by Thomas Wailgum

Gag Me with a Contract: These Software Licensing Tactics Should Be Illegal

Jan 30, 20093 mins
Enterprise Applications

So much for that whole “We want to be a trusted partner” line from enterprise software vendors. Forrester Research’s star ERP analyst Ray Wang recently blogged about software vendors’ latest licensing tactic.

In talking with clients during the last three months, Wang says, he has heard about “egregious” new license practices by software vendors. Namely, the vendors are attempting to impose “gag rules” in contracts to limit their customers’ use of third-party contract advisers. What’s worse, Wang writes, some of these vendors have succeeded.

Here are two specific areas where vendors have asserted these new stipulations:

Limits on third-party negotiation support. “Licensees [are] limited in their ability to discuss contractual terms with others,” Wang says. “On top of this, discussions of contractual details require the vendor’s written permission.”

The impact, Wang writes, is that legal advisers, contract specialists and other interested third parties must obtain permission. “A vendor recently banned a licensee from working with a contract specialist, citing confidentiality,” he adds.

Restrictions on freedom of speech. “One vendor had the audacity to include legal language to restrict a client from disclosing details about bugs, defects and contractual breaches with the press, peers and user groups,” Wang writes.

The effect: customers will be prevented from working with peers and others in the software company’s “ecosystem” to help with technical issues or compare pricing options. “In addition,” Wang adds, “the customer now lacks the proper checks and balances in pressuring a vendor to deliver on promised capabilities or address severe security issues, and cannot go to the media as a last resort, if needed.”

Vinnie Mirchandani, a former Gartner analyst, blogger and founder of consultancy Deal Architect, which helps companies negotiate software contracts with vendors, writes in an e-mail that “no vendor will make such a request if the deal is competitive. So every company should, during the evaluation, state they will have advisers and attorneys over the course of the procurement.”

“If a vendor has a problem, they can disqualify themselves,” Mirchandani writes. “Trust me, they will not.”

As to vendor concerns that advisers such as Mirchandani will spill the beans about the contract and information obtained during negotiation process, he says that every adviser signs a non-disclosure agreement with the technology buyer. “That should provide vendors some comfort,” he notes.

In addition, Mirchandani says, customers should turn the tables on the vendors and ask them “if they have advisers and consultants,” he adds. “Believe me…there are lots of advisers on the other side.”

For more advice on how to deal with this tactic—especially because software vendors have lost a lot of their negotiating power due to the economy—see Wang’s insightful blog.

Good luck and let me know if you’ve come face to face with these tactics recently.