CHIPS Articles: Best Practices and Lessons Learned for DoD Commercial Off-the-Shelf Software Licensing

DoD ESI and Enterprise Software Agreements have proven that managing the acquisition of commercially available software at the enterprise level reduces costs and provides greater visibility into IT asset management as illustrated in Figure 1. DoD ESI enables aggregation of software requirements and promotes the use of Enterprise Software Agreements that leverage the DoD’s buying power.

The ESI was established by the DoD chief information officers in 1998 and since its inception, the ESI program has accrued $5 billion in cost avoidance savings for the department. The ESI does not dictate the products or services to be acquired but what it does do is save time, effort and money in the acquisition of commercial software, IT hardware and services. The executive sponsor of the ESI is the DoD CIO.

The ESI targets DoD customer needs and efficiencies and aggregates the purchasing power of the DoD while streamlining the acquisition process for buyers. The ESI implementation successfully resulted in the institution of best practices, reducing customer risks and reducing the time to capability. The ESI allows IT investments to be managed as an enterprise asset.

The ESI program team includes members from the Departments of the Army, Navy and Air Force, Defense Logistics Agency, Defense Information Systems Agency, National Geospatial-Intelligence Agency, Defense Intelligence Agency, and the Office of the Secretary of Defense.

The ESI implements a unified vendor, strategic sourcing and contract management strategy with leading IT vendors. The ESI program uses an agile, low overhead model executed through Software Product Managers (SPMs) working in four DoD components.

The SPMs work closely with the Office of Management and Budget (OMB)/General Services Administration (GSA) SmartBUY Program to optimize IT acquisition policy and implement SmartBUY within DoD. SmartBUY is a Federal Strategic Sourcing Initiative (FSSI) featuring blanket purchase agreements (BPAs) for commercial off-the-shelf software. Federal agencies can buy software through any SmartBUY agreement. Selected agreements are available to state, local and tribal government organizations as well.

Tools, Training and Support

To assist IT buyers in the acquisition process, the DoD ESI has developed an educational series on all aspects of commercial software licensing for all experience levels of personnel, including acquisition and negotiation. ESI’s educational series offers robust training comprised of information from all ESI resources to ensure consistency across all components. The series benefits the ESI and DoD IT buying community — SPMs and contracting officers within ESI and program managers across the DoD — as well as ordering offices. A list of training dates and locations can be found in the brochure on the ESI web site (www.esi.mil) If you’d like a class in your location, please contact Renée Rothlein at (619) 553-9618 or renee.rothlein.ctr@navy.mil.

To maximize efficiencies and reduce costs, the DoD and military service departments have mandated the consolidation of IT infrastructure and the “use of enterprise commodity contracts to purchase hardware and software wherever savings can be achieved.” The ESI recommends that buyers review their components’ directives governing the acquisition and use of IT software, hardware and services. Department of the Navy users should visit the DON Chief Information Officer’s website for information about the latest IT policies and directives.

The ESI website features training classes and webinars, toolkits and a software buyer’s checklist. Instruction is available on products and pricing, license agreements, asset management, implementation and ordering, and obtaining best value. The ESI team is currently developing eLearning tutorials.

White Papers available include IT Virtualization Technology and its Impact on Software Contract Terms; Best Practices for Negotiating Cloud-Based Software Contracts and Considerations for Open Source Software Use.

There are also vendor toolkits and a CD available to participating DoD ESI IT vendors. The ESI Vendor's Tool Kit addresses “How to do business with ESI” as well as policies. The toolkit contents include: Why do business with ESI? Who is involved? What are the ESI processes? Pre-award process, Getting an ESA Awarded Post-award process, Roles and Responsibilities, Doing business with major DoD Components, ESI Toolkit Talking Points, and common questions for vendors feedback.

End User Licensing Agreements

The term “EULA” has multiple connotations for commercial software. Other names include: Purchaser Use Rights, Software License Agreement, and Software User Rights Agreement and there can be others as well.

In this article, EULAs are defined as the comprehensive license agreement between the government and a publisher or reseller – which can extend beyond simply end user’s rights. There are different kinds of EULAs: commercial, GSA, government and the ESI Enterprise Software Agreement (ESA) version. Key clauses and items to consider are illustrated in Figure 2.

When purchasing a license, always ask if a government EULA is available and remember that the order of precedence is key in resolving any inconsistencies between the software publisher’s end user license agreement and the EULA that serves the best interest of the government.

EULAs include key clauses and general provisions. Key clauses include:

License Grant – Specifies parties and authorized users, requirements, product names and functions, duration, permitted use, geographic location, language, quantity, the right to self-audit, times of conflict, and ownership and use rights.

Pricing – Specifies the financial investment, metrics, discounted amount, key terms and benchmarking. Metrics can include a named user, i.e., only this individual may use the license; concurrent users, anyone can use these set number of licensees as long as no more than a specified number use them at the same time. Metrics can include number of processors or cores in a CPU. Licenses may be site specific, i.e., may only be used as a specified geographic location. Or, licenses may be enterprise licenses that can be used across the enterprise as defined in the agreement.

Warranty – Understand the warranty protection afforded by FAR section 52.212-4 (o); ensure the warranty begins with productive use, not with delivery and that the buyer’s requirements are adequately documented. The warranty should include what is covered, who is covered, timing and remedies. Warranties may be implied as Merchantability or Fitness for a Particular Purpose. These implied warranties automatically apply to all sales of commercial software to the government through FAR section 52.212-4 (o).

Commercial product warranties may also be Express, specifying what is covered, who is covered, timing/duration and remedy in case of defects.

Maintenance – What does software maintenance include? Clearly define the scope of maintenance that is included in the price. For example, updates and patches may be provided as a license right and may not require purchase of maintenance. Major releases and upgrades may be considered the right to a future version of the software and therefore would be considered software maintenance.

Right to future versions are usually considered software maintenance. Technical support is dependent on the publisher and may or may not be included in a maintenance agreement. Other benefits such as training are dependent on the publisher, as well, and may or may not be included in maintenance.

Software maintenance is often considered a “product.” GSA schedule definitions have changed; see GSA special item numbers (SINs) 132-33 and 132-34. The determination of product/service could affect the allowable contract coverage period and funding.

Sample Clauses include:

Order of Precedence – DoD terms shall take precedence over any conflicting terms in a vendor’s agreement. If you are not able to change the EULA, have the terms of your order take precedence over the publisher’s EULA. If you are working with a reseller, get a letter from the publisher or original equipment manufacturer (OEM) indicating agreement to your terms and conditions.

Confidentiality – Confidentiality clauses protect information from being disclosed to third parties. The Government should avoid an agreement to not share pricing information internally and with authorized contract support.

Severability – Severability clauses keep the rest of an agreement in force when one provision is removed because it has been determined to be unenforceable.

Term – The time between the start and end dates specified in a contract is the term of the contract.

Termination – Understand the implications to software use and maintenance rights if an order is terminated without completion of expected payments. Address retention of rights when vendors are bought by other companies or when products are re-packaged under another name. Beware of any clause that gives the vendor the right to terminate or limit the government’s rights upon termination.

Limitation of Liability – Commercial Limitation of Liability clauses restrict the type and amount of liability for the failure of a product or service. Direct damages are the only type permitted in most agreements.

Assignment – Assignment means that a party transfers some or all of its contract rights or obligations to a third party. Most commercial agreements prohibit assignment by either party with some exceptions or conditions.

Relationship of the Parties – This clause defines the parties as independent contractors to avoid an employment relationship. In an employment relationship, the employer is responsible for a number of obligations they don’t have to independent contractors. Some examples include taxes and employee benefits. Be aware that the conduct of the parties can contradict the words in the clause.

Governing Law – Federal law shall apply and govern the terms of the software license. The terms and conditions of the EULA or the ordering documents shall reflect that federal law will apply to the government contract and therefore federal courts will have jurisdiction in case of a dispute. Buyers should be careful not to allow a Choice of Law (COL) provision from the publisher. Such a provision would be invalid by law, but it could cause an unnecessary disagreement with the publisher.

Dispute Resolution – Commercial contracts often contain clauses stating that disputes are resolved by arbitration or by courts or both. Government contract disputes are governed by FAR.

There are several license models to consider:

Concurrent Users. License price is based on the maximum number of users who could be using the software at any given point in time.

Named Users. License price is based on the total number of individuals in the user population.

Processor Based. License price is based on the number of computers (CPUs) and cores to which the software can be deployed.

Enterprise. License price is based on a decision to deploy the software across an entire enterprise (as defined by the customer). This model is used primarily with large, multinational or global customers with a high numbers of users — usually more than 10,000.

Site Unlimited. This model is used primarily with large, multinational or global customers with a high number of users — usually more than 10,000.

Subscription. This model calls for periodic payments instead of a lump sum payment. It may also be selected when a customer does not want to deploy the software within its IT environment, as in a Software as a Service (SaaS) arrangement.

Considerations for Cloud and Software as a Service

Cloud computing continues to grow in popularity, and organizations are being challenged to think about how this capability might change the way they purchase software. Ultimately, they need to decide whether it’s better to use the traditional model of buying a perpetual license and have software physically reside on-site, or opt to “rent” software as in the SaaS delivery model with software centrally hosted by a cloud service as shown in Figure 3. Before making that decision, organizations need to understand cloud-based software and the associated contracts for purchasing cloud services. The DoD ESI team has a great deal of experience in the field and is ready to help organizations develop that understanding, offering best practices and tools for use in negotiating cloud-based software contracts.

Generally, cloud computing is defined as the scalable provisioning of information technology as a service using the Internet. In a cloud environment, software is hosted by either a software provider or an off-premises third party hosting provider. The user rents the right to use the software from the provider; accessing it via the Internet.

Cloud Deployment Models shown in Figure 4:

Public – Uses off-premise services at provider location; services are shared with the general public; and users’ concerns and purposes vary.

Community – Services may be on- or off -premise; includes multiple related organizations and users share same concerns.

Private – Services and data may be on- or off-premise; limited to a single organization used by various business units within the organization.

Hybrid – Services on- or off-premise; environment in which an organization provides and manages some resources in-house and has others provided externally. User concerns may vary.

Choosing cloud delivery over a traditional model can result in several benefits. One of the most significant is the potential for cost savings. By accessing software in the cloud, the user avoids the cost of building and maintaining an infrastructure to run software. Also, since renting the right to use SaaS is often less expensive in the short term than buying a perpetual software license, the initial investment is less. Taken together, these factors should reduce an organization’s software costs. Therefore, the total cost of ownership (TCO) could be reduced depending on the discounted up-front costs, lower operational costs (by not having to implement and maintain software in-house), and other benefits realized by choosing a cloud delivery model.

However, it’s important for an organization to examine its specific computing needs and to perform a cost-benefit analysis to determine if the cloud model will result in cost avoidance or cost reduction. Analyzing the cost-benefit for an individual transaction might yield a different result than one which looks at the effects of several transactions on the overall IT environment.

Cloud delivery offers non-financial benefits as well, such as speed and flexibility. A software service delivered from the cloud can be rapidly scaled up or down in response to demand. Software deployment and expansion to additional users can be accomplished faster and at less expense than with traditional methods. Many SaaS providers also offer self-service provisioning for adding functionality and new users.

Licensing Considerations – SaaS versus Perpetual Model

There are contractual differences between traditional delivery and the cloud model and the arrangement that works best for the organization is clearly a central consideration in deciding which to choose. Under either delivery model, most contractual terms and conditions will be the same. However, there are four key exceptions: grant of a software license and payment terms, service level agreements and data ownership and security. See Figure 5 for comparison of models.

Contractual Architecture of a COTS Software License Under GSA Federal Supply Schedule and DoD ESI Blanket Purchase Agreements

The GSA FSS contains foundational terms and conditions that apply to the licensing of commercial software. There are General Terms and Conditions that can be applied to enable buyers to get the best terms and conditions. Users can use either approach below for best results.

Master End User License Agreement

• A1. Start with an ESI EULA.
• A2. Add acceptable vendor terms.
• A3. Enter the ESI version of the EULA; or
• B1. Start with the vendor’s EULA.
• B2. Attach ESI Addendum and remove objectionable terms.
• B3. Enter the vendor’s version of the EULA with an ESI Addendum.

Next, the ordering document incorporates all FSS, BPA and Master EULA Terms into the order. The ordering document focuses on the license grant, type, quantity and price. Changes in an order may only enhance the terms of FSS and BPA and may not dilute them.

Assistance

Navigating the pitfalls of COTS software acquisition can be daunting but help is always available. If you have questions or concerns, please contact the Software Product Manager or the contracting office assigned to the vendor or product you are seeking to acquire. Contact information is available on the ESI website under the section titled Ask a SPM.

The DoD ESI offers discounted agreements on thousands of software and IT hardware products and services. SPMs manage ESI’s relationship with each vendor company. Commercial agreements are arranged and managed by key categories, which include: Approved USB Thumb Drives, Asset Discovery, Business Process Modeling, Business Intelligence Collaboration, Data at Rest, Database Management, Enterprise Application Integration, Enterprise Architecture, Enterprise Management, Enterprise Resource Planning, Geospatial Imaging Systems. Information Assurance, IT Hardware, IT Asset Management, Office Systems, Operating Systems and Records Management.

Visit the ESI website for an up-to-date list of DoD ESI agreements.