Saturday, January 27, 2007

How To Protect Yourself In A Software Acquisition

Software users should protect themselves if an important vendor gets caught up in an acquisition. Here are a few simple rules.

Consider the possibility Gary Scholten, CIO at Principal Financial Group, considers the potential for acquisition during the due-diligence phase of choosing a software vendor, particularly if the company is in a fledgling area of technology. "Sometimes this leads us to say we're not going to take a chance on software in this space, where companies are being acquired and there's significant changes," Scholten says.

Hold fast to agreed-upon prices When a company's software vendor is acquired, it should require the acquiring company to honor the terms and conditions of its original contract for at least a few years, including maintenance prices, says Gartner analyst Alexa Bona, who specializes in software licensing. "We're seeing an increase in maintenance fees as a result of the acquisitions," she says. For example, Oracle's standard maintenance fee is about 22%, among the highest in the industry, says Bona, while Siebel's fees ranged between 15% and 17%, and PeopleSoft's were about 20%.

Beware architecture promises Be careful about the big four's plans for service-oriented architectures, such as Oracle's Fusion and SAP's NetWeaver. As a technological approach, SOA offers benefits, but it can give vendors an excuse to jack up prices. As SOA-based products emerge, Bona predicts, vendors will seek premiums of 30% or more over pre-SOA versions.

Go beyond the name Most customers license a product by name, Bona says, but in a contract, they don't define what's included in that name. That means an acquiring vendor can come back later and say, "We just rebundled this product, and it's not called a business suite anymore; it's called a specific process." Bona recommends customers include in contracts the basic functionality of the software that's been licensed, with a clause that says if it's renamed, rebundled or relicensed in any way, they're not going to pay anything extra for it.

Do your homework Principal Financial's Scholten is always wary of the acquiring vendor's integration claims. "We don't take their word for it." Scholten does an architectural assessment to try and determine how realistic such claims are, or whether in the end he'll have to do the integration work himself.

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