Software Agreements Line By Line

Software Agreements Line By Line
There is a disconnect between the interest of the end user and vendor. It’s important to break
down a standard, vendor-oriented software agreement line by line to understand the business
Large investments are made in technology, but many organizations lacked the specialized
knowledge to optimally structure their relationships with service, software and equipment
Many vendor software licenses are intentionally created for multiple revenue streams of income
for the vendor, eliminating or minimizing accountability from the vendor to the user.
Typical Vendor License
Licensors create multiple contracts to govern customer relationships – master services
agreement, license agreement and maintenance/support agreement.
 It is recommended to have a single agreement that encompasses all components in order
to (1) avoid inconsistencies in defined terms, (2) lack of coordination for remedial
solutions, and (3) make it easier to manage fees and costs.
 If a single agreement cannot be developed, make sure that the 3 points mentioned above
are addressed; add a provisional clause that states which agreement terms prevail in case
there are conflicts.
Basic terms included in a vendor license agreement
1. Definitions
2. Software License
a. Grant (i.e. non exclusive, non transferable, limited use)
b. Software use restrictions
c. Ownership
d. Copyright
e. Delivery (i.e. time period)
3. Support and Maintenance
a. General Obligations
b. Term and Fees
4. Term
5. Fees and Payment
a. License and Support Fees
b. Taxes, Charges
c. Travel and Other Expenses
d. Payment
6. Confidentiality
7. Limited Warranty
a. Licensed Software
b. Services
8. Warranty Disclaimer
9. Liability Limitation
10. Indemnification
11. Default; Termination
12. Equitable Relief
13. Independent Contractor
14. Notices
15. Force Majeure (i.e. acts of God)
16. Choice of Law (i.e. individual state(s)
17. Entire Agreement (i.e. supersedes prior agreements)
18. Severability
19. Assignment
20. Waiver
21. Heading
22. Agreement Drafted by Both Parties
23. Counterparts
Assessment Checklist
Four Critical Questions
1. What are the business purposes/goals?
2. How critical is the application to the organization?
3. What are the fees and cost for the initial and future years?
4. How long is the software implementation?
Checklists ensure that key issues are not overlooked
1. Has appropriate due diligence been conducted?
2. What is being licensed?
3. Does the license agreement define what the software I supposed to do?
4. Does the licensee have any specific performance requirements
5. Who is the license? (i.e. must be specific, not broad)
6. What is the scope of the license? (i.e. limitations, intended use)
7. What are the fees?
8. What is the license term? (i.e. perpetual or term)
9. What is the expected life of the application to the licensee?
10. Does the licensee have unique specifications, interoperability or functional requirements?
11. Is the software subject to acceptance testing?
12. How long is the software implementation?
13. Does the vendor place the source code with a 3rd party escrow agent? If so, has a copy of
the escrow agreement been reviewed?
14. What warranties are provided?
15. What are the support obligations? (i.e. service levels, term of support)
16. Will the vendor have access to proprietary or confidential data? If so, have the
confidentiality and security provisions been included in the agreement?
17. What indemnities have been provided? (i.e. personal injury, breach of confidentiality)
18. What is the liability limitation? What type of damages are included and excluded?
19. Can the licensee assign to successor entities or affiliates?
20. Does the licensee intend to outsource to a 3rd party?
21. Are there previous contracts been negotiated? If so, those contracts can be used as a
knowledge base to negotiation future contracts.
Scope and Fees
Scope and Fees are the most important provisions in a license agreement.
Definition of ‘Licensed Software’
 should be broadened to include all releases, version, updates, etc. so that warranties are
License Grant and Term
 grant should include all entities and personnel; should anticipate future expansion
 grant should be broadened to use for all business purposes
 term may not be apparent - should be perpetual instead of term
License Restrictions
 should include provisions for use of source code for regression testing ; request
application programming interface (API)
 should include provision to act at service bureau and process data for other entities
Fees and Costs
 Types of licenses
o Enterprise – broadest and most expensive license; based on size of organization;
used for frequent use (i.e. email)
o Named Users – total number of specific types of users, separate from concurrent
o Concurrent Users – number of users and devices who simultaneously access the
software; cost effective
o Seats – total number of unique workstations; paid for regardless of use
o Devices – software may only be used on specific hw devices; provision should be
included to notify vendor if device is upgraded or software is moved to a disaster
recovery site
 clearly define and disclose all potential fees up front
 non-refundable clauses should be rejected
 provisions should be included if a state excludes sales tax for electronic receipt of
 payment due date should allow for transit of invoice to licensee and processing time
 travel expenses should align with corporate travel policy
 if 3rd party software is provided by the licensor, the terms and conditions of that license
should be reviewed for limitations or concurrent use
Software Specification and Acceptance Testing
Software specification and acceptance testing are very important provisions in a license
agreement. Most vendor agreements do not include the functionality of the software or
acceptance testing to ensure the software meets expectations.
Specifications and Performance Standards
 license should identify specific performance, functionality and/or interoperability
requirements of the software
 the term ‘Specifications’ should be clearly defined
 expand the definition of vendor’s documentation (i.e. include what is in the document)
 cannot rely on documentation that could be modified to exclude functionalities
Acceptance Testing
 provisions should be included to require compliance with the Specifications
 provisions about automatic acceptance should be removed to avoid paying for a product
that does not work as specified
 include a provision that withholds 20%-25% of license fees until after final acceptance
 include phased testing
o installation testing
o interface testing
o component/module testing
o final system testing
 include a provision with right to terminate if acceptance testing fails after several
o request refund of all fees, including license, support and professional services
o incentive to hold vendor accountable
Warranties, Indemnities and Limitation of Liability
These are three of the most difficult area of negotiation in licensing agreements because typical
vendor agreements provide minimum warranties and indemnities and limited liability.
 Performance – the software should perform in accordance with the stated specifications.
The warranty period should extend for 12-24 months from the date of acceptance, not
 Services – should be provided in a timely manner in compliance with industry best
 Compliance with Applicable Law – dependent on federal, state and local laws
Third Party Software – full disclosure if 3rd party software is used ; if so, all rights should
be passed on
Infringement of Intellectual Property – should not infringe on rights of 3rd party
Viruses – software should be free and clear
Disabling Mechanisms – software should include lock-ups that could impede usage
Authority – vendor must have full authority to grant the rights in the agreement
Litigation- vendor must disclosure any pending litigations
Disclaimers – look for language that could undermine or conflict other areas in contract
Exclusive Remedies – should include defined period of time to perform remedies for
repair or support
Scope – warranties should include future releases and versions
 Litigation - Vendor should hire a lawyer for the licensee if a litigious situation arises; if
use of software is prevented by court order, licensee must have the following options
o Vendor must procure the right for continued use
o Vendor must replace or modify the product with another system or comparable
o Vendor must refund all fees, including license and professional services
 Intellectual Property – should not be limited to infringement of copyrights; should be
extended to include patent, trade secretary or other proprietary rights
 Property Damage – indemnity from claims arising from damage or destruction of
 Personal Injury – indemnity from claims arising from personal injuries
 Employee Compensation – licensee should be indemnified from compensation, overtime
and other claims from licensor’s employees
Limitation of Liability
 Two general categories of damages
o Consequential – lost profits, damage to data, data recovery costs, consulting fees,
damage to reputation
o Direct – refer directly to breach of contract
 Limitation of liability should be applicable to both parties, not just vendors
 Overall liability cap should be increased beyond fees paid to include all license fees and
professional fees
Confidentiality and Security
This section of the contract is frequently neglected. Vendor contracts tend to be one-side on
confidentiality clauses.
 Confidentiality clauses in the contract should protect both parties
 The confidentiality clause should be expanded to include any persons accessing the
software for licensee business purposes
 Confidentiality provisions in a contract should survive the expiration and termination of
the contract
 Software should be secure from unauthorized access (i.e. encryption)
 Request the vendor’s security practices (i.e. questionnaire); attach as an exhibit to
Maintenance and Support
Ask the following questions:
1. What level of support do I need?
2. Is this a critical application that requires 24/7 support and immediate response?
3. Is this a non-critical application that can withstand delays in support?
4. What is included in the support program? (i.e. unlimited telephone support, on-site
support when requested, support tools)
5. What is my ability to renew support in later years? What is the cost?
Support and Maintenance Obligations
 Can be a profitable revenue stream for vendor
 General maintenance and support consists of telephone support and delivery of software
updates, releases and versions
 Requirements for levels of support must be defined (i.e. response time)
 Avoid provisions that require licensee to immediately implement new software versions;
right to reject
 Licensee should be permitted to test any upgrades before installation and implementation
Support Term
 Preferable to have an initial term of 3-5 years followed by optional renewal terms from 25 years; licensee only obligated to initial term
Support Fees
 Typically a percentage of the license fees, ranging from 12%-18%
 Costs should be fixed for the initial term of contract
 If bank of hours for support are proposed, negotiate for the following:
o Exclude all warranty-related call and product defect calls
o Use stair step approach for peak/non-peak period
Miscellaneous License Provisions
Defined Terms - Avoid ambiguity by defining each term
Ownership – Avoid global usage of ownership terms; vendor has rights to software intellectual
property only (i.e. licensee could hold patents, trade secrets or copyrights that are embodied in
the software
Limitations of Actions – statute of limitation for breach of contract actions depends on
jurisdictions (average 2-3 years)
Force Majeure – acts of God should be limited (i.e. fire, earthquakes)
Integration Clause – any verbal representations that are important to software performance or
capabilities but not in the contract must be defined
Assignment – licensee should have the ability to assign its rights to affiliates, other entities and
successors or affiliates due to reorgs, mergers or divestitures.
Source Code Escrow – source code should be deposited with a 3rd party escrow company;
enables licensee to use the code in the event the vendor fails to provide support and maintenance
(i.e. bankruptcy, decision to stop supporting software)
Change Control – process should be defined to avoid issues during implementation
Potential Outsourcing – the right to outsource should be included in contract, even if it is not
Use of Licensee Name and Referral Sites – requires valuable time from the licensee; do not
offer a blanket commitment to vendor; negotiate to receive concessions (i.e. free training, bank
of service hours, price breaks on support)
Access to Licensee Facilities – rules of conduct while vendor is on site for implementation
Insurance – vendor should provide proof of insurance to ensure that coverage is available (i.e.
auto, claims)
Training – negotiation for train-the-trainer approach; try to lock in rates for ongoing training
Documentation – request rights to duplicate documentation for internal purposes
Managing Technology across the Enterprise
In most organizations, the responsibility for procurement, structuring and implementation of
software licenses are managed by various departments which all have different drivers for the
decision-making process. When these processes are done in silos, following are the adverse
results that result in lost revenue, competitive advantages and can impact an organization’s
Failure to identify hidden costs, liabilities and business risks
Failure to protect critical company assets
Duplication of effort
Inability to take advantage of corporate knowledge and apply uniform business practices
Inefficient and ineffective procurement process
Inefficient customer service/fulfillment issues
Procurement Process
 Vendors responses to RFPs tend to be done by the marketing department; very general
 Recommend using a Direct Procurement process:
o Require certain questions be answered by project leads and management, not
o Focus process on identification and delivery of the customer’s objectives
o Obtain written commitments from vendors on key terms and relationship
approaches (i.e. scope, payment upon acceptance)
o Develop target questions in order obtain meaningful responses; avoid close-ended
Critical Software Licensing Issue Identification and Acceptable Resolution
 Few organizations have procedures in place to insure that their corporate knowledge is
consistently and systemically applied on behalf of the organization
 Process improvements need to be developed to significantly minimize business risks
presented by software licensing transactions
 The following components should be included in contracts:
o Senior Management Support – appoint individuals or groups to have overall
responsibility for approving contracts; develop enterprise best practices and
monitor any deviations; provide tools to enable business teams to access best
practice positions
o Develop Tools – checklists, agreement libraries, form provisions, template
agreements, annotated agreement, knowledge bases
o Provide Support –ancillary teams, such as legal, should be accessible for timely
contract review and execution
Controlling the Agreement Negotiation Process
 Vendor like to drive the negotiation process by presenting their standard agreement and
exhibits and by scheduling the negotiation sessions
 Customers need to address difficult points in the beginning instead of placing them on the
‘parking lot’
 Customers should set formalized agendas to control the subject matter and direction of
the negotiations
o Tier 1 issues
o Detailed vendor feedback to the proposed agreement
o Work issues to resolution to minimize parking lot situations and issue reopening
Managing Completed Software Licenses
 Organizations typically don’t have a central repository in place to manage the various
components of a software license
o capture information (i.e. annual costs, maintenance renewal dates)
o collect and retrieve the contract terms
o track vendor compliance to contract terms
o track and resolve performance issues
o extract knowledge from existing licenses for use in future license agreements
 Best Practices:
o appoint individuals or groups to have overall responsibility for approving
o develop a process for collecting, cataloging and storing software licenses
o commit resources to review the agreements for key criteria and how they align to
the organization’s objectives and/or corporate policies
o create a report card for monitoring vendor performance (i.e. meeting deadlines,
SLAs, compliance to contract terms)
 Recommend purchasing KnowledgeGate, a technology agreement management tool