Companies spend millions of dollars on third-party software products to automate and integrate their operations—from operating systems (OS) for mainframe and distributed systems, to enterprise resource planning (ERP) software, to end user applications. For companies with software and systems shared across business units, implementing corporate changes, such as a divestiture, can be a challenge. Few companies have software strategies—or contractual provisions to support such strategies—that enable them to implement a divestiture without significant diligence, including the following:
- Identification of business unit dedicated and shared software
- Review of contract terms that allow for assignment (in whole or in part)
- Review of contract terms that allow for use as part of post-divestiture transition services
- Development of a software vendor communication plan and, if necessary, negotiation approach
We spend a significant amount of time working with clients to perform software diligence in contemplation of a divestiture or similar corporate action. Set forth below are a few pointers for lawyers and contract and sourcing professionals to consider when licensing software, managing software portfolios, and engaging pre- and post-divestiture activities.
Negotiating the Software License and Support Contracts
We all know that the big (and many of the small) software vendors can be tough to negotiate with, particularly for commercial off-the-shelf (COTS) software products and services. However, with software costs being a major investment and software vendors striving to be business "partners," many software vendors are developing a more flexible approach to address corporate change, which allows customers certain (if not limited) rights to assign rights in software agreements in whole and, in some instances, by license, with the additional right to unbundle maintenance. Agreeing to assignment and unbundling rights in software agreements upfront may save companies, including divested operations, incremental software costs in the event of a divestiture.
Good Software Management Practices
As software tracking and management tools and processes improve, many companies are focusing on the importance of maintaining current inventories of the software products in use and by which corporate entities they are used, what software is running where, licensing entitlements, and the number of software installations. Keeping inventories and usage databases current saves time when there is a corporate change to consider and, again, may reduce incremental software costs. Also helpful to any review project is a good contract management system (and the availability of current contract documents).
Key Diligence Activities Pre- and Post-Announcement
- Collecting inventories
- Collecting contracts
- Developing a contract review template
- Reviewing software contracts
- Assessing rights and consents and identifying high-risk areas
- Developing consent and assignment letters
- Developing a consent and assignment strategy
- Developing vendor communication plans
- Implementing vendor communications regarding continued software use
- Obtaining consents for use as part of transition services
- Obtaining consent for assignment and unbundling of software maintenance
- Effecting assignment
Many of the leading consultants have practices that focus on advising clients with respect to software negotiations. We found the article from Deloitte on "A Better Way to Reduce Software Costs in M&A" particularly helpful.