Software procurement is simply the process of acquiring new software for your business. It sounds simple enough, so why is it a big deal?

Software and business operations have become inseparable, with well-integrated software able to set your business apart from competitors. With IT software playing such a pivotal role in business efficiency, it is imperative that organisations look at software acquisition in a strategic way from the outset.

Software procurement is the process of identifying, selecting, contracting and managing the software an organisation uses. It covers requirements, supplier evaluation, licensing, contract terms and renewals. Done well, it controls lifecycle costs, makes sure new software works with existing systems and avoids paying for licences that are never used.

What Is Software Procurement?

Buying software differs from buying tangible goods. You are usually buying a right to use a product, not the product itself, and the terms of that right decide what you can do with it and what it costs over time. There are three considerations to bear in mind throughout the process.

• Costs – Unlike tangible supplies, software often incurs ongoing fees such as licences, maintenance and upgrades. It is always worth comparing the long-term costs offered by distributors or value-added resellers against purchasing direct from the vendor.
• Compatibility – Software is supposed to support and improve organisational activities, so it is essential that any new purchase is compatible with your existing infrastructure.
• Flexibility – Technology advances at a rapid pace. Weigh up the cost benefits of longer licence terms against shorter terms that allow your business to move to a new product when needed.

Implementation, integration and support are usually bought alongside the licence, so software purchasing overlaps with IT services procurement. The two should be planned together, as a low licence price can be offset by high implementation charges.

Procurement in IT companies has an extra dimension. Software is often part of the product being sold as well as an internal cost, so licence terms for development tools, cloud platforms and third-party components affect margins directly. A software industry procurement strategy therefore needs to cover what goes into the product as well as what runs the business. Where a technology business reviews how it buys as a whole, sometimes described as software industry procurement transformation, these contracts are usually among the first to be examined.

The Software Procurement Process

The software procurement process typically follows other procurement procedures and can be broken down into three stages: analysing and identifying needs, tendering, and contract execution. The steps within those stages are set out below.

1. Identify your needs – Analyse business activities and agree what the software must do. Separate essential requirements from desirable ones, and record the systems it must integrate with.
2. Review what you already have – Check existing licences and contracts. A need can sometimes be met by a product you already pay for.
3. Research the market – Identify suitable vendors and resellers, their pricing models and the technology that comparable organisations have successfully implemented.
4. Request proposals – Issue a tender or request for proposal (RFP) to a shortlist, with clear evaluation criteria.
5. Evaluate – Score the responses, run demonstrations against your own scenarios and compare the total cost over the full term.
6. Negotiate and contract – Agree price, licence terms, service levels and ongoing maintenance support with the selected supplier.
7. Implement and manage – Make sure the supplier delivers the software along with any agreed implementation, support or warranty, and keep track of usage and renewal dates.

The quality of the documents issued at step four has a large effect on the responses you receive, so it is worth knowing how to write an RFP before you start. For larger purchases, the process should also sit within a wider IT procurement strategy, so that each new product fits with the rest of your technology.

Whilst software purchasing might seem relatively straightforward, the licensing and contract terms can be difficult to compare. This is where external software procurement support is often used, particularly for high-value or business-critical systems.

Buying or renewing major software? Talk to our technology procurement team.

Software Licensing Models

The licensing model decides how you pay and what you own. Most software is now sold under one of five models, and a single vendor may offer more than one.

• Perpetual – A one-off fee for the right to use a version of the software indefinitely, usually with a separate annual charge for support and updates.
• Subscription – A recurring fee for the right to use the software for a fixed term. The right ends if you stop paying.
• Software as a service (SaaS) – A subscription in which the vendor also hosts and runs the software, typically priced per user per month.
• Usage-based – Charges that vary with consumption, such as transactions, storage or processing. Costs follow demand, but are harder to forecast.
• Enterprise agreement – A multi-year agreement covering a range of a vendor's products across the whole organisation, usually in exchange for a volume commitment.

No model is best in every case. Perpetual licences can cost less over a long period but tie you to a version. Subscriptions and SaaS give flexibility, but the total paid over five years or more can be higher, and prices may rise at renewal.

SaaS Contracts: What to Check

With SaaS, your data and your service sit with the supplier, so the contract carries more weight than it does for installed software. Whether you are on the customer or supplier side, clear terms in the four areas below reduce the risk of dispute later.

Data

Check where your data will be stored, who can access it and what security standards the supplier meets. Where the supplier processes personal data on your behalf, UK GDPR requires a contract that sets out specified terms, as described in the ICO's guidance on contracts between controllers and processors.

For security, the National Cyber Security Centre publishes 14 cloud security principles that can be used to question a supplier.

Service Levels

The service level agreement (SLA) should state the availability the supplier commits to, how it is measured and what is excluded. Check the support hours, response times and the remedy if targets are missed. Service credits are common, but they are often capped at a small share of the fees.

Exit

It is always advisable to agree the exit before you sign. The contract should confirm that you can retrieve your data in a usable format, how long you have to do so, and that the supplier will then delete it. For critical systems, ask for a commitment to help with the move to a new provider.

Renewals

Many SaaS contracts renew automatically unless notice is given, sometimes months before the end date. Check the notice period, whether the price can increase at renewal and whether you can reduce user numbers. It is recommended that you include a cap on renewal increases. A software contract review before signature is the easiest point at which to correct these terms.

Software Procurement Best Practices

The software procurement best practices below apply to most purchases, regardless of size.

• Buy on needs – Base the purchase on what the business requires, not on the most advanced package on offer.
• Involve users and IT early – The people who will use and support the product should help define the requirements.
• Assess total cost – Include licences, implementation, integration, training, support and upgrades over the full term.
• Test before you commit – Ask for a trial or proof of concept using your own data and processes.
• Check integration – Confirm how the product connects to your existing systems, and whether one product could meet two needs.
• Avoid over-reliance on one vendor – Consider how easily you could move if prices or service change.
• Keep a licence and contract register – Record what you hold, who uses it and when each agreement renews.
• Review before renewal – Compare actual usage with what you are paying for well before the notice date.

Common Pitfalls

Most overspend on software comes from a small number of avoidable problems.

Shelfware

Shelfware is software that has been paid for but is not used. The obvious advantages of technology can make it tempting to buy beyond the needs of the company, and suppliers will often try to sell their most advanced packages. Regular usage reviews, and buying in line with actual need, keep this under control.

Auto-Renewals

A contract that renews unnoticed removes your chance to negotiate, reduce volumes or change supplier. A simple renewals calendar, with a reminder set ahead of each notice period, prevents this.

Licence Audits

Costs associated with software rarely end at implementation. Larger software vendors usually reserve the right to audit your use of their products, and if an audit finds more users or installations than you are licensed for, the result can be a substantial unbudgeted charge. Keeping accurate records of who uses what is the best protection.

Hidden Lifecycle Costs

The ongoing costs of maintenance and upgrades often overshadow the initial acquisition cost. These should be considered during the procurement phase, not after it. There is more on this in the guide to reducing IT costs.

Key Takeaway

Good software procurement looks beyond the initial price. Define what you need, understand the licensing model, and check the contract terms on data, service levels, exit and renewal before you sign. Then keep track of usage, so that you only pay for what the business uses.

How Athena Can Help

We provide IT procurement support that helps your business understand what your true requirements are before you make any decisions. We can guide you in reviewing your existing technology contracts and what to look for in new ones, so you avoid automatic price increases, capacity limits and cancellation restrictions.

Choosing the best vendor can be an overwhelming process. We can help with market research and negotiating price, drawing on our knowledge of the market. Once you have defined your requirements, we can assist with researching appropriate suppliers, contacting them for formal proposals, negotiating your terms and making sure remedies are in place if a supplier doesn't perform.

Buying or renewing major software? Talk to our technology procurement team.

Frequently Asked Questions

What is software procurement?

Software procurement is the process of selecting, buying and managing the software an organisation uses. It includes defining requirements, evaluating suppliers, agreeing licence and contract terms, and managing renewals. The aim is software that meets the need at the best total cost over its life.

What is IT procurement software?

IT procurement software is a different thing from the subject of this guide. It refers to the tools used to run purchasing itself, such as systems for raising purchase orders, approving spend and managing suppliers and contracts. Some organisations use these tools to manage their software and hardware purchases alongside other categories.

How do you justify a procurement software investment?

Start with the cost of the current position, including staff time on manual tasks, spend outside contracts and renewals that were missed. Compare this with the total cost of the system over its term, including implementation and training. A business case based on your own spend data is more persuasive to finance than a supplier's general claims.

What is the difference between a perpetual licence and a subscription?

A perpetual licence is paid for once and lets you use that version of the software indefinitely, usually with an annual support fee on top. A subscription is paid for periodically and the right to use the software ends when payments stop. Subscriptions offer more flexibility, whilst perpetual licences can cost less over a long period.