License Fees

Third-party technologies come with a variety of license fees. A good way to think about these fees is that anything you license represents the business model of some technology provider. As a result, you may have to deal with any of the business models described in the previous chapter or, for that matter, any business model the vendor has identified as being useful. Fortunately, technology providers tend to keep their business models at a reasonable number. The most common approaches, and their likely impact on your tarchitecture , are described next .

Prepaid Fees

In this arrangement you pay an agreed-upon fee for the time-based access or usage of the technology, whether or not you actually use it. Such an arrangement usually results in minimum impact on your tarchitecture, as you are given maximum flexibility in integrating the technology into your system. The fee must be included in the cost estimates provided by the marketect to justify initial development and in the ongoing costs associated with maintaining the system.

Usage-Based Fees

In this arrangement you pay an amount based on some measured usage of the in-licensed technology, often with a minimum payment required to access it (metering). Such an arrangement always has an impact on your tarchitecture because you must ensure your compliance with the license agreement. Specifically , you must make certain that your tarchitecture can capture the metering data. Clearly, it is advantageous for the marketect to negotiate a usage model that is conveniently implemented.

As described earlier, when the fees are variable the in-license technology vendor will often require a minimum payment, referred to as a floor . You'll want a ceiling , or the maximum amount you'll have to paywhich the vendor will resist. The strength of the technology supplier, the kind of technology being provided, the quality of the relationship, and the overall volume of the expected deal are all factors that play a part in negotiating usage-based fees.

Percentage of Revenue Fees

In this arrangement there are no up-front fees to license the technology; instead, you pay the provider a percentage of the gross or net revenue gained from its use. As with prepaid fees, such an arrangement has little impact on the tarchitecture. It can, however, have a fairly substantial impact on the marketecture, requiring both companies to agree on precise definitions of the fee.

The fee structure specified by the technology vendor will motivate the exact negotiating strategy. However, the following are some universal strategies that I've found useful.

Protection from Product Obsolescence

A marketect needs to know that her technology providers are going to be able to support her needs for as long as necessary. If she intends to support a given platform or operating system, she should make certain that the technology providers are also going to support it.

Protected Pricing

Whatever fee structure is chosen , marketects should try to negotiate such provisions as capped price increases , favored pricing plans (in which no other licensor will be given better terms than the licensee; should such better terms be offered , they will also be automatically applied to the licensee), and volume or usage discounts .

Milestone Payments

One client of mine made a very costly mistake: licensing a key technology from a vendor, paying a very large up-front fee, and subsequently failing to deliver their technology to the market. A better approach is to base fees on key milestones that represent revenue you're going to receive from the use of the technology.

Say that you've decided to license a core technology based on an annual fee (the usage fee). During initial development, when the technology is being incorporated into your product and you're not making any money, the most you should pay is a small access or development fee. The next payment, and typically the largest, should be upon release or launch of your product. The final payment may be due after the product has been in the market for some months.

Negotiate Fees Based on Value

Modularly designed software systems in which each module is separately identified and priced can provide the marketect the greatest advantage in keeping certain in-license fees as low as possible. In one system I created we had licensed in technology from two vendors based on a percentage of revenue. We isolated the usage in specifically created, nonoptional modules and separately priced each one. We then structured the overall price of the system so that the largest cost element was the core system, which consisted of technology that we had created ourselves (thus, no license fees).

This approach served two fundamental purposes. First, it was inherently fair. Because the core system used no in-licensed technology, our vendors had no right to receive fees associated with it. Second, it reduced the percentage of the average selling price subject to license fees and so resulted in greater profits.

Training and Development Costs

You may be able to obtain free or discounted training or educational materials, preferential access to support or development organizations, or special review meetings in which you can meet with key representatives of the technology provider to make certain your needs are being met.

Whatever the licensing arrangement offered by your provider, the actual costs must be given to your marketect for proper financial modeling. Simply put, too many license agreements, or even just one with onerous terms, can seriously erode any profit margins you expect for a product. In extreme cases the wrong fee structure can actually kill a project.