Cisco Enterprise agreements can provide long-term benefits and savings, but they must be scrutinized carefully case by case to see if they make sense.
Cisco Enterprise Agreements (“EAs”) are becoming an increasingly popular vehicle for purchasing and consuming software products and services from Cisco.
The general concept is that – rather than purchasing individual software products and associated software maintenance on a unit by unit basis – the enterprise pays Cisco an upfront fee to cover all of its purchases of a certain suite or suites of Cisco software products, plus the associated software maintenance, over an agreed period. EA unit pricing is typically a function of the number of authorized users, or covered devices. But other metering units may apply to certain suites.
The benefits to the customer are that the upfront fee for the suite or suites under the EA should be less than it would have paid to purchase the software licenses and support on a unit by unit basis, and the customer can acquire more software or service units to meet its business needs without incurring additional charges, provided that the total consumption remains within certain growth limits. The benefit to Cisco is that it gets a lump-sum payment upfront for closing a sale for a substantial volume of business in a single transaction.
Cisco targets its EA propositions, which they call suites, at Cisco ONE software, collaboration software and security software products. Significantly, these EAs do not cover the sale or support of Cisco’s hardware products
Maximizing the value of a Cisco Enterprise Agreement
As with any new deal construct, there are various important criteria enterprise buyers must consider to realize the benefits they expect. Sizing the EA correctly is one of the most financially significant considerations. Some earlier iterations of Cisco EAs offered, to all intents and purposes, an all-you-can-eat proposition, with no limits to organic growth, which is broadly defined as growth that is not due to mergers and acquisitions. Cisco now rarely offers all-you-can eat EAs. The current iterations of EAs cover a specific projected quantity of software consumption, with an allowance of 20% growth before additional charges apply.
When determining the covered users, devices or other metered usage baselines for the EA, you must strike a balance between making sure that the EA is not oversized, which would cause you to pay for units that will never be consumed. You must also make sure it is not undersized, which would introduce a risk of exceeding the growth allowance and give rise to additional payments, unless you intentionally design it that way.
Cisco uses an “End User Information Form” (EUIF) to document the exact inventory by type and count of product and services the EA will cover. The EUIF also establishes the growth allowance. You should obtain, review and validate the EUIF early in your negotiations with Cisco to set the optimal baseline and growth allowance. If, for example, your forecast of what you will consume under the EA is very accurate, you may want to under-size the EA slightly so that the in-built 20% growth allowance covers the expected overage from such under-sizing, thereby maximizing the realized value of the 20% allowance.
In evaluating the value proposition of an EA, you must understand the rate at which you would expect to use the covered products. In particular, Cisco will present the value assuming you will consume all covered products from day one of the EA. In reality, you are likely to ramp up your usage over time as you deploy the applicable software throughout the enterprise. This makes little difference when purchasing perpetual software licenses since you incur the same cost regardless of when it’s purchased. But for software maintenance and software purchased on a subscription basis, the start date is relevant because there is “lost” value from the EA for unused software maintenance and subscriptions as you ramp up consumption.
Consider a three-year EA executed on July 1, 2018. It would provide software maintenance coverage from July 1, 2018 to June 30, 2021. If you do not activate a particular software license until January 1, 2019, you would receive only 30 months maintenance coverage for that particular license rather than the 36 months of coverage you purchased.
Now consider that you purchased the software maintenance independent of an EA. The three-year software maintenance contract would run until December 31, 2021, six months longer than the coverage under the EA. Understanding and quantifying this “lost” value due to license-consumption ramp-up is an essential part of evaluating the overall benefit of an EA and should inform any EA pricing negotiations.
Credits for prior purchases are an additional area that can help boost the EA’s value for the customer. Under a leverage-based negotiation, enterprise buyers may be able to obtain Cisco’s agreement to provide credits (to be applied against the cost of the EA) for past purchases of software and support that would be covered by the new EA going forward. This can be a key deal point because most discussions on an EA occur when the relevant software and services are already starting to be deployed by the purchasing enterprise.
Negotiating the commercial details
As part of negotiating a Cisco EA, there are a number of commercial parameters that you’ll need to work through, which all contribute to allowing you to realize the EA’s full value:
Working out how the 20% growth allowance is applied – EAs typically include a range of different software products and services. Understanding and precisely documenting how the 20% growth is administered is key. For instance, does each individual covered software product have an individual growth allowance, or is the allowance applied in aggregate? Carefully defining the usage metrics can also make or break the business case. For example, company personnel may consist of a variety of on-site personnel, such as traditional employees, staff augmentation resources and extended term project personnel from outsourcing providers. Depending on the company and the deal, not all of these personnel categories should be counted for EA pricing purposes.
Agreeing to the cost of exceeding the growth allowance – The charge for an EA tends to be rather opaque. It may not be readily clear what the applicable unit charges would be when/if the growth allowance is exceeded. Accordingly, you should reach agreement with Cisco or the VAR on these incremental unit charges up-front, and then capture them in the contract. Your EA terms and conditions should clearly document the true up/true forward process (which is normally an annual, go-forward only process), with a particular emphasis on defining what constitutes “using” a license. Merely accessing a license in the Cisco portal shouldn’t necessarily constitute consuming that license.
Securing rights to upgrades – Your rights to receive upgrades and incremental feature releases at no additional charge need to be carefully negotiated. An EA does not necessarily automatically give access to all potential new upgrades and releases.
Addressing changes to the included software and services – Cisco will reserve the right to make changes to the services provided under the EA, and even potentially declare services to be end-of-support or end-of-sale. For EAs with a longer term, this can mean that the software and services you purchased up-front are no longer available or are changed in ways that make them less fit for your purposes in the later years of the EA term. Negotiating rights and remedies in this area (such as refunds) can help protect the value of your EA purchase as Cisco’s software and related service offerings evolve.
Obtaining EA extension rights – Laying out what happens when the EA expires is a fundamental deal point. Moving back to purchasing the services on a unit-by-unit basis may be difficult or commercially unpalatable at the end of the EA. But if the price for extending the EA is not agreed, then you may also find it difficult to negotiate a new/extended EA at an agreeable price and terms. Accordingly, extension rights – including the price for such extensions – should be agreed when you first enter into the EA, which is when you have more negotiation leverage.
Contracting to Protect the Commercial Benefits
EA contract structures can be challenging to navigate for the uninitiated. Despite its name, a Cisco EA is not usually a single enterprise contract document entered into between Cisco and the enterprise customer. As with many Cisco offerings, EAs are often fulfilled and contracted through Cisco’s third-party channel partners or VARs under the enterprise customer’s purchase agreement with the VAR. For your enabling EA contact documents to reflect the deal you want, you must establish ground rules early in the process with both the VAR and Cisco to ensure their mutual and constructive engagement in the negotiation. To be successful, you must involve Cisco directly. A middleman between you and Cisco is rarely productive or efficient and can lead to a sub-optimal outcome.
With most middleman-dependent supply channel arrangements, the VAR contract documents are unlikely to address the EA framework in way that adequately protects the customer’s interests. The initial set of documents may be in the form of a letter agreement, work order, or purchase order (under an existing VAR resale purchase agreement) incorporating Cisco’s EA program terms, which are made available to the VAR by Cisco and then passed through to the customer. These program terms may be presented by the VAR as non-negotiable. For enterprise buyers, EAs should not be entered into on a non-negotiable basis.
After you’ve obtained the VAR’s and Cisco’s concurrence to negotiate and set the overall master-agreement structure under which the EA will sit, there are several other layers of EA-specific terms and conditions to work through. In addition to the VAR master terms and Cisco EA program terms, EA contract documents will include any or all of the following: suite-specific terms and conditions, End User License Agreements, end-of-life policies, platform omnibus or umbrella terms and conditions, suite or platform-specific acceptable-use policies and service descriptions. Many of these contract layers are added via URLs in various other documents in the EA document stack. Identifying and reviewing each layer and then negotiating contract changes that reconcile problematic conflicts or inconsistences is an essential step in preserving your commercial deal.
A particularly fraught area in EA negotiations is the decoupling of the customer’s upfront payment for the software product and service bundle from the performance and delivery of those products and services over the EA’s term. In most software and service transactions, customers can receive refunds or cease paying for services or software when the software or services materially fail to meet their specifications or the contract’s other requirements. The form of the payment relief varies. It could be a refund due under a warranty when software defects have not been corrected in a timely manner. Or it could be contract-termination rights that allow the customer to discontinue use and future payments for software or services that materially fail to meet the contract’s requirements.
The combination of the Cisco channel partner fulfillment and contracting model (where Cisco provides the services, but payment obligations and other remedies flow through the VAR), the upfront payment in full of the EA’s multi-year fee, and Cisco’s firm reluctance to refund fees paid in advance introduces considerable risk that a customer will remain fully on hook financially for software and services that it should, under normal deal circumstances, be able to terminate for cause. Eliminating this risk entirely for EA transactions is unlikely, and such risk should be factored into the purchase decision when pursuing Cisco EA offerings. There are, however, some strategies available to help customers mitigate these risks:
Adding detailed software and service descriptions – To establish whether the software and services Cisco provides include the features, functions and performance you relied upon in agreeing to pay the EA price, the EA contract documents should expressly set forth service descriptions, software specifications and service levels. Customers should strive to stabilize these specifications in their EA contract documents.
Defining termination triggers – The EA contracts should identify scenarios when the customer may terminate, for cause, individual software products or suites and the EA in its entirety. Useful termination triggers include: Cisco or the VAR materially breaches the contract and fails to cure the breach within a defined cure period; Cisco discontinues a software product or service or materially and adversely changes any software in the EA bundle; and the occurrence of one or more service level failures that qualify as a critical performance failure.
Establishing a credit mechanism and refund rights – Although refunds are preferable, customers are more likely to obtain a successful negotiated outcome with Cisco and its VARs by pursuing credits to get financial relief when the customer terminates specific software platforms or services for cause. Refund rights are best reserved for termination of an entire EA suite. Since most EA pricing is bundled, care should be taken in the pricing negotiations to establish a means to determine credit or refund amounts when there is a partial termination.
Cisco EAs should drive lower costs for the customer and provide purchasing flexibility. They are, however, an evolving and complex deal structure that must be carefully analyzed, negotiated and documented to make sure that the cost savings and purchasing flexibility benefits are clear, realizable and contractually protected. Armed with these insights, customers can minimize the cost and risks while maximizing the value of their Cisco EAs.
This article originally appeared on NetworkWorld.