META Report: 14 Warning Signs of Poor ELAs

The combination of a March 31 fiscal year end (Computer Associates, Compuware), low

OS/390 MIPS growth, and a tough economic climate will generate an increased percentage

of poor independent software vendor (ISV) enterprise license agreements (ELAs) this

quarter (and throughout 2002).

Although most large ELAs are straightforward, approximately 30 percent will contain

poor pricing or terms and conditions (T&Cs) that users must avoid. In addition, ISVs

are deferring advance ELA renewal negotiations to the last minute, which further aids

an ISV’s negotiating position.

Given these factors, plus the increased tendency of individual sales representatives

to employ deceptive practices in a tough economic climate, users must manage

enterprise ELAs more carefully, refusing to sign until fairness and value analyses are


Beware Capacity Pricing’s ‘Last Hurrah’

Related Stories

META Report: Avoid Paying Extra for Licensing Fees

JDE: Back to the Present?

Consolidation Forecast for Software Vendors

When Vendors Turn Vicious

One of the costliest pricing structures is one that binds all product pricing to total

MIPS capacity. Although equitable where systems management products use all MIPS,

independent software vendors often bundle lightly used products (e.g., those that

operate on one to two logical partitions into capacity-based pricing. This generates a

200%-500% price boost for limited-use products, lasting three to five years. Some ISVs

may try to push these schemes near term, because capacity pricing will begin

disappearing after 2004. The emerging IBM License Manager (ILM) product (generally

available in the second half of 2003) contains a Sub-Capacity Reporting Tool that will

ultimately include ISV product usage reporting (2004/05), enabling users to better

negotiate ELAs with light-use product pricing based on accurate usage statistics, not

capacity MIPS.

Where users must negotiate large ELAs now (e.g., expirations), we recommend two

tactical approaches. Users can negotiate steep $/MIPS discounts (e.g., 50%-90%) that

reflect partial usage (10%-75% of MIPS) or can exclude these products from the ELA,

offering to pay list price (based on used or tiered MIPS). By 2004/05, as

sophisticated IBM and third-party monitoring tools evolve, these tactical strategies

will be unnecessary.

Discuss ELA Trends

What tactics are software vendors using to capture your business on their terms? Discuss what you’ve experienced and offer advice in the CIN Forum. Click here to discuss this topic.

New to the Forum?Click here for quick registration.

Visit the CIN Forum Homepage here.

14 Warning Signs of Poor Enterprise License Agreements

We recommend examining enterprise license agreements for the following pricing, usage,

or contract clause conditions. Where users uncover problems or questions that cannot

be resolved quickly or to mutual satisfaction, they should postpone negotiations (if

applicable). The primary characteristics of a poor ELA include:

  • Capacity-based product pricing: Many products use 100% of capacity, but

    numerous ones do not. Users must exclude partial-use products from ELAs based on

    capacity pricing (flat-rate $/MIPS) to avoid a substantial overcharge for light-use


  • Annual 10% or greater price increase:This price-gouging tactic implements a

    10%-15% annual price increase throughout the five-year ELA (61% increase, compound

    rate). ISV product pricing rarely increases more than 3%-5% per year.

  • Higher than list price: Many ELAs (15%) are priced above list. Some ELAs

    are based on single-CPU rates and fail to include the ISV’s 25%-60% secondary CPU

    discount, which generates a rate lower than the ELA’s $/MIPS rate. ELAs should not be

    signed until the ISV provides full pricing information enabling users to independently

    calculate the discount.

  • Restricted usage: The ELA may offer price improvements, but might contain

    restrictive usage clauses that force users to pay multimillion-dollar charges when

    unexpected change occurs (e.g., mergers, divestitures, application-specific

    outsourcing, agency consolidation). Users must ensure the ELA does not restrict

    business and computing change.

  • No declining or volume discount rate:Cost must decline as MIPS volumes

    increase (e.g., 20%+ less for an added 1,000 MIPS, another 20% less at 2,000 MIPS).

    Other acceptable pricing benchmarks include annual declines (10% $/MIPS reduction per

    year). Without this protection, pricing is linear and can be especially costly in

    one-time merger- or acquisition-based MIPS growth.

  • List or then-current pricing on expiration: If the vendor increases

    pricing 50% or more during a multiyear ELA, users may owe whopping charges at

    expiration. Wise users negotiate one-year extensions if both parties fail to agree on

    ELA renewal terms, with pricing increases capped at roughly 10%-25%.

  • No capacity separation for operating-system-specific usage: A 2,000 MIPS

    user installing 200 MIPS of OS/390-hosted Linux, Microsoft, or Unix can potentially be

    charged for a 2,200 MIPS implementation of the new environment, due to total MIPS

    pricing structures that do not differentiate whether MIPS are dedicated to a separate

    operating system or LPAR environments.

  • Charges for first-year’s maintenance: Users receive the first year’s

    maintenance free with new purchases, but not with upgrade purchases made during a

    multiyear ELA. These charges can add up; users should try to negotiate immediate

    upgrade maintenance out of an ELA.

  • High maintenance/upgrade percentage: Some vendors discount upgrade charges

    attractively, but associated maintenance rates might be extremely high (25%-40%),

    negating any savings. During periods of low growth, users with these clauses pay

    maintenance rates at 100%-150% of list.

  • ISV “do-nothing” scenario confusing: The multiyear pricing scenario (“do

    nothing” or “business as usual”) shows attractive savings, but the vendor’s underlying

    calculations are difficult to analyze. This can be a deliberate tactic; no ELA should

    be signed until users can recreate the ISV’s calculations.

  • Multiyear product lock-in: ELAs rarely allow users to delete products (and

    lower ongoing payments) during the term. Users must negotiate advance price reductions

    or exclusions for products that may later be dropped; otherwise large overcharges can


  • The deal is best if signed quickly: Some ELAs are offered with quick-sign

    bonuses. Although many fiscal-close “quick sign” deals are legitimate, the tactic is

    most frequently deployed to hide the complex deal’s many underlying weaknesses.

  • ISV-supplied growth estimate: ISV-prepared, multiyear MIPS growth estimates

    often contain “fluctuations” increasing costs in the vendor’s favor. Users must

    prepare their own long-term growth/cost scenarios.

  • MIPS capacity ceilings: No ELA should contain charges or penalty payments

    for growth above a specific total MIPS ceiling, unless MIPS growth is free until that

    limit. Some vendors try to insert both; this becomes a duplicate and excessive upgrade

    fee, especially in mergers.

Business Impact: To achieve optimal software cost reductions, users must

implement a supervisory asset management office, with dedicated personnel handling

scheduling, staffing, and vendor negotiation responsibilities.

Bottom Line: Users should negotiate ISV enterprise license agreements

cautiously in 2002. This practice can reduce ISV costs simply by identifying,

minimizing, and even eliminating poor or deceptive ISV enterprise license agreement