Whether it’s standard software or software customized for your company, there are a few things to keep in mind when signing a software license agreement. In our new blog series, we will therefore devote the next few weeks to the most important software contract topics – stay tuned!
In this article, we are revealing the top 5 red flags that you should pay attention to in software license agreements, so you are able to negotiate better terms for yourself and avoid cost traps:
1. The software license agreement is too vaguely worded:
Clarity is essential in any contract. The subject matter, scope of services and costs should be clearly defined and easy to understand.
You should ask yourself the following questions in advance:
Which software is the license granted for?
Is it granted for the entire platform, or only certain services or functions?
Are there any restrictions for the use of the software?
Do you have unlimited access to the software, or is it limited to a certain number of authorized users? Is the use limited geographically or allowed worldwide?
Is the license granted temporary or perpetual?
Is the software cloud-based or installed on-premises?
Who is the software licensed to? Companies with parent, subsidiary or sister companies should check whether they are also covered by the license.
What purposes can the software be used for? In B2B contracts, for example, the use of the software is often limited to internal business purposes.
2. Details are clarified only after the contract has been signed
Leave nothing to chance and clarify all details in advance if possible! When a contract is signed, the software provider has no incentive to make concessions. Especially with standard software, a clear, comprehensive technical description is recommended.
In the case of tailor-made software created according to agile methods, not all technical details are clarified by the time the contract is signed. If software developers and customers work closely together to create the optimal and individual product for the customer, it is advisable to precisely describe the desired goals or functions and link the compensation to their achievement.
3. The risks are not clearly defined
In addition to implementation and costs, the parties should also clearly define the risks in the software license agreement: What happens if the user has technical difficulties, or the service is no longer available? Will the software provider be liable for this, or will you have to bear the costs yourself? These conditions are usually included in a service level agreement (SLA). Licensors rarely offer such SLAs – unless the customer asks for them. When reviewing an SLA, consider the following points:
How and when can you contact customer service?
Is this service included in the fees, or is there an additional charge for it?
What happens if the system goes down or there are slow loading times? Will you be compensated for this?
What happens if the service goes down regularly?
Is it possible to terminate the contract without penalty if the software provider fails to meet its obligations?
4. Particularly high acquisition costs
Due diligence will also always include the If you are offered software at disproportionately high acquisition costs, but are not charged a monthly usage fee, it should raise a red flag. After all, even software that has already been developed needs to be maintained and updated on a regular basis to ensure its future performance. Why should a software vendor feel the incentive to make these improvements even though they have already received their fee in full up front? Furthermore: What happens if the software does not meet your expectations after all? It is questionable whether you will get your payment back.
5. An excessively long contractual commitment
A long contractual commitment is basically nothing more than high acquisition costs: You have to keep paying monthly fees, regardless of whether you still want to use the software or not. Why should you continue to pay in the second year, when you have already noticed in the second month that the software does not really meet your expectations?
Also, this practice does not necessarily speak for the skills of the software provider either: If they have enough confidence in their product, they should not feel the need to tie you down with a long contract period to ensure further revenue.
And even if you are satisfied with the software, who can guarantee you a high level of service if your vendor knows you can’t leave the contract anyway?
The software license agreement is clearly formulated, and you know what scope of services you will receive and how the risks are distributed in the event of malfunctions. Monthly payments without large upfront costs or long-term contracts create fair conditions for you and the provider alike: In return for a regular payment, the provider has the incentive to continuously improve their software and can, thus, offer you the best possible service.
If you want to learn more about IT Contracts, please go ahead and contact us. We are happy to provide you with our Checklist on IT Contracts free of charge.