Strategically Negotiating Software Contracts
Software suppliers today have a strong negotiating position—whether they are hyperscalers, SaaS providers, or traditional on-premise manufacturers. Contracts and licensing models are often deliberately designed to be complex in order to retain customers in the long term or generate additional revenue.
This presents IT managers with three key challenges:
- Cost risks: Licenses, subscriptions, and support are among the largest cost blocks in IT. Price increases of 10%–20% are not uncommon.
- Security and compliance risks: Audit clauses, GDPR, data location—mistakes can be costly.
- Lock-in risks: The deeper the technical integration, the more difficult it is to switch. Software providers are aware of this advantage and use the dependency to their benefit.
That is why software contracts are no longer purely a purchasing issue, but are based on strategic management decisions.
The following checklist can serve as a guide for your next contract negotiation.
1. Existing contracts (if any) analyzed?
Review existing contract terms, notice periods, pricing structures, and usage clauses to identify risks and potential savings.
2. Have you fully understood the contract mechanisms and licensing models?
Classification of license types (perpetual use, rental, PAYGO) and types (e.g., user, device, volume, or consumption models) and their impact on costs and flexibility.
3. Have license requirements been accurately determined and optimized?
Comparison of actual usage with existing licenses, identification of over-licensing or under-coverage, and derivation of optimal requirements.
4. Have demand developments been integrated?
Planning for future organizational changes such as growth, projects, outsourcing, or automation in order to realistically map future requirements.
5. Market benchmarking and alternatives examined?
Comparison of prices, contract models, and technological alternatives on the market to evaluate negotiating advantages and possible provider changes.
6. Complete TCO calculation for the contract period created?
Calculation of all direct and indirect costs (licenses, support, infrastructure, operation, migration, training) to understand the overall economic impact of the contract.
7. Commercial model detailed?
Negotiation of price and discount model, taking into account flexibility options in the event of changes in requirements (increase/reduction) over the contract period.
8. Regulatory requirements contractually taken into account?
Comparison with requirements such as GDPR and industry-specific regulations to meet compliance obligations.
9. Are audit clauses fair?
Exclusion or definition of transparent audit mechanisms, reasonable deadlines, and fair procedures to avoid unnecessary risks from manufacturer audits.
10. Is the exit process clearly regulated (including costs and data format)?
Determination of how data can be exported, which formats are used, what costs are incurred, and how a smooth transition is ensured.
Conclusion
Software contract negotiations should be based on well-founded strategic decisions. In most cases, preparations should begin at least six months before the target contract date. An interdisciplinary team comprising specialists from IT, purchasing, software asset and license management, data protection, IT security, and legal should be entrusted with the preparation and negotiation. External experts in software licensing and contract negotiations, such as Complion, can provide support during the process. The IT manager should be kept informed throughout the process and involved in important decision-making points. With the right timing, they can also exert a decisive influence on the outcome of negotiations with the software supplier.
Author: Felix Baran