Legislative Analyst's Office

Analysis of the 2002-03 Budget Bill

Software Enterprise License Agreements

Current state practice allows each department to purchase and maintain its own software contracts for the same software product. Because of this practice, the administration generally does not combine its purchasing power and purchase software on a statewide basis. Through the use of Enterprise License Agreements (ELAs), which are software contracts encompassing the entire state, the administration could reduce state costs, improve automation cost estimates, and provide more consistent software support levels. We provide a number of suggestions and recommendations that can help the Legislature ensure ELAs are cost effective and beneficial to the state.


When a department makes a determination that it needs a particular software product, the department contacts the software firm and negotiates the "best price" and contract terms and conditions that it can receive. Upon completion of contract negotiations, the department is responsible for making annual payments and ensuring that the software vendor meets the contractual agreements.

Problems With Current Software Acquisition Process. Since each department negotiates its own software contracts, the state does not combine its purchasing power to obtain software on a statewide basis. It also means that the price each department pays for the same software product line varies depending upon the department's software needs and its contract negotiation skills. Finally, the state's total cost for particular software products are unknown since the Departments of Finance and Information Technology do not require departments to report software needs and costs.

Enterprise License Agreements

An Enterprise License Agreement (ELA) is a software license contract that applies to an entire organization or "enterprise." In the case of the state, an ELA could encompass all or a combination of departments. An ELA will include annual contract payments and software specifications, and it can include sub-agreements such as volume purchase and maintenance agreements.

New Trend in Software Licensing. The ELAs are a relatively new trend in software agreements and provide government agencies with opportunities unavailable in the past. State ELAs allow large numbers of government agencies to use the same software product with one annual payment. Some states have already established forms of these agreements; however, ELAs vary depending upon the needs and size of the states' information technology operations. In May 2001, California entered into an ELA with the Oracle Corporation. At that time, the administration indicated its intention to enter into additional ELA contracts.

The ELA Benefits. State ELAs have the potential to reduce costs, improve automation cost estimates, and provide consistent software support for all state entities. State ELAs eliminate software price variations and reduce departmental resources being used for monitoring software contracts. In addition, software cost estimates of proposed projects would improve because the state would know before a software purchase the state's actual agreed upon cost of the software. A properly negotiated ELA would establish minimum and maximum levels of software support, thereby guaranteeing that the state would receive consistent software support across all departments. If the state combined its purchasing power, it could potentially acquire the software at a lower price than each department buying it separately.

Potential Risks With ELAs. State ELAs also pose a new level of risk for a state. For example, ELAs are generally multi-million dollar contracts covering several fiscal years, whereas departmental contracts are generally under a million dollars and are renewed on an annual basis. An ELA requires the state to enter into a contract that will obligate large amounts of funds over multiple years for one specific product. If the state fails to properly assess its current and future software needs, the state could be in a contractual agreement that does not meet its needs and yet still requires large annual payments.

Options for Developing a Successful ELA

In order to maximize benefits and reduce risks from ELAs, there are several steps the state should take in developing these types of contracts. In this section, we discuss some of those steps as summarized in Figure 1. 

Conduct Statewide Assessment. Before beginning procurement activities, the state should first conduct a statewide assessment covering (1) the reasons an ELA makes sense at this time; (2) what it is that the state specifically needs from a statewide ELA, including the capacity, maintenance and support requirements; and (3) the costs and benefits of entering into such an agreement. In addition, the assessment must determine the strategy the state will use to transfer its existing contracts into the new contract.

Figure 1

Steps Necessary for Developing a Successful ELA


ü  Conduct statewide assessment

ü  Assign clear responsibility and assemble procurement team

ü  Use a modified competitive process

ü  Conduct independent “Best Price Analysis”


The state currently requires departments to complete Feasibility Study Reports (FSR) for large IT projects. The FSR, with some modifications, should be used as the mechanism to document the ELA assessment process, and can be used during ELA procurement activities and contract negotiations.

Assign Clear Responsibility and Assemble Procurement Team. Upon completion of the assessment phase, the state must assign a department to be responsible for conducting the procurement, negotiating the contract, and administering the contract. We would recommend that the Department of General Services (DGS) be assigned this lead role because DGS is responsible for other statewide procurements.

As it does on all large procurements, DGS will need to assemble a team of experts for the ELA procurement. However, this team should be composed of staff with strong negotiation skills, software acquisition expertise, and knowledge of the competing companies and their product lines.

Use a Modified Competitive Process. Current laws require that procurements over $25,000 be conducted through a competitive process. The traditional procurement approach includes issuing a request for a bid and then allowing multiple vendors to compete for the contract. However, since specific software is owned and manufactured by only one company, competitive procurements can be difficult. However, there are procurement methods that the state can use to ensure competition. For example, if the software is sold through resellers then the state can issue an invitation to bid to the potential resellers. If there is only one software vendor providing the product, then the state can use a "best value" contracting process that evaluates the proposal not just on cost but on other considerations such as increased support levels and price reductions on future products.

Conduct Independent "Best Price Analysis." Before signing the contract, the state should acquire services to conduct an independent analysis of the tentative agreement. It is important that the analysis be conducted by an entity uninvolved in the procurement and contracting processes to insure an objective evaluation of the tentative agreement. This analysis should compare the state's tentative agreement with government and private industry contracts of similar size and scope. The analysis should compare the agreement's costs, and the terms and conditions to determine if the state's agreement is competitive with other such contracts.

Contract Provisions in a Successful ELA

Since ELAs pose potential financial and programmatic risks to the state (as well as benefits), a successful ELA should also include a number of unique contractual terms and conditions or "provisions" aimed at specific factors within the software industry. We discuss the specific ELA provisions that we believe will minimize potential ELA risks and offer the most advantages to the state in more detail below.

Provisions That Address Uncertainties. Software products continually change, and software companies acquire and eliminate product lines on a routine basis. In addition, the software industry is continuously evolving with technologies that are more sophisticated and have more capabilities. For these reasons, the ELA should have provisions that protect the state from the uncertainties in the software industry. These provisions could either limit the duration of the contract or allow the state or the vendor to renegotiate the contract should specific circumstances occur. For example, in the event the software company announces that it will no longer support the software, the state or the vendor should be able to re-negotiate the contract to eliminate the software support provisions.

Allows Flexibility in Software Rights. The ELA should include a number of provisions aimed specifically at software rights such as ownership, maintenance, support, transfer, upgrades, testing, and back-up systems. These provisions should provide enough flexibility to allow the state to move software from one location to another, from one computer to another, and allow its use during testing and on back-up systems without additional costs.

Legislative Oversight Needed

We believe ELAs with the provisions described above can provide many benefits to the state and help minimize potential risks. However, we believe the Legislature has an important oversight role in ensuring that these agreements are ultimately cost effective and beneficial to the state. While ELAs should be provided to the Legislature during the annual budget process, there may be circumstances in which this may not be possible. For this reason, we recommend that the Legislature add a new Budget Control Section to the budget to ensure that tentative ELAs are reviewed by the Legislature prior to obligating state funds. This will provide an opportunity to review the ELA proposal to ensure that a thorough statewide assessment and cost benefit analysis has been conducted and adequate protections have been implemented that minimize risks and meet the state's software needs. We recommend the Legislature adopt the following language:

Sec. 11.10. (a) Departments are required to notify the Legislature prior to entering into an Enterprise License Agreement, not previously approved by the legislature, that obligates state funds in the current year or future years, whether or not the obligation will result in a net expenditure or savings. Departments are required to prepare a Feasibility Study Report documenting a statewide software assessment and cost benefit analysis. No less than 30 days prior to the effective date of the agreement, the Director of the Department of Finance shall notify in writing the Chairperson of the Joint Legislative Budget Committee, and the chairperson of the committee of each house of the Legislature that considers appropriations and that consider the state budget, of the state's intention to enter into Enterprise License Agreement. Each notification required by this section shall (1) explain the necessity and rationale for the proposed agreement; (2) identify the cost savings, revenue increase, or other fiscal benefit of the proposed agreement; and (3) identify the funding source for the proposed agreement.

(b) The following definitions apply for the purposes of this section:

(1) "Enterprise License Agreement" is a software license contract that can be used by multiple state agencies subject to both Chapter 7 (commencing with Section 11700) of Part 1 of, and Article 2 (commencing with Section 13320) of Chapter 3 of Part 3 of, Division 3 of Title 2 of the Government Code.

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