Every software-enabled solution has a license agreement, but when was the last time you actually read one? Do you know what’s in the fine print of software license agreements? Are you aware of the potential consequences when using digital products and services without fully understanding their terms?
License agreements define the rights and responsibilities of each party – the user and the supplier. This webinar will help you navigate a license agreement, identify common pitfalls to avoid and give ideas on how to structure a license agreement that is clear to everyone.
During this 45-minute interactive webinar recorded January 26th, 2023, Applied Frameworks’ SVP of Product Carlton Nettleton and SVP of Sales and Marketing Laura Caldie explored:
What exactly is a Software License Agreement?
What to Look Out for When Reading a Software License Agreement
Common Misconceptions About Software Licenses and How to Avoid Them
Understanding the Rights, Limitations, and Obligations of Software Licenses
The Benefits of Knowing Your Way Around a Software License Agreement
*Transcribed using Otter.ai – Please ignore spelling and grammar errors
Carlton Nettleton 00:00
Laura Caldie 00:04
All right, so my name is Laura Caldie. And I run Sales and Marketing here at Applied frameworks. I’m also the webinar host for today. So that’s my main job right now is to let you all know that we’ll be recording the webinar and sharing out the link to the recording along with some. You know, if whatever questions get asked during this, if we feel we could do a better job or a deeper dive into any particular question, that’ll also be part of the email that we’ll send out to registered. So I think one of the things to note in terms of logistics for the webinar is, as you have questions, it would be great if you could put them in the q&a button. And when I can, or when it makes sense, I’ll interject them over the course of the webinar. And whatever we can’t get to that way, we have time at the end to talk about questions. So any question you have in q&a will be helpful to us. Even if we don’t get to it, we will get to it in the follow up email. So no question is a waste of time. Absolutely. The point out here is if you need to reach me, my email address is on there, Laura at applied frameworks.com. And I’m sure you all know this, we say it a lot. But our focus is helping organizations create sustainable, profitable software enabled solutions. And when you’re thinking about the application, or the introduction of software, for some companies, their hardware software is new, right? For other companies, software is what they’re delivering. But figuring out how to create a business model that’s both sustainable and profitable, requires a lot of things right? Often agility is part of it. Portfolio management is part of it, right? So these are areas that we focus on in that product management space. This is Carlton is our head of product. So this is certainly a area of extreme interest for him. But this webinar really is about okay, well how do we think about sustainable profitability when we’re talking about a software enabled solution? So if you want to flip forward, Carlton, so for me, my personal interest in kind of how you create a profitable software enabled solution really is around customer understanding. And my background, other than being in sales is I’ve participated in many kinds of customer research, customer understanding pieces, and when we’re thinking about the system that is profitable software, we talk about it as profit streams. Customer is just one segment in here that that I happen to be kind of personally interested in. But it’s the system. And there’s a lot to this. And this is why I’m really excited that Carlton is leading this conversation, because he’s really going to be talking about licensing, which is super important to the system itself, but not necessarily my personal strengths. So I’m really glad that
Carlton Nettleton 02:48
Okay, thank you. So I’ll pass it over to you, Carlton. And you can say a few words about yourself. Yeah, I’m the SVP of product here at Applied frameworks. My responsibilities are around managing our portfolio products, which includes, you know, lots of different things that we offer here. So our consulting services, our live instructor led training and our online academy. So I’m the co creator of the five frameworks Online Academy with our CEO, Jason Tanner. And a lot of my focus recently has been working on how do we improve and expand the impact of our product management accelerators. In fact, I’m getting ready, just this week for a trip to India to do some work with the product management academy for one of our clients in India. So I’m really looking forward to that. I live in Portugal. So we think,
Laura Caldie 03:43
no, actually, well, if you put the slide forward your dog shows on there, too, which is, of course, I love your dog.
Carlton Nettleton 03:52
So this is my dog.
Laura Caldie 03:53
Oh, actually, one more. So one thing I did want to mention here, and we’ll send this out, as well as we have a lot of webinars that are recorded now around profit streams. And so this is one dimension, but for those who are interested, especially after this, if you go to our webinar page, you’ll see recordings for many others that I think are also really interesting. Yep.
Carlton Nettleton 04:12
Yeah, this is me, my background here, just SVP of product from trainer and Laura wants to see the dog. That’s my dog is Boston Terrier. He’s one year old this week. So. Okay, well, thank you very much, Laura for introduction and helping people come to orient themselves to what else we’ve talked about with respect to profit streams. Today, we’re talking about software licenses. And when I mentioned the term software license, what image comes to mind? Alright, so kind of think about that. Is it like we have here the image on the left a seemingly incomprehensible block of text written in perhaps a foreign language or Is it kind of like the image that we might have here on the right? Peering into a mysterious abyss that perhaps has no end? Our goal today is to help clear up some of the confusion you might be experiencing. So that the next time you read your software license agreements, you feel confident, you understand what you’re reading. Okay, so let’s take a look at some of the agenda that we have. Agenda straightforward introductions, we’ve already done that. What we’re going to be talking about next was Why do you care about this topic? And what do you need to know some pretty straightforward agenda. And what I’m going to do today is to synthesize multiple concepts from different webinars. So don’t worry if you’ve missed out on different webinars, you won’t miss it much. But I’m going to synthesize multiple concepts to show you how design choices made by product managers and product owners impact multiple elements of a software enabled solutions business model. So we’re going to do some synthesis today and show how all this stuff is interconnected. And as Luke and Jason like to say, the authors of our profit streams book, it’s a system, right? So let’s think about why do we care. And I want to start on this idea here. A long time ago, I was a geophysicist. And here are some of the tools that I used while out in the field. Right, rock hammer. So as geophysicist, you want to expose a fresh surface of rock outcrop so that you can see the minerals and you can see what’s there get under the dirt. Next, we have Brunton compass, so the Brunton compass is used to measure what’s called the strike and the dip of faults and rock layers or rock formations found in field. This is just data that you collect very important to help you understand what’s going on in the subsurface. Here is a digital camera, enabled with GPS. And this is used to record any outcrops, or unusual formations with an image. So a lot of pictures, geologists, geophysicists take or have like, folds and rocks, and they usually put like a coin in the picture for scale. And then finally, last thing you need are hiking boots, because if you’re going to spend a lot of time on your feet, you need some good shoes. All right, and what I want to ask all of you, right, because we are, connect this in a moment two software licenses, one of these tools is different from the others. And I want you to think about which one that is. And you can share with us in a poll. What you think it is. So let me launch the poll. So Laura, we while we wait for people to answer this poll, what do you think which of these tools is different from the others?
Laura Caldie 07:51
Oh, I have an unfair advantage, because I know. But you know, given the fact that I’m, you know, about to need a better pair of winter boots myself, like I’m focused there, I’m Chicago. And it’s snowing and wet and cold, and my shoes aren’t going to cut it today.
Carlton Nettleton 08:10
I have to say the point and compass, I wish I didn’t move recently, and I found my broken compass, I had to adjust it for the declination, because compasses need to be adjusted where you are in a position of the Earth, because North kind of moves around.
Laura Caldie 08:28
I wouldn’t even know how to calibrate that. I would not know you
Carlton Nettleton 08:31
have to you have to look at a table. So. Okay, so feels like we’ve got 16 out of 19 people at I’m going to end the poll there. And let’s see what came up. We’ll share the results. Alright. And the results are just for everyone here. rock hammer 22%, compass 11% digital camera 44% and hiking boots. 22%. Okay. And let’s sell for those of you that said it was the Pentax GPS enabled digital camera. You are correct, right? That one is different from all the others. But how is the digital camera different? What makes it unique? Right, how is this one different from the others and tell us in chat? Right? What do you think Laura? What what makes the digital the Pentax GPS enabled digital camera, different from the other ones?
Laura Caldie 09:32
Well, again, I know the answer, but one of the things I’m thinking that output is digital and it can live in many it’s output can then live in many places so I could have what it produces live on my computer, it could be in the cloud, like there’s flexibility on the output of what it creates.
Carlton Nettleton 09:50
So we’re seeing some ideas technology, it’s technology it has GPS creates an archive software neighbors the camera function out functionality input output. So for the folks or people that said technology, it’s true, but remember, the compass is a piece of technology. It’s it’s a magnet, it is its technology, it’s analog. It’s analog technology. Right? And this here, I think people would say, I think someone mentioned software, right? What makes the digital camera unique is the software. Right? It is the one field tool here that relies on software. And while and, and here is why I’m talking about this software enabled camera in a webinar about software licenses, right? Just get this to work. Software is not a physical thing, its intellectual property. Right. And this is really, really important when we talk about software licenses, because because software is not a physical thing, right? It’s intellectual property, it means that we have to license the software to the customer, it’s not sold. And unlike a physical good, like perhaps this candle, or my wallet, or the button compass, where the customer can transfer ownership rights, I can give that Brunton compass to someone else, or I can give my rock hammer to geologist student, a software license restricts how and what ownership rights may be transferred, if any at all, right? Now, some of you might be thinking at this point, wait a minute, digital cameras a physical thing I can buy. So I’m not quite following your logic here, right? Because, you know, this is this is a camera digital camera, too, right? Physical. If you attended our November webinar on value exchange, you will recall that the pattern of value exchange described with my digital camera example is called hardware. If you did not attend that webinar, don’t worry about it. A value exchange model is simply a pattern that describes when the customer is a provider money. What do they expect, in return? In this case, right? That would be a pen text GPS enabled digital camera, right. And so I give the provider, let’s say it’s amazon.com money. They give me back a pen text GPS enabled digital camera. But without the software. The digital camera is an inert piece of junk. And that’s why we call that value exchange model hardware, the value people associated with the hardware, right, the digital camera comes with free software already installed on the device. Right. And so what software exists on a digital camera? Well, there’s algorithms to digitize and store them in memory. There’s software to manage and display digital photos on the camera on the little LED screen, their software to adjust the various settings of an image such as color, saturation, tin, warmth, Christmas, etc. After the photo has been taken, and most importantly to the geophysicist in the field, their software for the GPS, the precise latitude and longitude and elevation of a location. So when I’m out there taking pictures of these rock formations or when, where these faults are, right, I know where that was on the map, I don’t have to go figure it out old school, like with the Brunton compass and try to triangulate my position, which I did in graduate school, right, and the use of that software, all that software that’s on the Pentax digital camera is governed by license agreements. In fact, the Pentax digital camera shows that there are actually two types of license agreements that we need as product owners and product managers to pay attention to. Right. So if you’re buying the digital camera, right, your use of the digital camera is governed by a customer license, the rights and restrictions imposed upon you by Pentax right. On the other hand, if we’re Pentax and we wish to embed, for instance, the GPS software into our digital camera, the use of that software is governed by what’s called a solution license, the rights and restrictions imposed on us by our suppliers. Okay, so this digital camera example is really good because it talks about when you buy a digital camera and you open it up as a piece of hardware. There are a number of license restrictions that you have related to the software, right you can’t actually go and modify the software on that digital camera. You’re not allowed to do that. I can give the digital cameras somebody else. Right. That’s fine. They can use it, but they can’t go would modify that software either. Now, Pentax also makes agreements with me as the user of the camera, what sort of things that they will provide me. And as you know, with sometimes with digital cameras sometimes support for the software for, you know, downloading the images. They don’t support it after a certain amount of time. So after 510 years, like I have some really old digital cameras, the software, the software that runs a digital camera, like on my computer, it’s defunct. So why does a product manager need to understand the relationship between customer and solution licenses, especially as it relates to solution licenses? Because every software enabled solution is a mixture of new code and systems integrations with other components. And in the case of the Pentax digital camera, how they used and paid for the various components of like the GPS, the image algorithms, digitize our lives, digitize the images. All of that was defined by a solution license. Right? They had to go to the people who wrote the software for for those two examples, and get permission to use their software on their physical device. And they had to pay for those rights that didn’t negotiate what rights they could have. And if you think about the applied frameworks profit stream canvas, this is why licensing is two blocks. In the profit stream canvas, the profit stream Canvas has 10. So 20% of the profits from Canvas is all about licensing, customer licenses, right those relationships you impose upon your customers, and solution licenses, the relationships that are our suppliers impose upon us. And in the Pentax example, we saw the outlines of how the value exchange model hardware drives, design choices made in the solution and customer licenses. So let’s look at another example which will show how design choices in our solution like how we architect the system propagates into pricing, solution licensing and customer licensing. And I just want to emphasize again, software enabled solutions and profit streams. This is all an interconnected system. You can’t think about these things in isolation. So in the applied frameworks Online Academy, we licensed multiple solutions to deliver our advanced Scrum and product management accelerators products, right. The three solutions we in license, right are our learning management system, or LMS. We get that from a company called Cypher learning our ecommerce platform WooCommerce pretty standard internet, and then our credit card processor stripe. So let’s look at in detail are some of the restrictions stripes imposes on us because we don’t want to build a credit card processing system. We don’t want to build an E commerce platform, we don’t want to build an LMS. So Arj competency is continuing education for product management and advanced scrum practitioners. So we in license these technologies to deliver our solution, perfectly legitimate approach. But because we license stripe to do our credit card processing, they put certain restrictions on us how we use our technology. So stripe charges a transaction fee for each sale we make, right that’s their value exchange model is called transaction. And this has an impact on our profit. So for instance, one of our products that we offer an advanced scrum training is called Advanced Certified Scrum Master Express. Our current price level is $795. Right? And if you look out, you know according to the transaction fee from stripe stripe, you can see what our payout is and how much we have to pay stripe to use their solution on every transaction. But if you look at the price level, right, this is sufficiently high so that this payment stripe is negligible when compared to the overall profitability of this product itself. Okay. Stripe also has some rules around refunds, which impact the profitability, right. So let’s take a look at what our refunds were at our online academy last year. Right. So this is for everything that we sold on the Online Academy. We had 13 out of 29 transaction 239 transactions were refunds it’s about 6% which is a little bit below the industry average. So I’m not too concerned about this annual loss. You know the big scheme of things this is you know, acceptable. However, strikes rules about No refunds after six months does have a material impact on our customer license. So because stripe will not refund us, after six months, they won’t send the money back to someone’s credit card. That means on our end, we would have to write a check, right to pay someone back their money. And, you know financially, we’re not going to do that. Right, that’s actually a much bigger loss than 379. So as a result of stripes, restriction that impacts the customer license and our customers like so is absolutely no refunds after six months. Now we give people all sorts of refunds. If you don’t in the first seven days, if you don’t like it, we give a full refund. After that it’s a pro rata refund based upon how much you consume. But after six months, there’s absolutely no refunds, because we can’t get that money back from stripe. And I just want to emphasize here, right? Is the second example, much like the Pentax example illustrates why understanding software licenses are so important for product managers and product owners, right? All of these things are interconnected. And while things you don’t think would have an impact, really do. Take a quick pause because I feel like I’ve been monologuing how’s it going our session on me so so far.
Laura Caldie 21:29
So at this point, if anyone has any questions, or you just want to make sure we’re going to talk about something or maybe even have a scenario you want to pose, please feel free to come. And we can certainly do some kind of scenario discussion discussions as well. Yeah, no, I think keep going. And don’t have anything to interject.
Carlton Nettleton 21:52
Okay, yeah. So, alright, so where does the product manager start? Right? Well, here’s some advice we give our clients, the number one piece of advice we give to our clients, be the contract. And software license agreements are contracts. And if you do not read the contract, you do not know what you’re signing up for. So I urge you take the time to understand the terms contained in any solution license for the components that you use in your software enabled solution. And make sure it’s clear in your mind, what commitments you’re making to your customers in your customer licenses. Because that is a contract of a relationship that you’re establishing with your customers. So if you say it in the license agreement, you have to deliver on. And because software licenses or contracts are often detail. They use specialized language. And let’s face it, they’re a bit dry to read. I was just reading one preparation for this webinar. It’s tough, right? And if you don’t understand something in a contract, do not guess, consult with the corporate counsel. Product Managers are not lawyers. So do not pretend to one and I just want to emphasize this point, right? If you don’t understand what’s there, go talk to a lawyer. That’s their job to give you advice and to know this stuff. Right? Okay. So, talk to a lawyer. If you have any doubts, there are lots of sections to these contracts. Right. And in the spirit of time, I’m only going to focus on these six areas, okay. And to help make this conversation more real and less theoretical, right, I’m going to share with you excerpts from a customer license agreement from a customer company that I discovered called spanning spanning is a small software company based out of Austin, Texas, about 25 people. And they’re a provider of a software enabled solution that stores and protects data generated by SAS solutions. So for instance, suppose you want to make your own you want to make your own copy of any sort of proprietary data that you’ve stored in a Google workspace or in Salesforce spanning solution allows you to make a backup of that data that you have stored in the cloud. So let’s take a look at the first sections that we identified definitions usage. So this section offers a precise legal depth, legal definition and description of all the important terms or items referenced in your license agreement. Right? We recommend that you pay close attention to what is listed in the the sections, right because these definitions will often include specific version numbers, supported operating systems, hardware considerations, and so forth. And If it’s not listed here, you don’t get access to it. For instance, if you’re expecting upgrades and support, and they’re not covered in this in these sections, you will have to create another contract to pay your supplier to provide you with the needed or required technology. So if support isn’t covered in definitions and usage, guess what? You’re not getting it. So let’s take a look at an example from spanning. So what you hear are some examples of definitions. Little bit dry, right, Laura? And other things that they define in their, their license agreement, this section of definitions are, what’s confidential data. What did they mean by documentation. So why statement of work, they defy that what a user is an order form and other terms. Right. Again, this is a this is a legal contract. So they have to define all these things in here. Next, take a moment here to see what is described as Unisys. What you’re going to see is I’m going to highlight and read the key parts of these contract agreements just because I wanted to highlight the key ones. So, this is the usage non sub licensable. Right means you can take their solution and put it into another solution that you create non exclusive, which means other people can use it, revocable which means they can take away rights, non transferable right to use the software. So you can transfer to a different company, the ability to use their software, okay. It is limited to authorized users, which is the reason why they define what a user is, you shall not exceed the number of purchase seats. So seats are also defined. And it shall be used for the licensees internal business purposes only. Right. And this kind of emphasizing like, Hey, you can’t win based on this contract, you can’t go out and create a cloud backup service. I can’t like Laura, you and I can’t get together and be like, Hey, we think people will love to use a cloud backup service. Let’s go to expand its tool and use it and sell it not allowed to do that. Alright. Now, again, the thing I want to kind of emphasize also here, when you look at usage later in the agreement in the section on proprietary rights, which I did not highlight, the contract is very clear that this software is licensed, not sold. Remember what I said software is intellectual property, therefore it’s licensed, it’s not sold, and that any services that spanning might provide would be on a subscription basis that they are not sold. So they are being super, super clear that you are only licensing this. Okay, definition or term, quite simply, this is just when the contract begins and ends. But it gets a little bit more complicated than that. Because we’d start talking about little different types of dates. Right. And you’ll notice here I say, Hey, pay close attention to these dates, there’s lots of dates, you may not be able to read the effective date, expiration date, payment, audit periods, and termination notice. So the effective date is when the the date the contract begins. expiration date, date when the contract ends. Payment is when you need to pay the supplier for the use of the technology. Next audit peep periods. If you have audit periods in your contract, which this one actually does, and it highlighted here, that means that the supplier can come on site and review your use of the technology. And if you are using the technology in a way that’s not defined, you may have they can revoke your right to use the technology. Remember, it’s revocable or they can charge more. And then termination notice is how much time you need to give to begin to end the relationship. Okay, so let’s take a look at what some examples from spanning. Okay, so here’s what we’re talking about is that they’re talking about terms is defined as periods are actually going in. And I like this example of the spanning license agreement because it’s not super clean. There’s a little bit of messiness, they have a definition embedded in a section talks about the effective date and notice that they said that there’s not a termination date, they will define one for you. Right three year anniversary of the effective date. Okay, that’s fine. That’s the section on specific use and supplies things, but sublicenses. So, there are three types of use. Typically, there’s development, so you can get a license to use something in a development environment. There is another use, which is quality assurance or verification. So basically, hey, I want to assess the technology before using it. Right. And then there’s finally the which is like a commercial use, okay, you can use this in commercial products. One of the things I want to make super clear is, you have to confirm how you use the technology. Right. And so this picture I showed this recently to some colleagues, they really liked it. The idea here is that unless your license agreement says that you can use the cat in the box, right, you can, you know, for instance, you have this cool component, and it’s represented by the cat, let’s get it from a supplier. If you don’t have the right to sublicense that component, you cannot take that component that you get a supplier and put it into another solution. Right, you can only put it into your solution. And if you want the ability for your product to exist and another solution, right, you need to ask for permission from your supplier, you need to ask for permission from your supplier to use that cat in a different box. Right? And this, let’s take a look at what spanning says about sublicensing. Okay, so you get one copy for backup or test purposes. Right? You can only deploy or possess the number of copies that are expressly specified on the order form. And I think we saw earlier right, they talked a lot about non sub licensable. Right? Again, this is a legal agreement. Right? And this is how they’re describing its use. You can you could only have a number of copies that are equivalent to what’s on the order form, except for one copy made for backup or test purposes. All right. And then here we’re talking here non sublicensable, non exclusive, revocable non transferable right. So in this case, spanning is like you are not allowed to sublicense or technology in any way form. Or you will be in violation of the agreement. All right. So termination, right, one party may and so termination talks about this idea that, how do we end the relationship? Right. And one party may breach the agreement due to performance ratings reasons. Right? Maybe I’m bought spanning and I only bought 10 licenses, I am using 50. Or maybe spanning is not providing a solution. That’s performance. And so it was sort of maybe has lots of bugs or quality decreases, right. So termination allows one party to breach. But oftentimes there are remedies. enumerate in the contracts, just because there’s a breach in the contract. There’s sometimes are like clauses, which will say, Well, you know, each party has opportunity to rectify the breach. Sometimes, contracts are terminated, when there’s a substantial change in control. There’s a bankruptcy. So maybe standing just goes out of business, or the producer or they no longer produce the technology. So Spanish says, Listen, we’re not going to we’re not going to support this anymore. That’s very common with software, because certain versions become deprecated. And the thing, though, with termination, especially if you’re in licensing a solution, right? Replacing an end license technology with a new tech, let’s say, you know, we want to use the new LMS. That is a big, big undertaking for us at Applied frameworks. I’ve already replaced one LMS and went through that process learning management system, I wouldn’t do it again, or growing your own. Like say we say, you know, we can build our own learning management system. It always takes longer than planned. So even though that there isn’t learning man, a termination clause for remedies. It’s not, you know, sometimes it’s better to stick with the technology. So an LMS is called a learning management system. It’s a platform in which to engage with learners asynchronously for people who might be unfamiliar with that term. Alright, so they talk about termination for standing Let’s take a look at the really easy one section be the end of a term that’s not renewed. Right? So at the end of the contract, they just say, Hey, we’re not going to renew it. That’s termination. Right? Or you could say, hey, not 30 days following written notice of any material breach. So you can end the contract, but you have to have written notice. Right? That’s an oh, that’s why I made a comment here. So it’s references sections two or three by the licensee. So what did what were some examples. So I looked at the contract here, it says, exceeding the number of users specified in the order form. That would be an example of the material breach, having multiple copies of software, using the software outside of internal business purposes, reverse engineering the product, right. So you’re not allowed to try to reverse engineer spanning solution. So you can’t purchase span and solution with the idea of like, hey, if we buy this, we can kind of on crack its code object code. Nope, can’t do that. Creating a derivative work. So my example or and I like, hey, we want to create a new business to create a cloud backup solution, and at its core will be standard solution. No, can’t do that. Hacking license keys, and also violating US export laws, right? Most software license agreements, especially with sensitive technology, are governed by federal export laws. Alright, so real simple, this section here, how much does it cost? And this Where’s where things can get tricky, right. And the tricky thing is that when you in licensed technology from a supplier, they have their own business model, right, their own value exchange model, in which they want to make money. And so you want to make sure that your value exchange model of your software enabled solution is compatible with the value exchange model of your supplier solution, or that ideally, that they’re harmonized, or at least they can work together. If there’s, if there’s a disk, they’re discontinuous, then you may not be able to leverage that technology. In your solution, you may have to build your own solution. Good example that I like to use is thinking about the idea of, we want to create a streaming service. Let’s say that streaming service is going to be you know, show movies, a variety of movies, classic movies, but maybe kids movies, right, but and we want to get and we want our customers to pay what’s called time based access. 99 United? Great, okay, that’s good. But maybe the library of content that we want to get, right, the coolest science fiction movies or the coolest superhero movies in order to license that technology. That supplier says hey, you know what, you need to pay us a royalty basically a transaction fee. Right? If that transaction fee is sufficiently high, right, that meant the cost associated with consuming that content from that library could outweigh the money I collect from my time based access the 9099 per month. So yeah, it’s just that that mixture that the to match up as a product owner or product manager. And here’s an example here from spanning. And notice here, right, software, based on software licenses, service purchases purchase, not actual usage, right, doesn’t matter if you buy 100 licenses, you know means too, too bad. Non cancelable non refundable. Right, so we sign a contract for 100 licenses, and then later we say oh no, we don’t want to do that. Or we want to get a refund of 30% too bad and you can’t decrease the contract. Renewal. This is pretty straightforward. What happens when the contract ends when the time runs out? Well, is this something that you want? You want to be on the lookout for automatic renewals? So it seems convenient as a consumer, like oh, yeah, as a customer, I got automatic renewals like LinkedIn does automatic renewal If I am in licensing technology for my software enabled solution, and its core to by the delivery of my value to my customers, core profitability. Sure, automatic renewals Great. Let’s see how spanning solves this problem. And I just picked spanning at random, I was trying to find an example of something to download as a PDF. And if you go back to the slide on spanning, there’s a little bit LI tag there, you can download their license agreement, read it on your own. So here automatic renewal of the term equals the length of the previous term. Alright, so if we had a one year contract, automatic renewals one year, if we had a three year contract, it automatically renews for three years. And remember, it’s non cancelable, non refundable, you can’t decrease the number of licenses that you have. It’s based on seeds, not usage. Right. And so let’s say we had a big company, we had 200, licenses for spanning right, went through some downsides and some economic problems. Good we need, we only need 50. But we had automatic renewal, that means we would still have to pay for 200 licenses to automatic renewal. The other thing, which is really, really interesting here, is they automatically build in a 5% increase on the new term, plus any increase in the consumer price index. And in the United States recently, there’s been a lot of inflation. Right now, right, I looked at what this would be. So from the US Bureau of Labor Statistics, that is 6.5%. So if you have automatic renewal spanning write it the total is 11.5%. That’s a lot that you may not want to be paying on an automatic renewal. So read very carefully around automatic renewals. And this is other sections, territories, noncompete deployment restrictions and marketing requirements. territory is sometimes related to, you know, you want to read these sections carefully, where you can use the solution, or any restrictions you might want to put on the customer on how are they use it non compete, right? Are you able to compete in the same space by using it? Marketing requirements that is more with respect to a classic one is Intel inside? Right? There were a lot of times, you know, people would say we have the Intel chip. So that’s the marketing requirement. These are some things that you think you want, but you probably don’t, which is exclusivity. Generally you don’t want to have it, you think it might be valuable for exclusivity on a certain solution or component, or access to the source code. But the thing with the source code here is okay, so you get the source code, what are you going to do with it? So sure, it’s nice if it’s in the contract. But if the supplier goes bankrupt, you have access to the source code. It’s not really gonna help you because do your engineers know the programming language? Are they familiar enough with it to get it up to speed? So source code, you know, is a nice thing to put in a contract, but may not really be that relevant. And that brings us to the end. So Laura, what sort of questions we all? Know, you’re on mute. Sorry.
Laura Caldie 44:01
Yeah, I think some of them might have been answered already. But, um, and I know we’ve lost sort of, so we can. But let’s see. So you talked about it, but it’s like really being clear on what the duration and term is of a contract is really important from the, you know, and I’m gonna paraphrase here. But if you’re the creator of the software enabled solution, be very intentional about what the term is that you’re granting to your customer for whatever money is exchanged, has to be really clear. And I think maybe sometimes the I can imagine where the term and contract doesn’t actually match how the software behaves in the market. Right. So when you’re at the end of the term, does the software just stop working?
Carlton Nettleton 44:47
Yeah, right, or,
Laura Caldie 44:52
or does it never stop working and your end of the term and you have to manually go police those systems that you’ve built, and so you’d met hinted earlier, but having this systems thinking approach means that what sounds good and easy and a contract may or may not be good and easy to enforce from a software architecture and behavior standpoint.
Carlton Nettleton 45:13
Right? Exactly right. Everything’s interrelated. So if if, if you’re trying to enforce, hey, at the end of the license, they lose access, your developers might be a sample, what happens to their data? Right? Delete the data, see a compliance, right?
Laura Caldie 45:31
There might be some kind of compliance requirement that you retain data for a certain amount of time. Alright, so firm can end someone loses access. And your engineers are absolutely right to ask, Well, what happens to the data? And the answer might be very much tied to what the compliance and regulatory environment looks like that you operate in,
Carlton Nettleton 45:51
which is another block and the prophecy that I put. Or you may be required by compliance to maintain the data, which means you have to, you have to put that in your license agreement, right, that you lose access, but their data will be maintained for this amount of period.
Laura Caldie 46:15
On the flip side, when you’re talking about like, in licensing, right, let’s say you’ve incorporated some library or some data set into your solution that you do have the rights to resell or incorporate in your solution. But perhaps you have a term licensing that needs to be renewed periodically. And are you remembering that that’s the case? Do you have mechanisms in place to make sure that those renewals are happening? Or at least reviewed? I can also imagine there’s a point in time where maybe you’re not using them anymore, and yet, you’re still paying?
Carlton Nettleton 46:48
Alright, well, yeah, that’s why sometimes there’s these automatic renewals in these license agreements, where as a product manager, you need to decide do I want this or not? And B, B, and here’s the thing with a lot of solution, solution licenses, unless you’re super mega, there as is, you can’t negotiate. You can’t I can’t go to span and be like, Oh, by the way, you know, I want this in the license agreement, right? That’s not going to happen, you’ve got to be at the mega scale of like the huge tech companies to get your own license agreement. So it’s your responsibility as a product manager to be aware of these risks, like for instance, renewal, and then to work with the engineers and say, Hey, do we still need this? Is it still providing us value? And is it still? Is it still profitable? Yeah.
Laura Caldie 47:44
Um, okay. So another one that I wanted to talk about a little bit is, when you have performance, big, you know, performance metrics, or SLA is built into your contract that your customers then purchasing from you whatever solution it might be. There might be times where, while you say you’re going to be up 99% of the time, and then there’s penalties if you’re not, and the customers kind of call you on that legally. And from a business term standpoint, it might be enough to like put you out of business, what happens if you can’t adhere to what you’ve said, you will be able to do, right? Like that could actually happen, where the penalties are so great that it puts the company at risk for not having to adhere to it.
Carlton Nettleton 48:26
Right. And and so the job of a product manager or product owner is to bottle out that risk. So right you say hey, you know what, we’re up 99.99%. uptime. Great. That’s awesome. All right. But you have to look, you have to do the modeling, say, okay, worst case scenario, we’re down here are the penalties. Can we absorb that? Right. And I would propose that’s the product manager needs to bring up that topic. But it is the decision makers isn’t the product manager, it’s the it’s the executive leadership team with that organization would have to make that choice or whoever is the operating financial authority at the at your level, because I don’t think Google’s going to be making that the CEO of Google’s make that decision, they might try that down a little bit lower to like,
Laura Caldie 49:18
it does bring up kind of an interesting scenario that I remember Luke Holman, talking to us about where he was working for one organization where the license agreement said, in effect, and I’m paraphrasing, will, will support every version of iOS right from the beginning, right, and they didn’t write it in a way that allowed them contractually to stop supporting super old and in fact, eventually completely unsupported versions of the OS. So they had to renegotiate the contract with their customers to say, look, if we if we don’t renegotiate this term, and we’re required to support you know, versions of an OS that might be eight or 10 years old. We can’t do it. It’s an existential Risk for our company like there, it’s so difficult that we would probably go out of business if we had to do it. So they actually renegotiate every one of their contracts in order to have a more reasonable backward compatibility clause because they hadn’t thought about it first built it.
Carlton Nettleton 50:15
Yeah. And I, you know, people say, Oh, well, you know, you can’t renegotiate a contract. Actually, you can. That’s a good example. That’s not the only example I’ve heard of renegotiate a contract. I’ve also heard of another scenario, where there was a big, there was an error on the on the fees, huge fees, right? Someone put, you know, three too many zeros in there. And people went back and said, Hey, we made a mistake. We didn’t review this. And, you know, we agree to this. We it’s an existential, we’d go out of business. And we want we were coming to you, we want to support you. We’re not saying we don’t want to support the product. We just made a mistake. And and a lot of the people are like, yeah, no problem. We don’t want you to go out of business. Right? So they fix that error. And so you can renegotiate these things. I mean, then you’re talking, I mean, you put it you gotta get the lawyers and the product managers.
Laura Caldie 51:13
Product Manager notices it, right. I mean, as boring as it may sound, it’s actually remarkably interesting to read through a contract on both sides. And just think about, like, what kind of impact does this have on your ability for future choices, or revenue choices that you might want to make? Again, it’s a systems thinking piece, where in what impacts and surprising ways. So
Carlton Nettleton 51:35
yeah, and that’s kind of summarized here. I mean, there’s three main points. One is all the components of the business model of a software enabled solution, our system, you cannot look at these in isolation, right. And changes made in one area of a software enabled solution are linked to one or more areas. And so changing your solution can have could have impact in on your customer license or your pricing as a product manager. The second point is you must read the licenses for any technology in license. So any component even something simple, like Java library, right, or some type of framework that’s fundamental, read it. Right, make sure you’ve read it like okay, I, most I understand what this is. Yeah, most importantly, you need to understand the input, those implications to your business model. A lot of components you just buy, and you have perpetual license. Great. And then finally, I would say it’s your responsibility to create and update the customer license, as your solution evolves. And review your in license technology, as the solution involves every six months or so is what we recommend.
Laura Caldie 52:47
So there’s one more question that I think is better answered in one of our pre recorded webinars, but um, Brijesh asks about the product managers ability to affect things like pricing. In this case, he was talking about user pricing and how that ends up being impacted by procurement and where it’s being sold from and bulk kind of buying agreements. And so this is kind of, I think, gets into the pricing webinar that Jason? And so if, actually, if you want to, I’ll put the link in the chat, actually, but go ahead and listen to that. But yeah, I mean, it’s a combination of what’s the value exchange model? What’s the actual price? And then what are the policy, the pricing policies allow for changes in that to happen. So when you talk about like bulk pricing and how that gets implemented through this system? It’s, again, it’s a combination of the value exchange model being defined, the price being defined, and then policies that impact the ability for people to have flexibility on what price is paid for volume deals, for example.
Carlton Nettleton 53:52
Yeah, I think that’s a Jason has three categories, different types of discount policies. One is buyer identification, and another one is time. Timing. When you buy, yeah, allows you to get a discount. Yeah. So
Laura Caldie 54:14
two, yeah. All right. So we’ll put a plug in for that one. I think if you want to advance the slide, Carlton, there’s a couple I wanted to
Carlton Nettleton 54:22
pick. Which you want to go near the end where we talk about what’s coming up.
Laura Caldie 54:27
Yeah, I mean, we’ve got just a couple of minutes left, so we should probably get close to wrapping. So what’s next? You know, if you want to flip to the next slide, I’m curious for those who are here, what do you wish we would go deeper on or what else do you want to know? The profit stream Canvas is a you know not Don’t be restricted to what you see here. But in case you wanted to be refreshed on some of the things that we could potentially dive into. If you could make a webinar request or a topic request, throw it into chat if you have an idea about what you’d like to see and And then if you want to while people are typing that in if you want to advance one more here so the other things that can come next would be the profit streams book is very close to being done. In fact, I have a pre release actual physical thing that looks really fantastic. So we’re getting very close to the screen available. So if you go to the profit streams.com you’ll see that we also teach this course it’s a two day class. It has been fantastic feedback on this so far. So while it’s one of our newer courses, it’s available and if you want to talk to us about delivering it as a private course we are updating our public course offerings as well but definitely as a private courses is fantastic too. So those are two things there and that I think that’s probably it. And look at that
Carlton Nettleton 55:50
All right, well, thank you everyone. I appreciate the folks that made all the way to the end. If you have questions on this, please send them to myself or Laura. Join our profits students community we are trying to bring people together really want to learn and exchange more and stay in touch right Laura?
Laura Caldie 56:12
Yep, stay in touch and stay tuned for more we’ll be sending out the link to the recording and then updates about future webinars. Okay. Thanks everyone and crops and thank you so much. This was really
Carlton Nettleton 56:23
cool, great. Later Oh,
About the Maximize Your Software Profit series:
The Maximize Your Software Profit series is hosted by SVP of Product, Carlton Nettleton and is designed to introduce the idea of Profit StreamsTM
Profit is the net income resulting from revenue minus expenses. Profit is essential because, without profit, a business is unsustainable. The problem is that while there is lots of guidance on how to price regular goods and services, there is little guidance on how to design profitable software-enabled solutions – until now. This series will introduce you to Software Profit Streams™, the natural – and necessary – evolution of value streams.
Carlton Nettleton is the SVP of Product at Applied Frameworks, and co-creator of the company's Online Academy. Carlton has over eighteen years of industry experience working with clients to improve quality, increase productivity, build great teams, and launch new products using Agile software development practices and techniques.
Today, Carlton’s focus is directed at mentoring and supporting Scrum and Agile practitioners who work in less than ideal conditions. He shares his energy and enthusiasm with our learners so they can achieve their personal and professional goals. Carlton is fluent in both English and Spanish, has written a short book on Scrum and has been Certified Scrum Trainer® since 2012. Read Full Bio