Before signing at the dotted line, evaluate these contract provisions. First of a two-part series.
You’re about to sign a software contract for a core application. You’ve already done your homework at the software itself: Thoroughly reviewed its current and future capabilities, performed due diligence at the depth and data of the seller and its staff, and checked references and assessed the vendor’s financial stability.
Now you are prepared to join up the dotted line. Don’t minimize the significance of this step. Your job — or even the longer term profitability of your organization — may be at the line.
Even in the event you implicitly trust the seller you’ve chosen, you’ll little question seek legal assistance, preferably from attorneys acquainted with software program contracts. Still, you need to re-read the contract to make sure you already know all of its clauses. Is the contract straightforward and straightforward to realize? Does it include the entire negotiated or agreed upon issues?
[Converting critical systems? Follow these best practices: Core System Conversion: Dos And Don’ts.]
One or more of your lines of economic must review the entire provisions of the contract, whether it covers on-premises or hosted software. Below I’ll discuss the key terms and stipulations. In a subsequent column, I’ll go over the opposite three major provisions of a software contract: warranties and upkeep liability; training and education; and testing and repair-level agreements.
Payments and term
The schedule of payments and the term of the contract rely on one another. You are able to negotiate for a lump-sum payment or an installment schedule. The volume you ought to pay depends on you money flow needs (with appropriate present value analysis) and the term of the contract. In the event you select an extended-term contract (greater than the typical four or five years), insist on substantially lower annual payments.
It’s important that the contract distinguishes between payments to purchase the software and payments to keep the software. Some vendors will aggregate the acquisition and upkeep amounts. However, with a view to properly evaluate the price of the software and its future maintenance compared with similar software, the contract must spell out these two components separately.
Whether you buy the software in a lump sum or under an installment plan, the contract would require an upfront payment, usually one-half the 1st year’s payment. The opposite half will usually be due 30 or 60 days when you sign the contract. It is a vital point to unravel with the seller: The balance of the upfront payment, whether on a lump-sum or an installment basis, is just not due until once you complete acceptance testing. More in this point later.
Licensed machines or servers
Make sure you’re able to operate the software on a couple of machine. Even supposing you’ve got little intention of expanding your centralized mainframe processing, you could have future needs for remote or maybe correspondent processing. Either of those circumstances could require multiple versions of the software.
If your software vendor won’t provide this pliability on the same price, ask for a compromise. Include a clause that gives the seller with an equitable percentage of the proceeds, above some threshold amount, received from processing for external customers.
Price escalator
Many of today’s software contracts include a worth escalator clause, which lets the seller increase the yearly purchase installment (another factor to be considered within the lump-sum versus installment payment decision) and upkeep fees. The escalator is often in line with some well-known index, equivalent to the shopper price index.
If you observed your company’s costs more appropriately reflect another index, comparable to the GNP deflator, discuss it with the seller. Anyways, compute a trend over the past 12 to twenty quarters of the proposed indexes to see which are the least costly on your company.
Discounts
Most customers receive discounts from the software’s list price (seems like buying a car, doesn’t it?), provided they buy several applications concurrently or within a suite amount of time. Obviously, check that these discounts are true reductions within the price of the software and never only a technique of striking parity with the vendor’s competition.
Also, do the discounts apply only to the acquisition of the software or to the upkeep in addition? It really is another point of negotiation, particularly in case your company is acquiring several applications. Does the yearly maintenance cost, usually between 15% and 20% of the acquisition price, apply to the vendor’s list or discounted price?
Identifying applications
This may sound like a no-brainer, but make sure the contract specifically identifies the appliance or applications you’re acquiring. Ensure that the modules or other interfaces you can assume are portion of the applying are indeed listed or described within the text or as an appendix to the contract.
Merger or acquisition
What happens to the vendor’s obligations should it become the division of another company or get reorganized in any other major way? Your organization should want to include wording within the contract that terminates, reduces, or modifies any more obligations should this transformation occur.
Legal expenses
Who incurs legal expenses within the event of a dispute between the seller and customer? Are they borne separately? Is the software vendor limited only to the quantity of its out-of-pocket legal costs and revenues received out of your company?
These are issues it is very important resolve within your organization and along with your prospective vendor. In my next column I’ll discuss warranties and upkeep liability, training and education, and testing and SLAs.
Bennett Quillen, a former CIO for a number one mutual fund processing firm, has greater than 35 years of expertise in financial industry technology, operations, cash management, and compliance. Today he provides financial institutions with project management and technology advice, focusing on system evaluation, development, conversions, and security and compliance management.
There’s no single migration route to a higher generation of enterprise communications and collaboration systems and services, and Enterprise Connect delivers what you must evaluate the complete options. Register today and study the total range of platforms, services and applications that comprise modern communications and collaboration systems. Register with code MPIWK and save $200 at the entire event and Tuesday-Thursday conference passes or for a Free Expo pass. It happens in Orlando, Fla., March 17-19.
More Insights