Negotiate software license agreement to protect firm

by Stuart J. Vogelsmeier

for the Business Journal

Assume that you are an owner of a firm that provides professional services. You have a professional and support staff of approximately 20 persons. You have just made a significant expenditure for new computer hardware and software for word processing, financial, billing and professional functions.

Four weeks after the software is installed on the hardware, your system crashes.

You and your office manager scramble to call the toll-free phone number for support services, which is listed in your user's manual, but it is after business hours.

You finally receive a call from the technical support person about mid-day on the following day and after two or three hours of phone calls with your office manager, the technician determines that the problem cannot be fixed over the phone. The software vendor needs to send somebody to fix the problem.

The service person arrives two days later and spends 12 hours at your office to get your system up and running. In the meantime, your office has been in chaos for the week. Bills have not been sent, receivables and payables have not been logged and your staff is generally frustrated. Two weeks later, you receive a bill for support services at $175 per hour plus travel expenses.

Also, you will need additional hardware to support the software which you licensed. You and your office manager face the fact that you never read the software warranty, you never clarified the support services, which you expected to come with the software and the software was really never tested appropriately on your hardware system.

Does this sound outrageous? It can, and does, happen. Obviously, good vendors will not let this happen. However, customers often feel they just need to sign the software license agreement that a sales representative puts in front of them because they are told "If you do not sign now, I cannot guarantee the price or the installation date." The thought of actually negotiating a software license agreement never enters their minds.

Why should one review and negotiate software license agreements? First, you are likely to spend a greater proportion of your budget every year on software or computer-related materials. Like it or not, computers are integrated into more business settings each day.

Even in a small office setting, significant dollars are involved. In a large corporate setting, software license fees often climb into six figures. Although computer hardware is more visible, the software and the frequent upgrades are often more expensive. As these costs increase, businesses must start paying more attention to them.

Second, the vendor's standard software license agreement is often one-sided and designed only to protect the vendor.

Third, sales representatives make all kinds of promises regarding the capability of the software and the service you will receive, most of which are not in the license agreement. At repair time the representative may be nowhere to be found.

Finally, negotiating a software license agreement clearly establishes your expectations. If a vendor is unwilling to put these expectations into writing, it could be a sign of future problems with the vendor.

Once you have identified your needs and system specifications, and identified a vendor and a product, you will be presented with a software license agreement. The standard vendor contract is often ambiguous, poorly drafted and sometimes just plain one-sided.

The following areas should be addressed to your satisfaction in any software license agreement:

Product. A customer company needs to know exactly what it is buying. Although this sounds simple, often the products and services the customer is ordering are not clearly identified.

Pricing. Many standard contracts provide scattered and ambiguous pricing terms.

Pricing should be simple and clear and tied to specific milestones. For instance, many contracts provide for a large down payment at the time the agreement is signed and a final payment to the vendor upon delivery. However, once that final payment is made, there is less incentive for the vendor to actually install the system and get it up and running to the customer's satisfaction.

Acceptance testing. A customer should have the ability to test the software before making the final payment. The software license agreement should specify the criteria for testing, the types of data that will be tested and the remedies if the software does not test to the customer's satisfaction.

Warranties. Among the warranties which may be expected are:

1. The software will perform pursuant to the specifications or documentation;

2. The software will have a specified performance or response time;

3. The software will operate in conjunction with the customer's hardware;

4. The software is free from bugs and viruses;

5. The vendor has both power and authority to grant the software license;

6. The software will comply with requirements for the year 2000; and

7. The media on which the software resides is free from physical defects. Most standard agreements have explicit limitations on warranties. This language should be carefully reviewed.

Upgrades. The customer will want certain assurances regarding the customer's rights to obtain upgrades or fixes of the software, and the additional costs, if any.

Support and maintenance. When does support and maintenance of the software commence? What specific support services are provided? What response time or priorities does the vendor employ when dealing with service calls? This is often an area in which vendors impose additional charges and the software license agreement should specifically express what services are included in the standard support fee.

The implementation plan. Often, the software license agreement contains a vague statement of the vendor's implementation responsibilities. It does a customer no good to sign a software license agreement and sit and wait for months and months without receiving the product. A timetable which meets the customer's needs should be negotiated as part of the software license agreement.

Users/licenses. The agreement needs to clearly specify any limitations on the number of users and identify any specific wrinkles, such as remote users or pricing for new users or products in the future. This is critical in businesses in which expansion of the current computer system is likely.

Source-code escrow. New software vendors are sprouting up all over the country on almost a daily basis. What happens if that vendor is no longer in business in two years? A provision for the escrow and release of the source code in the event the vendor files for bankruptcy or ceases to do business is essential. Source code can be easily understood by programmers and could allow a customer to continue to support the software even if the vendor goes out of business.

Hardware configuration. Another hidden danger for customers is if they spend significant funds on software only to find out that they need to make unexpected hardware purchases in order for the software to properly function. Before the software license agreement is signed, the customer should seek assurances regarding hardware configuration and compatibility.

Custom software. Often, the vendor prepares custom software specific to the customer's needs. In these situations, specifications and warranties for the custom software need to be explicitly discussed.

Training. Training and education of a customer's support staff and users entails a significant time commitment and additional costs. For instance, some vendors provide training only at their out-of-town location. These items need to be clarified.

Out-of-pocket expenses. Travel, airfare, hotel and meal expenses will be necessary for a vendor who is not located in the customer's area. The customer should ask for reasonable limitations on these expenses.

Confidentiality. Often, the software vendor will be exposed to confidential and proprietary business information about the customer's business. The vendor should explicitly agree to keep this information confidential.

These are just some of the major issues that a customer should consider prior to signing the vendor's standard software license agreement. If these and other issues are not clarified up front, serious problems could arise down the road for the customer.

(Stuart J. Vogelsmeier is a partner at the law firm of Lashly & Baer PC in St. Louis. He regularly negotiates software license agreements on behalf of health care clients, institutional clients and small businesses. The preceding column was provided by the Missouri Bar Association.)

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