The Top 3 “Gotchas” in IBM Deals


IBM agreements are known for their complex licensing rules and opaque renewal rights, which result in myriad risks to the customer. We have identified the three biggest problem areas in IBM contracts: (1) not-to-exceeds, (2) the Aggregate Capped Program (ACP), and (3) audit rights.


Not-to-exceeds


A not-to-exceed (NTE) is IBM’s way of saying “renewal cap”, which limits the percentage amount that the vendor can raise prices, found in its enterprise agreements (ESSO, SSSO, ELA). Usually, the NTE is bundled and requires customers to renew 100% of its software and support. Please note that when customers do not renew the full 100%, they are still required to pay the full NTE dollar amount. Also, in some cases, the NTE does not cover all software and support in a contract, and IBM can charge list pricing at renewal on these items.


Customers with no NTE caps in their contracts are at risk of random price increases and being forced into new spends to avoid list price increases at the end of the term. This leads to lost discounts and value in IBM agreements, which can only be mitigated by additional spending.


What you can do:


We advise clients to establish competitive renewal language in their IBM ELAs to maintain a positive negotiation position at renewal. With NTEs in the contract, clients can renew their deal at a pre-determined rate, rather than reward IBM with new spend in exchange for reasonable maintenance costs. As a general target, IBM NTEs should cap increases at 5-10% above the cost of the last year of the customer’s contract.


Aggregate Capped Program


The ACP refers to a customer pre-paying into a pool of funds or credits that can be used to deploy certain products within the contract. If the pool of credits is not used up before the contract term ends, they expire.


This program is marketed as a flexible, buy-as-you-go model. Customers believe they can easily add licenses at a later date, and therefore think they need not forecast accurately, or worry about over-buying product initially. However, we have observed two problems that result from this mindset: customers often over-commit to ACP funds, which they later forfeit, and/or they fail to include the correct products in their catalog. Clients frequently complain that they are unable to use the ACP in their agreement.


What you can do:


Customers are urged to invest the time to determine the accurate amount of funds needed in an ACP, and exactly what produces to include in their catalog. Otherwise, IBM will ask the customer to extend the ELA and commit to additional ACP funds to avoid write-offs. This situation would only make matters worse: the customer will end up spending more money on credits without solving the underlying problem, which is not having the right SKUs in the catalog.

Audit Rights


IBM is contractually allowed to audit customers at any time during the ELA term. If found out of compliance due to over-deployment, the customer must true-up at list price for the unentitled software.


The most common audit finding is related to sub-capacity rules.


Sub-capacity lets a customer license a portion of a server rather than its entirety, which can greatly reduce licensing needs and costs. To be eligible for sub-capacity, customers must be using the highly problematic IBM Licensing Metric Tool (ILMT), or another eligible software asset management (SAM) counting tool. Either way, the tool needs to be up and running quarterly reports that date back two years.


Customers routinely fall out of compliance and guarantee audit findings due to IBM’s rigid reporting requirements and complicated ILMT. A customer’s inability to provide the required reports, or any issues with installing or configuring ILMT will void the rights to use sub-capacity licensing. Subsequently, IBM can charge list price and two years of back maintenance fees for the full capacity licensing requirements.


What you can do:


We recommend that clients make sure that their SAM team keeps up with all the rules in the IBM licensing agreement. If their internal lacks experience with IBM licensing rules and ILMT, we urge them to bring in a third party to optimize licensing and identify any gaps between entitlements and deployments before a software audit occurs.


It is important to remember that IBM is among the industry’s most aggressive auditors, and frequently begins audit activity at the same time as customer renewals. Knowing that they are highly likely to discover instances of noncompliance, IBM uses this knowledge as leverage against the customer: you can either pay the inevitable noncompliance penalty charges or commit to more spending.


For more information on this subject, download our guide titled Top 3 ‘Gotchas’ in an IBM Contract, read or our blog titled Leverage: The Key to Every Deal, or contact your ClearEdge representative.