Software vendors are waking up to the fact that software negotiations aren't one-sided anymore. In fact, small and mid-sized businesses may even be able to use conditions in the software market to their advantage and gain the upper hand.

The fact that software is now being sold over the Web as a service, combined with the growth of the open-source movement, has sent the cost of a lot software lower -- in fact, some programs that small businesses can use are even free. Meanwhile, competition in the software market is booming.

There are "some incredibly fast-growing software vendors that are building a better mousetrap and no one knows about them," says Michael G. Oxley, former US Congressmen (R-OH), and co-author of the Sarbanes-Oxley Act of 2002 (SOX), which requires public companies to certify the integrity of their financial records, is now an attorney with Baker Hostetler in Washington, D.C. Oxley says that software companies need to take advantage of the proliferation of software vendors out on the market today.

Vendor selection smarts

Although IT managers may not have as much experience as a sales rep when it comes to the negotiation conversation, a few key pointers can make all the difference for gaining favorable contract and license terms.

Start with a wide field and then narrow it down. Once you have two prime candidates, you can start the negotiations. Your goal should be a contract that allows for growth, flexibility, and price protection. Just hold your cards close so that you're not giving away your bargaining chips.

What you should try to demand

  • Better definitions of users. There should be a provision in the contract that allows for additional users if the company grows. Ideally, the software vendor should set up the equivalent of a shopping cart to make it easier for the company to add additional licenses, but R. "Ray" Wang, principal analyst for Forrester Research, says that most of all, businesses need to quickly establish price protection. When this is established, companies will know exactly how pricing and vendor discounts are determined.
  • Don't buy all of your seat licenses at once. For instance, if you only need 25 seats, make sure you negotiate for 50 so when you lose 25 (this is accounting for the give and take of negotiation), you'll have achieved your initial goal. Wang says that you also don't want to pay for more software than you actually need. If your software becomes shelfware (unused software) or if you fall short in the number of users, then the vendor should give you a full refund. He also adds that companies should negotiate 25 seats over the course of three years, rather than deploying 100 seats at once. Wang says, "Be cautious with your comments to the sales reps…. If I've got 100 seats, I'll need software for less than that."
  • Better ownership rights. Give affiliates and contractors access to the software, which can also include managed hosting providers and other third-party providers.
  • Full disclosure in contracts and vendor financial records. Companies should have access to customer lists, legal and performance issues, bugs, as well as financial performance.
  • Maintenance. Wang adds that companies need to keep their maintenance costs low at around 20-25 percent, which is the equivalent of purchasing new software every four to five years (in a 10-year software lifecycle). According to Wang, vendors should also price fix regular maintenance updates and that these updates should be tracked.
  • Deals on other software. If the manufacturer has other products your business could use, try to negotiate a package deal for both. 

Both Wang and Oxley agree that it's important to hire legal counsel whenever there's a contract involved, but having extensive knowledge about the negotiation process will help you get the best possible deal since IT managers work directly with all involved parties.

Draft your own contract

Although writing your own contract is a lot more work that using the one provided by the vendor, the results will be worth the time and effort.

In today's economy, IT managers are the go-to people to solve business and technology issues, as they are the ones who understand their software's lifecycle best. It's crucial that IT managers understand the importance of education, research, and discussions amongst their peers to make wise software choices and save money for their businesses.