You’re in the final stages of your outsourcing agreement. You and your outsourcer have worked out pricing, processing, staffing. Then up pops the devil in the form of third-party software licenses. Suddenly you’re bogged down in complex negotiations you expected to be simple.
“Among the most perplexing legal issues that challenge outsourcing dealmakers are those related to third-party software licenses,” said Bill Deckelman, shareholder in the Austin law firm of Munsch Hardt Kopt Harr & Dinan, P.C. “Not only can deals be delayed or disrupted when software issues are not addressed early in the vendor selection or negotiation process, but it can also get quite expensive. Depending on the scope of the deal, payments to third-party software vendors can range from less than $100,000 to many millions of dollars.”
Software issues should be viewed as more than legal or financial hurdles to closing the deal, said Deckelman, who is actively involved in representing companies in outsourcing and software licensing transactions. An outsourcer’s willingness and capability to deal effectively with third-party software issues is an early indicator of their level of commitment and responsiveness.
“With years of transactions and litigation with software vendors under their belts, outsourcers should have a wealth of institutional knowledge that can benefit their customers,” said Deckelman.
Software licenses typically include clauses protecting the licenser’s proprietary rights, and key software issues in an outsourcing agreement revolve around transferring the customer’s software licenses to the outsourcer for that company’s access and use. For example, most licenses require the licensee to maintain the confidentiality of the software and not disclose it to any other party. These licenses also may restrict the scope of use of the software to the licensee’s own internal business. Finally, the license may require that the licensee obtain the consent of the licenser prior to any assignment or transfer of the license.
Deckelman recommends a four-step process to initiate the software license transfer.
- Obtain an accurate inventory of licenses your company holds and actual complete copies of the current licenses.
- Determine the structure of the outsourcing. For example, are you planning to transfer systems and applications software licenses to the outsourcer or only systems software licenses? Are there some licenses that will be canceled rather than transferred to the outsourcer because the outsourcer will provide the software under its own enterprise license? Will there be a period at the beginning of the outsourcing when the outsourcer is operating and accessing all of your third-party software? The outcome of this analysis will dictate which licenses must be reviewed and the types of restrictions the parties are attempting to identify within such licenses.
- Conduct a license review. One or more people who have experience in dealing with software licenses should undertake this review with supervision by an attorney with similar experience.
- Finally, review the results of the license review and determine which software licensers must be contacted and the type of consent needed from the licensers.
“If this is where the process ended, it might appear rather straightforward,” said Deckelman. “However, at the point that third-party software licensers are contacted to request the necessary waiver or consent, you will discover that many are difficult or very expensive to deal with.”
One sticking point, he said, is whether the customer’s license indicates that the licenser’s consent will not be “unreasonably withheld or delayed.” If not, although applicable state law could have a bearing on the parties’ rights in this case, the licenser could refuse to grant a waiver or consent for any reason or only upon payment of a significant fee to the licenser.
“Each licenser must be dealt with individually to work out these types of issues,” said Deckelman.
Although timing may not be everything in dealing with software issues, it can have a critical impact, according to Deckelman.
“In many cases, for confidentiality reasons, the parties will not request third-party waivers and consents until all other issues between have been resolved and the outsourcing agreement is ready to be signed,” he said. “Because the parties are usually in a hurry to complete their transaction, they will naturally impose pressure on the licenser to respond promptly to the request.”
That situation can lead to heated “eleventh hour” negotiations, said Deckelman, with the customer and the outsourcer in the position of needing to negotiate an allocation of financial responsibility for payments required by the licenser.
Choosing an outsourcer that has both the willingness and capability of dealing effectively with software issues can alleviate some of the hassles. Deckelman recommends that those attributes be identified early in the outsourcer selection process.
“An outsourcer can be a valuable asset in dealing with all of these legal and financial issues,” he said. “How valuable is a matter of the outsourcer’s breadth and depth of experiences in these matters, as well as the intensity they can bring to the table as your ally in negotiating terms and costs with software vendors.”
Lessons from the Outsourcing Primer:
- Determine your outsourcer’s capability and willingness to negotiate with software licensers.
- Don’t leave negotiations for your third-party software licenses until the last stages of the agreement.
- Obtain an accurate inventory of your licenses.
- Conduct a license review and determine which software licenses you want transferred to your outsourcer.
- Be prepared to negotiate.