ERP Licensing: Positioning Your Company For the Future (Part 2)

This is the second of two postings that outline key pricing protections you should consider negotiating with licensors of ERP software to provide flexibility and predictability in managing the ongoing license and maintenance costs associated with the software.  In the earlier posting, we discussed future option discounts, exchange rights, and maintenance locks and caps.  In this posting, we focus on shelving and termination rights, acquisitions and divestitures, and successor products.

Shelving / Termination Rights

Shelving and termination rights provide the ability to reduce annual maintenance spend on unused licenses by either “putting them on the shelf” until needed or terminating unneeded licenses altogether.  There are three basic approaches to shelving and termination rights.  In descending order of desirability, they are:

• Shelving – which allows you to shelve and later reinstate licenses subject to paying a reinstatement fee (typically based on the maintenance fees that would have been payable on the shelved licenses during the shelving period);
• Termination – which allows you to terminate unneeded licenses to reduce maintenance fees, but does not allow reinstatement of the licenses (i.e., you would need to purchase replacement licenses if you later have a need for them); and
• Termination Tied to New Buys – which allows you to terminate unneeded licenses only to offset maintenance fees on a contemporaneous new purchase of additional software from the licensor.

Licensors often strongly resist shelving rights and they can be difficult to obtain in the absence of considerable negotiating leverage.  As a result, termination rights may be the only viable option on some transactions.

Some licensors take the position that termination is an all-or-nothing proposition; that is, the client must terminate every license to every licensed product in order to terminate even a single licensed unit of a product.  This is an outrageous position, particularly given the broad scope of products and functionality in ERP software.  At a minimum, you should push hard for the right to terminate either individual licenses or logical groupings of licenses without having to terminate all other licenses.

Acquisitions & Divestitures

Once implemented, you can expect to use ERP software for many years.  During this period, there is a good chance that you may acquire another company or sell off one of your business units.

• Acquisitions – To address future acquisitions, you should make sure that the license covers all existing and future affiliates of the legal entity that executes the license agreement.
• Divestitures – To address divestitures, the license agreement should permit you to use the software to provide transition services to a divested business unit at no additional license or maintenance fees (other than fees associated with increased usage of the products). The transition period should extend for a minimum of 12 months and desirably longer.

Successor Products

From time to time, licensors will discontinue products and incorporate functionality from the discontinued products into new products.  This forces you to either migrate to the licensor’s successor product or look for an alternative in the market.  Given the cost and criticality of ERP software, you should negotiate the right to obtain successor products without additional license or maintenance fees when they are released by the licensor (and in any event at such time as the licensor announces it will cease to provide mainstream maintenance on the product).  Licensors will often condition this right on you’re not using any new functionality of the successor product.  However, the design of the successor product may make it impossible to avoid using new functionality and there should be an exception that permits your use of new functionality to the extent it cannot reasonably be avoided.