This is the latest in a series written in collaboration with Paul Longhurst at 3Kites and first published in Global Legal Post.

“Software costs shouldn’t be a problem – we have maintenance agreements in place with providers and, in many cases, have bought our software licences outright”.  So why are we hearing more and more stories about firms receiving notifications of huge increases in annual costs or being moved onto subscription licences when they already own a perpetual licence?

We are in the midst of a general trend for vendors to transition customers across to new cloud environments but, as a part of this process, some are applying pressure to switch from annual maintenance for products held under an existing perpetual licence to an annual subscription model which includes both the licence and maintenance costs. 

Looking at this from the vendors’ perspective, the cost of developing fully cloud-based SaaS solutions is huge.  Add to this the cost of maintaining a legacy on-premise system and you can see how the operating costs soon rack up for vendors.  To encourage the transition across to the cloud, some vendors are reducing or stopping functional development for on-premise systems so that these fall further and further behind the cloud system over time.

However, if your firm has already purchased perpetual licences, then it does not make sense to move to a subscription model for existing (and no doubt dated) on-premise software.  The problem we are finding here is that not all law firms have copies of the original contract, especially where these are from 15 or 20 years ago.  Without the contract, it is more difficult to argue about what a perpetual licence entitles you to or any limits on maintenance cost increases. 

Here is where Richard Kemp and his team at Kemp IT Law come in… over to you, Richard.

As Paul says, the first thing is to look at the contract the firm is currently operating under so you can see what you’ve got.  This can be less easy than you think – the contract may have been shoved into the proverbial bottom drawer (i.e. no one knows where it is), people may have moved on, the vendor may have been taken over or the firm may have merged.

But even when you’ve tracked it down, this may not get you very far as what the firm is actually using today may look very different from what it bought all those years ago.  If that was an on-prem, perpetual licence deal, the likelihood is that the firm will still be paying for maintenance annually, typically around 20% of the old perpetual licence fee (plus inflationary rises of at least 5%).  When the vendor’s support invoice comes through, it may also have Ts&Cs on the back which vary the original agreement.

So, that’s the problem – what’s the solution?  Cloud (or SaaS, Software-as-a-Service) contracts typically operate as a subscription model where the firm pays a periodical fee (frequently monthly) per seat which wraps up, in one charge, all the ‘as a service’ elements – hosting, licence and support.  So the question is how best to switch to this cloud model from the on-premise model.

The initial point is whether you have to think about a choice now.  This means finding out from the vendor how long you’ve got with the on-premise system: we’re seeing vendors increasingly ‘end of lifeing’ their on-premise systems (i.e. saying support will no longer be commercially available) beyond a set date, typically two or three years out, to ‘encourage’ customers to switch to the cloud.  

If you want, or have, to switch to the cloud, the firm is really blending two sets of commercials which should be addressed in the contract at the same time.  First, what’s the deal on the cloud?  The vendor will give a better price for a longer term deal (which the firm won’t be able to terminate part way through for convenience) and more seats (which generally the firm can increase but not reduce).  The vendor may offer tiered support (silver, gold, platinum) at higher prices.  If in the cloud the firm is using the vendor’s platform or a third party platform as a service (e.g. Azure or AWS) in place of its own on-premise servers, that will be an extra cost, and maybe a further contract with the PaaS (Platform-as-a-Service) provider, over and above the cloud SaaS.

The second thing is how much the on-premise service (i.e. the present day value of the balance of the perpetual licence and support) is worth and whether the cloud provider will, in effect, part exchange this for the new cloud service.  In our experience, this ends up as a horse trade rather than a detailed financial exercise, but vendors have been receptive to the charge of making firms pay twice for the same thing and as a result been prepared to contra on-premise runoff costs against ongoing cloud costs.

So there you have the contractual options, both for your existing system and to consider for future procurements.  One other option here is to switch to a new vendor altogether although there may be issues with supporting the existing system as you transition across to the new one, getting access to data for conversions, and/or with accessing legacy data in the old system after such a change.  It is important to know what your position is before you start this journey… and to ensure it doesn’t happen in another 15 years with the new one, even if you aren’t there to help at the time!