Introduction

Successful use of technology frequently dictates prosperity in today's marketplace. Every business, regardless of size or industry, is dependent on technology to remain competitive or to obtain a competitive advantage. Despite huge investments in technology, many organizations lack the specialized knowledge required to optimally structure their relationships with service, software, and equipment vendors, which are critical to the success of their technology initiatives. Over the past ten years, the authors have represented technology users in formulating and executing successful strategies for the licensing and implementation of software. From the outset of our involvement in structuring and negotiating software licensing transactions, we observed that the typical vendor software license had much less to do with the licensing of their technology than it did with the creation of multiple revenue streams flowing from the user to the vendor and the elimination or minimization of most forms of accountability from the vendor to the user. It is surprising to us not only how broadly accepted the standard vendor approach to software licensing is among the user community but, earlier on in particular, how much resistance there was within the user community to challenging these standard vendor approaches to licensing. Nevertheless, clients we represent have for years challenged these standard approaches with considerable success.

Today, our best practice approach to technology transactions, including software licensing, has evolved from the experiences accumulated through thousands of transactions. Implementation of these best practice approaches to software licensing has provided our clients with the tools they need to manage their technology initiatives to success, and significantly reduced the costs and business risks associated with such initiatives. Notwithstanding the benefits of a structured enterprise approach to software licensing, including the procurement process, structuring and negotiation of the transaction, and implementation of the software system, the vast majority of businesses today still procure technology utilizing standard vendor forms and making minor adjustments to selected terms. In recognition that not all software licensing transactions warrant a customized license, we have designed this book to provide a context-based discussion of relevant business issues and recommended language for use in the modification of the typical vendor software license.

To promote the utility of this book in your company's day to day assessment and review of software licenses, we have created a composite vendor oriented license agreement, introduced in Chapter 1, to serve as a touchstone for discussion and analysis of issues. The composite vendor oriented license agreement contains terms and conditions common to most types of software licenses, and is used in transactions ranging from the thousands to millions of dollars. We will utilize the composite agreement to highlight and discuss key issues that any user entering into a software license must address, and to offer recommendations as to how relatively minor changes to the composite agreement can significantly improve the outcome of the software licensing negotiation from your perspective.

Of course all software licensing transactions do not have the same business significance, cost, or risks. Chapter 2 provides a framework for assessing key factors that will help you to better structure your approach to a particular software licensing transaction.

Chapters 3, 4, and 5 identify and discuss key issues impacting software licensing transactions and provide guidance as to how best to approach the software license transaction based on your assessment of these issues. Particular attention is given to issues such as (1) the scope of the license granted by the vendor to the user, restrictions on use of the software, and identification and minimization of fees, (2) the importance of user developed software specifications and approaches to acceptance testing to insure that the product delivered (i) meets the business objectives identified in your business case supporting the transaction, and (ii) delivers the promised functionality; and (3) that an adequate measure of vendor accountability is built into the agreement through a coordinated use of warranties, indemnities, and allocated liability. Vendor accountability, in particular, is an area where the typical user practice is deficient and, as discussed in detail in Chapter 5, vendor accountability is central to assuring that the vendor's business interests require it to deliver on the promises it has made, and the vendor is not so insulated from liability that it can either leverage you to pay additional fees for legitimate corrective actions, or choose to walk away rather than absorb the costs of correction.

Attention surrounding issues of confidentiality and security with regard to both your businesses' and customers' data and key processes has increased exponentially in recent years. The distinction between confidentiality and security is sometimes blurred by both customers and vendors and these issues are often inadequately addressed in software licenses. In Chapter 6, we discuss the protections licensees should require in their vendor agreements to ensure the licensee's sensitive data and information is held in confidence and adequately protected from authorized access and provide recommendations to help you in structuring diligence inquiries based on the criticality of the data and applicable confidentiality requirements surrounding the transaction.

In Chapter 7, we provide a framework for evaluating your software maintenance and support requirements. We also provide tips to help you obtain the appropriate level of maintenance and support for a particular transaction and to avoid hidden costs related to receiving the entire spectrum of software enhancements, whether such enhancements are characterized as a patch, correction, update, revision, release, version, or some other term.

In Chapter 8, we discuss various terms which can independently significantly affect the quality of your software license, but do not neatly aggregate under a single chapter heading, resulting in the tantalizing Chapter title "Miscellaneous Licensing Provisions." Do not be mislead by the title, this Chapter discusses issues of critical importance to the meaning, risk allocations, and adaptability of your software license, including ownership of intellectual property, limitations of liability, and the impacts of a change of control at your software vendor. Finally, we discuss the importance of addressing in detail the concept of change within your enterprise, whether through merger, acquisition, or divestiture, and the ability to use the software with your business partners as dictated by your expanding and interactive business relations.

In Chapter 9 we advocate for the implementation of an enterprise information technology management process in which business processes and tools are used to create an enterprise-specific "best practice" approach to software licensing and technology services procurement, structure and negotiation, and implementation. We discuss the business drivers supporting the use of a structured approach to software licensing in your organization and provide specific recommendations on how to effectively implement such a process.

The appendices provide additional background material for the reader. Appendix information includes Internet-related resources, a table cross referencing specific provisions of the vendor form license agreement to the chapters in which they are discussed, and a glossary of key terms used throughout this book.

There are valuable nuggets of knowledge gathered through our involvement in billions of dollars of technology transactions over the years. We encourage you to find those ideas that you think can drive the most value to your organization and put them in place on a fast track. After your initial successes, come back to the book to structure subsequent phases of improvement to software licensing in your organization.