- May 15, 2017
- Posted by: Tom Ryan
- Category: Thought Leadership
Author: Thomas K. Ryan, Principal, GLB Global
Abstract: Two recent cases in the news highlight the need to ensure that when you negotiate your ERP software licenses that you keep your eyes wide open, think and plan for the consequences of what you agree to over a 10 year time frame (or more), and that you protect yourself for what some ERP vendors are willing to do to gain more revenue.
Two recent cases in the news, one between SAP and AB InBev plus one between Oracle and Mars highlight what can happen to you if you don’t consider the extended impacts of what you negotiate into your contracts with the software publisher. Additionally, these events emphasize how you need to pause and consider the long-term impacts of each clause in the contract, no matter how seemingly innocent.
In the SAP vs. Anheuser-Busch Inbev case, SAP is seeking potential damages in excess of $600 million for breaches in the software license agreements. A very large sum considering that InBev spent about $140M annually over 3 years with SAP. This case follows on the heels of SAP winning a similar disagreement with another brewery, Diageo, to the tune of $70 million. At the heart of both cases is the concept of indirect users or accessing data indirectly from the SAP database by Salesforce.com or similar system. SAP’s argument is that, essentially, each of these Salesforce users, even if they aren’t SAP users, gained benefit from data originating from SAP transactions which is maintained in the SAP database, even though that data belongs to the client. AB Inbev has been a loyal customer of SAP based on spending about $420 million over three years. This type of behavior by SAP makes you wonder why anyone would want to be a loyal customer when they put a knife to your throat in this way. The heart of this dispute is in the definitions of different types of users, what they cost, as well as the definition of what is considered allowable indirect access and how is that measured and costed.
The Oracle case derives from what they can demand and do to a customer in the execution of a compliance audit. In this case, Mars Inc. filed with the courts for relief from Oracle’s demands for documentation to support their audit efforts. Before relief was granted, Mars had deliver 233,089 pages of documentation at their own expense in response to a “license review” initiated by Oracle in 2014. The information that Oracle demanded, and was not contractually entitled to, was focused at VMware version 5.1 or higher servers that were not running Oracle but Mars was using for other applications. [Note: Oracle’s VirtualBox competes with VMware Workstation] It was Oracle’s contention that these servers and clusters that were not running Oracle applications should be licensed as well. They went so far as to threaten to terminate their agreement with Mars if their demands were not met. Mars has dropped its case; implying that a settlement was reached. The heart of this case is the definition within the contract as to what constitutes a server, CPU, core, etc. and what constitutes “running” the licensed applications.
Please don’t think from these examples that this is only a problem for the larger enterprises. I know of one where a $150M revenue company had two international entities that were a part of the total enterprise. The vendor knew about both entities when the license was negotiated and they were referenced in the license. But several years later, the software vendor redefined what the legal entity relationships meant and they wanted $250K more in license fees. Also bear in mind that most mid-sized enterprises don’t have the resources to fight these types of abuses. Even in the Mars case mentioned above, the unique event was that Mars fought it, not that situations like this don’t happen frequently.
You should be sensing a theme here, definitions of terms in a contract. Often these definitions are glanced at, accepted without much thought, simply not analyzed for potential financial impact in future lean years when software publishers may get more aggressive in licensing tactics and more creative in their enforcement of the terms of the licenses.
You need to make sure in your negotiations with software publishers that the definitions of the terms that drive pricing are clear with little ambiguity or room for interpretation. This can be a difficult negotiating task, especially with the larger, more powerful, and well established software publishers.
- What is a concurrent user, a named user, a limited user, an indirect user?
- What constitutes a CPU, a core, a server?
- Where does a VM server fit in?
- What about high availability and disaster recovery environments?
- What is the definition of an instance? Is there a licensing difference between production, back-up, test, training, etc., environments?
- What about multi-site environments or subsidiaries/divisions?
- What are the nuances caused by different corporate legal setups/organizations?
- What are the implications during a transfer or sale or acquisition?
- Are there any limitations on the frequency of audits or penalties as a result of an audit?
I personally don’t like any of these licensing methods. They can all be subject to interpretation that leads to court or at least arbitration and added indirect costs to defend yourself. Instead, I prefer clearly measurable transaction metrics, e.g.
- Outbound order lines shipped, not just entered
- Inbound order lines received, not just entered
- Paychecks processed, not just employees
- SKUs in a forecast, not just SKUs in the database
- Production/Work orders processed, not just entered
Finally, ERP contracts are not just a legal document. Take the time and read all the fine print. Run projections over a 10-year period to make sure you understand the full costs of ownership. Negotiating these contracts is not something you do every day. You need to involve a broader base of operational, technical, and legal resources in the review and negotiation process. Anticipate where your business is heading and negotiate pricing for future purchases now when you are a new client and have the greatest leverage. Each time you add new capabilities you have a new chance to negotiate. The publishers are going to try to reset you to current pricing for everything, don’t let them.
Please visit our Resource Center for other items we have published. There you will find other related articles, specifically; Challenges Cost Justifying ERP in F&B and Key Factors for ERP Business Case Success. For more information about using a consultant to help with software selection, see our previous post titled The Smart Software Selection Consulting Decision.
Last, if you have any questions about building a business case, enterprise systems available to assist with food and beverage manufacturing, software selection, implementation oversight issues, or contract negotiations, please contact us at firstname.lastname@example.org or 630-303-2282 or 630-481-6340.
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