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).
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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
complete.
Beware Capacity Pricing’s ‘Last Hurrah’
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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.
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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
products.
- 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
occur.
- 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
offers.