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enterprise license agreement (ELA)

What is an enterprise license agreement?

An enterprise license agreement (ELA) is a contract between a customer and a vendor that allows purchase of a software product for a company at a discounted, fixed rate for a certain time period.

At the end of the contract, the customer can usually opt to extend maintenance for an additional year at the discounted ELA price. After that, companies are charged full price for support, or they can sign another enterprise license agreement for a new term of use. The average time period for an ELA contract is three to five years.

Why do companies use enterprise license agreements?

With an enterprise license agreement, a customer can pay for a license on an annual basis and receive immediate access to the software. This eliminates the need for a customer to register software each time a new employee in the company uses it or each time it's installed on a new device. ELAs help customers save money, simplify software license management and streamline procurement.

What is included in an enterprise license agreement?

While every vendor and customer agree to terms specific to their situation and needs, most ELAs include information about:

  • the time period that it will be in effect;
  • permitted uses and restrictions;
  • payment considerations;
  • usage rights;
  • whether it allows for product updates and support; and
  • audit clauses allowing regular reviews to determine if the product is being used according to the terms of the licensing agreement.

Benefits of enterprise license agreements

Enterprise license agreements benefit the vendor and customer in a variety of ways. For organizations purchasing software products or services, enterprise license agreements typically:

  • offer the best prices and discounts;
  • improve budget planning by locking in prices for the length of the agreement;
  • provide a common IT platform deployed across an organization;
  • ensure users always have access to the latest software version;
  • streamline procurement of services with predictable payments through a single agreement; and
  • offer a choice of deployment methods to meet the specific requirements of an organization.

ELA best practices and considerations

The following are some ELA best practices and considerations:

  • Add language to the agreement giving the customer the right to request an on-site ELA audit in addition to the vendor's right to audit.
  • Negotiate and create a contractual definition of software deployment agreed to by both parties to avoid audit confusion.
  • Customers should negotiate the definition of "substitution methodologies" so they know what they're paying for. This should include examples of how the units of software they don't deploy might be substituted into credits and how they can use these credits to consume other software offerings.
  • Customers should play close attention to software consumption tracking reports done by third parties, such as accounting firms. These firms may not totally understand how or why a customer is using the provider's software, which can cause problems in tracking the real consumption.
  • Assign internal resources to regularly track ELA consumption. This helps foster a better understanding of a company's technical environment and enables a company's leaders to accurately forecast, manage and get the most out of its enterprise license agreements.

Designing an enterprise license agreement

Most software vendors have a licensing agreement template that they use when they design an ELA.

The terms of an enterprise license agreement usually vary depending on the needs of the software provider and the customer. Before designing an agreement, it's critical to define what the terms mean for the software vendor and its customers.

Enterprise customers need agreements that offer added flexibility, low cost/predictable pricing and are easy to administer. An ELA should be designed to fit the requirements of the customer.

Software providers should consider the following when they design ELAs for their customers:

  • What do the customers need the software to do?
  • What limits would be onerous?
  • What flexibility will enable the customer to be more effective in its business operations?

After outlining the customer's requirements, the software provider can determine the best pricing model. Pricing can be one of the most challenging parts of designing an ELA. However, it's important to ensure the enterprise license agreement offers adequate compensation.

When designing an ELA, software providers should consider including a clause that addresses unlimited use or full access to the software. If a vendor gives a customer unlimited use of a software program or full access to a website, it restricts the vendor's ability to be adequately paid for the customer's use of its software.

For example, if the customer merges with or is bought out by a larger company, more people will be using the vendor's software and the vendor may need to increase support. To manage such acquisition and merger issues, the software provider may need to evaluate any "change of control" clauses included in the agreement. One approach is to include a "change of management" clause or a specific time period for the enterprise license.

When designing a license agreement, the parties should consider the time period that it will be in effect. Will the license cover the expected lifetime of an initiative? Will it allow for software updates and adequate support? All this should be presented clearly in the enterprise license agreement.

Customers should be sure to fully understand the limitations and scope of the software product before they sign their enterprise license agreements. Customers can typically negotiate with their software providers if the terms of the ELA don't meet the needs of their companies.

This was last updated in May 2021

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