Vendor contract negotiations can be
complex, arduous and costly. And sometimes there appear to be competing “must haves” on each side that can end up breaking a potential deal.
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Such was the case as a large European bank entered into negotiations for enterprise-class database technology with Oracle. Forrester Research Senior Analyst Duncan Jones, who wrote a report on the situation, says he cannot name the bank or provide many specifics on the deal, but the bank’s approach to the negotiations provide best practices for how to deal with seemingly insurmountable disconnects with vendors.
First off, there was one big sticking point that the bank needed to address at the outset. Software companies, including Oracle, typically include clauses in their license agreements that remove their liability from any kind negative business-related events resulting from the software (like crashing all your company’s servers), nor are there any warranties for the buyer to fall back on.
In other words, it’s “buyer beware” on steroids. “If it doesn’t do what you thought, it’s not our fault,” Jones adds. “[Vendors] are very unlikely to do anything that creates promise in the future.”
Two of the main reasons why software companies typically include such licensing provisions are because, first, they can; and second, because there are accounting rules designed to stop vendors from misstating the timing of when they record revenues. For example, if a license agreement includes a 12-month warranty period, explains Jones, the vendor could not book the revenue from the software deal until after the 12 months expired.
In the report, which Oracle did see a copy of before Forrester released it, Jones notes that “these clauses are not usually up for negotiation because revenue recognition policies are sacrosanct, and a single exception can jeopardize a vendor’s entire accounting framework.” (Oracle declined to comment on the Forrester report to CIO.)
“I’ve heard other license-negotiation experts describe the issue as ‘Don’t bother to ask, they’ll never agree,’ and not just for Oracle but for SAP too,” Jones says. He notes that in his experience Oracle is more open than some of its competitors on software licensing deals.
But this particular bank had a corporate software-purchasing policy just as sacrosanct as Oracle’s licensing policy: The bank needed some software guarantees.
That’s because large financial institutions “insist on warranties and indemnities from their suppliers to avoid getting dragged into litigation by third parties trying to pick the bank’s deep pockets,” Jones points out. They want protection. And from day one, the bank was dead set on getting this concession from Oracle.
So as the negotiations commenced, these two “immovable policies,” as Duncan terms it, were in direct conflict with each other. One side would have to blink first.
Getting Oracle to Yes
Going in, members of the bank’s IT team knew the warranty and indemnity issues would be a possible deal-breaker. So the team assembled a couple of “carrots” to sweeten the deal on its end to get the deal moving.
First, however, came the sticks.
The bank’s lead negotiator was clear from the outset that the bank would not budge from its demand that it must have a warranty for the software. The negotiator also made it known that the bank had realistic alternatives to awarding Oracle its business.
“The IT sourcing director had to convince Oracle that his alternatives—to choose another vendor or to cancel the project—were not negotiating ploys,” writes Jones. “He told the Oracle rep on day one that the bank had an immovable policy on this point and held that position throughout further discussions until the Oracle sales team got the message.”
Then came the carrots. The bank showed Oracle that it was interested in a long-term relationship worth several million dollars. This lure proved to be a “substantial incentive” to Oracle because of the size and scope of the deal; it also was a smart negotiating tactic on the bank’s part, Jones says.
The bank also didn’t shrink from a big purchase if Oracle agreed to the deal. The bank’s IT sourcing director “ensured that the bank did not start the program prematurely with a small order, thinking it could resolve commercial details later,” Jones writes. “It, instead, offered a substantial initial purchase plus further commitments, subject to the complete contract being agreed, to give Oracle the assurance it needed before it could agree to such significant concessions.”
And lastly, members of the bank’s team did their due diligence to understand Oracle’s bargaining position, specifically where Oracle could give in, in each phase of the negotiations, Jones notes.
“The bank wanted several other concessions that had no impact on revenue recognition and were, therefore, relatively easy to get,” he writes. For example, the bank couldn’t allow Oracle the right to conduct license audits, due to confidentiality reasons, and it was able to remove the “right to audit” clause. Oracle, Jones writes, “knew from experience that other vendors had agreed to remove the audit clause with minimal resistance once the rationale was explained to them.”
What This Deal Means for You
Today, the bank and Oracle continue “to be happy with the relationship,” Jones reports. The bank got the contract modifications it wanted, and Oracle got a long-term customer. (Oracle didn’t object to Forrester’s case study and did see a “courtesy preview” of the report, he says.)
“Clearly, in my experience, this was a unique case,” Jones says. While other software vendors may concede this point during contract negotiation, Oracle is usually not one of them, he says. “This was unique for Oracle.”
The point of this example, Jones says, is not that other companies will get the same concession from Oracle. “But if you really have your heart set on something and go about it the right way—setting out from day one and sticking to it over and over again and making it worth the vendor’s while to give you those concessions at the end—then you can get some valuable contractual concessions,” he says.
Providing an alluring incentive to Oracle, of course, was key to finalizing the deal. “Don’t expect to get this concession,” Jones says, “if you’re ‘only’ spending a couple of million.”