CHIPS Articles: Tools to Achieve the Best Value in Commercial Software Acquisitions

If your time, funding and resources are constrained, you may be forced to accept the vendor's quote and the software publisher’s standard terms and conditions, and hopefully achieve some additional value as a result of basic research and negotiation. But even when you have sufficient time, funding and resources for a more methodical approach, where do you begin?

To provide assistance, the Department of Defense Enterprise Software Initiative (ESI) developed the Best Value Toolkit for commercial software acquisition. It includes a disciplined process, tools, guidance and recommendations that enable an IT buyer to obtain the "best value" on large enterprise software acquisitions.The toolkit is available at www.esi.mil/bestvaluetoolkit. A best value acquisition of high-dollar enterprise software, whether spanning a period of two months or 12, can be broken down into four key areas: establishing requirements, referencing existing contracts, identifying target price and terms, and planning for negotiation with pricing and terms and conditions.

Establishing Requirements

The first step in the requirements phase is to have the end-use technical and management teams identify and finalize current and future requirements.This requires familiarity with the product, software publisher licensing terms, desired licensing metric, customer operating environment and the customer's planned physical, system or operational changes. Also, prepare to answer the following questions:

• Does this purchase include all the products and tools needed to fulfill current requirements?
• What additional items or licenses might be needed, now or later?
• Can usage requirements be consolidated across organizations, commands, outside the organization, etc.?
• Is there a licensing or usage metric (per processor, named user, employee, enterprise license, concurrent device, etc.) that best fits the needs? If not, can the requirements be adjusted? Is this software needed for one specific application or can it be combined with other applications or processes? For multiple uses? Are development or user rights required?
• Is a perpetual license, term license or Software as a Service (SaaS) model preferred?

Referencing Existing Contracts

Researching existing contracts or schedules that include basic terms and conditions and some established pricing guidelines for comparable purchases can provide an effective frame of reference. If the initial acquisition was relatively uneventful, then there is a framework for avoiding some of the major pitfalls experienced in commercial software licensing. Such contracts include DoD ESI/SmartBUY blanket purchase agreements (BPAs) and organizational enterprise licenses and volume purchase agreements. Baselines for price and terms and conditions can be established against which improvements can be sought and better value obtained by examining existing contracts in the context of the following checklist:

• How does the contract price compare to the vendor's list price? How long is it valid? Are discounts available for larger orders? What are future period prices?
• Do the licensing and usage metrics (per processor, named user, etc.) match the requirements? If not, is it easier to change requirements or seek a different licensing metric?
• What are the contract terms? Are they transferrable? Are previous software orders placed under this contract available for review? What terms and conditions were modified or added? Were any restrictions added?
• What specific information or insights can the cognizant contracting officer(s) for the contract vehicle or individual orders provide?

Identifying Target Prices and Terms

In the event that price, terms and conditions data about recent, similar transactions are not available, there are two resources that might be helpful — industry guidance and historic government transaction data.

Look for a resource, such as an industry analyst, that offers software acquisition benchmarks and guidance. These firms can provide general information concerning acquisition planning and identify trends for software vendor pricing and licensing methods.

Data from prior government transactions can also be leveraged, provided that key elements of similar acquisitions, discount levels or key terms and conditions are comparable. If no historic transaction is similar, the target price and terms and conditions could be extrapolated from existing known values. Use the following key criteria to identify and prioritize similar transactions:

• Dollar value of the transaction;
• Type of license and license restrictions;
• Total contract value, including all option years, product options, maintenance and support;
• Discount percentage — from list price to GSA schedule and ESI/SmartBUY base prices;
• Product list, including quantities;
• Licensing metric, such as named user, per processor or per server;
• Identification of contingencies, performance clauses, acceptance criteria and solution guarantees; and
• Time of year (relative to vendor fiscal periods).

ESI's Best Value Toolkit

ESI's Best Value Toolkit (www.esi.mil/bestvaluetoolkit) emphasizes review, analysis and decision making based on software requirements and fit, price, terms and conditions, and total cost of ownership. The toolkit includes a roadmap, guidance, informational checklists and worksheets, and a library of tools to be used during the acquisition process to help attain best value. It also identifies resources to assist with any step of the acquisition process.

Planning to Negotiate

Armed with pricing, terms and conditions, you should be well-prepared to enter negotiations with the software vendor. Understanding the nuances of the transaction from the seller’s perspective can also help with proposing arrangements desirable to the seller, while satisfying the requirements of the end user.

Term licensing and SaaS licensing are very different from perpetual license grants because they essentially limit negotiation options to price, products included, licensing metric and license restrictions.

When negotiating a perpetual software license, some important requirements, such as intellectual property ownership, transaction revenue recognition, definition of user rights and timing of the transaction relative to the seller’s fiscal accounting periods, can affect the financial value to the seller or possibly be non-negotiable depending on specific circumstances. Knowing these issues up-front can help in give-and take negotiations that create a win-win situation for both parties. In any case, it is advantageous to negotiate ancillary items such as software maintenance and support; training and education; and consulting services, including projected pricing for the life of the deal, along with the software license purchase, while there is still the greatest leverage.

Consulting services, however, are a unique element in license acquisition. The vendor has very strong financial incentives to segregate the license transaction from consulting services because potential claims tied to performance of consulting services could make the transaction ineligible to be recorded as current revenue. That said, it is still an effective strategy to negotiate labor rates for future unspecified services at the time of license negotiations, including separate rates for qualified vendor personnel versus the potential need for subcontractors to assist later.

There is no reason to be intimidated by large enterprise software transactions. Simply follow the steps outlined in this article, gain some insight into the nuances of software publishing and take advantage of the information and resources available at www.esi.mil to ensure that the acquisition can be completed within the framework defined by the Federal Acquisition Regulation as a best value purchase.

What is ESI?

The Department of Defense Enterprise Software Initiative is an official DoD program sponsored by the DoD Chief Information Officer (CIO) to save time and money on purchases of commercial software, IT hardware and services. Through its joint team of experts, ESI consolidates requirements and establishes agreements with IT providers, resulting in a unified contracting and vendor management strategy across the entire department. In its first 10 years of operation, DoD ESI has generated more than $4 billion in cost avoidance as compared with prices established on the General Services Administration Federal Supply Schedule.