SAP license negotiations: Beware of shelfware

Shelfware is one of many risks in SAP contracts, so customers must be up to speed on how to negotiate SAP license deals, according to Gartner.

The goal of any negotiation is generally to get the most product for the least money. But when it comes to SAP and other enterprise software vendors, that strategy can backfire.

It's common for large software contracts to include significant discounts for customers that purchase more licenses up front, according to Jane Disbrow, a research vice president for Stamford, Conn.-based Gartner. These volume discounts can seem too good to pass up -- even when the customer doesn't necessarily need the additional products being sold.

"This is not a good deal for customers because they end up with a lot of product they don't need -- and it becomes shelfware," Disbrow said.

Having unused software around may not seem like a big deal, especially if it was obtained at a deep discount, but it can end up costing a customer in other ways. One major hit can be maintenance and support, Disbrow explained. This generally costs 15-17% of the discounted software price per year -- whether the product is used or not.

SAP's CRM modules in particular have come under scrutiny in recent years, with SAP claiming market leadership based on license revenue and Oracle responding that SAP CRM amounts to shelfware at its customer sites. It's not easy to negotiate these fees based on whether the product is used, either.

"SAP takes a pretty hard line on this," Disbrow said. "They say, 'We gave you this discount based on the total amount of money you were spending, and we won't reduce your maintenance and support because you're not using these modules.'"

The risks associated with SAP license negotiation don't end with shelfware. Other problems that may pop up surround terms that aren't included in a contract. Disbrow called these "missing terms and conditions" and said they often have the potential to wreak havoc on a deal.

Outsourcing and merger and acquisition activities are often overlooked when a software contract is being negotiated, according to Disbrow. If one of these conditions is an option, even far in the future, it should be explicitly addressed in the contract, she said.

"You would be amazed at how many people come to me and say, 'I was involved in this negotiation, we discussed this over the table, but now I realize it didn't end up in the contract and we're having problems because of it,'" Disbrow said.

She advises customers to refer to the "entire agreement clause" in a contract to get the definitive information on what is included.

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Avoiding problems

One way to avoid contract issues is to get technology procurement professionals involved early in the process, Disbrow said. Most large organizations have specialized people on staff, but smaller companies may have to look to third parties.

In addition to procurement professionals, a contract negotiation team should be a combination of legal, technical, applications, finance, and business unit representatives. Procurement professionals should conduct the actual negotiations while turning to the rest of the team for their expertise and for specific requirements, according to Disbrow.

When Danvers, Mass.-based Abiomed, a midsized medical device company, negotiated its contract with SAP, Dan Lubin, the company's director of information technology, led the charge with assistance from general counsel. SAP was represented by sales management, internal counsel, and someone from the SAP legal team.

"For an important contract, legal should be involved from the beginning," Disbrow said. "However, unless there is a specific legal issue to discuss -- lawyer to lawyer -- I think it is best for a procurement professional to lead the negotiation."

This all may seem like a no-brainer, but contracts are often decided on by higher-ups before they ever reach the procurement office.

"One of the most basic negotiation tactics is to be willing to walk away if you don't get the deal that you want -- whether it's with a car or with software -- [but] most of the time customers aren't willing to do that," Disbrow said.

Tough row to hoe

From the time the proposal is tentatively accepted, she said, an SAP contract generally takes about one to two months to finalize -- remembering that the customer should always reserve the ultimate "yes" until the contract is negotiated -- if the customer has negotiating leverage and wants to make substantial changes in the contract.

Abiomed's Lubin agreed that negotiation can be a time-consuming process.

"Negotiations were lengthy, taking a couple of months due to delays on both sides," he said. "Both sides were tenacious but committed to making it happen."

Companies like SAP and Oracle want their contracts to be pretty consistent with all customers, so even with technology procurement professionals involved, getting more favorable contract terms can be a struggle, Disbrow said. But once precedent has been set, she added, getting discounts becomes easier for everyone.

Disbrow cites this as one reason Oracle, in particular, can be very difficult to negotiate with -- it doesn't want to set a precedent that would then trickle down to smaller clients. The bottom line: It behooves organizations, especially smaller ones, to do extensive research before negotiating and signing a contract.

Even then, it may not be possible to achieve ideal terms and conditions. Customers should know where the risks lie, Disbrow said, so they don't blindly sign on the dotted line.

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