there should be concurrent licenses instead of named-user licenses. That is, they want licenses to be shared among different users in their company instead of a license being tied down to one particular user. Also, licenses should be sold in smaller units.

"Why should I buy a 500 user license when I know that at any given point of time only about 150 users or so will be using them? In this case the product is underutilized and we are spending more," complains HPCL's Kumar.

Then there is the problem of buggy software and its impact on business. "Is the software vendor willing to compensate for business losses affected due to buggy software?" asks a CTO.

Despite the various complains there are still good examples of software licenses or contracts. These can serve as ideal examples for others to follow.

"One of our better experiences was with Microsoft," reminisces Godrej's Mulki. "We find their advance two-year upgrade license scheme beneficial. They also offer discounts for a large number of licenses. We recently purchased 1,000 licenses for Windows XP and Office XP, which are used across our enterprise. We also had a good deal with Wipro Infotech. The company helped us in connecting our distributors and the cost and terms of the deal was good."

HPCL's Kumar who is all for concurrent licenses cites the example of Uniplex, a British office management suite. "You can buy 60 concurrent licenses, and 150 users in your organization can use the product as along as only 60 can use it simultaneously. In this example, the company saves on costs and the utilization is high," he says.

"One good example that I can think of is SAP," says Hero Honda's Balasubramanium. "They levy a standard charge of 17 percent as AMC which besides covering upgrades also takes care of support. Upgrades for ERP are certainly involved and take several man years of coding and testing before it is released, and it is surely worth paying for. In addition, they have one of the best support systems. When we encounter a problem we log in the complaint, which is attended by any of their experts around the world, and the matter is resolved expeditiously. In addition, we receive various information updates on a regular basis. The support network and the services are extraordinary and clearly justifies their upgrade license policy."

Brian Pereira can be reached at

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