"The consultants sure seem nice and smart. Why don't you just sign a contract with them? Or, on second thought, why don't you just rake your money into a pile and set it on fire?" — Michael Newman, article on Company.com, November 2000

In my previous article, I discussed five easy ways to manage IT costs. It starts with attacking costs rather than reacting to budgets cuts. Additional tips involve maintaining lean staffing levels, looking for low-cost education opportunities and assessing technology components to stay ahead of the curve.

Now, let's explore the fifth method in depth: negotiating contracts.

Contract Pitfalls

The following examples are excerpts of actual vendor contract proposals submitted over the years. The names have been omitted (to protect the guilty).

Licensee shall pay ... fee for support services in effect on the anniversary date. Avoid "then-current" fees. Lock in rates or cap increases.

Customer will reimburse [vendor] for all actual travel, lodging and other incidental expenses. Sounds reasonable on the surface, but would you pay for first-class airline tickets, booked at the last minute? Or in-room movie rental? Agree to preapproved expenses.

Vendor product is not warranted "to meet customer expectations or to be error-free." This does not provide a warm, fuzzy feeling. How about "product will perform in accordance with the documentation"?

If the software is not rejected within 30 days of delivery, it shall be deemed irrevocably accepted by licensee." This forces you to react quickly to deliverables. Maybe the deliverable is not completed until you accept it in writing.

Our goal is to provide in excess of 99.6 percent uptime. A worthy goal, but where are the penalties if the goal is not met?

Software errors may be corrected as warranted. Maybe this should read, "willbe corrected."

Vendor will maintain normal business hours of 8 a.m. to 5 p.m. (CST) during normal business days. Will this provide support when your business needs it? What happens after 5 p.m., or on a holiday you are working and your vendor is not?

Vendor "shall not incur any liability from any delay or failure to perform ... if caused by fire, flood ..." Doesn't the vendor have a disaster recovery plan (like you do)?

[Space deliberately left blank.] Often the biggest pitfall is the language notin the contract, like penalties for the vendor not meeting agreed-upon service levels.

6 focus areas for contract improvement

Here are six targets for technology contract improvements:

1. Initial cost

  • Try to leverage volume discounts. Buying in larger quantities should provide additional pricing leverage.
  • Consider longer-term agreements. Again, this should provide leverage in your negotiation. Plus, by locking in pricing for a longer period of time, you reduce the risk of budget surprises.
  • Include test, quality assurance (QA), and disaster recovery licenses. If left out, you may incur additional costs after the contract is signed.
  • Reimbursement for preapproved expenses. Avoid surprise expenses.
  • Target a reasonable maintenance percentage (e.g., in the range of 10 to 15 percent). I have seen vendor proposals in the range of 30 percent or more. "Reasonable" may be in the eye of the beholder, but consider the weight of these maintenance costs and how many years it would take to buy the software all over again. Your peers or technology analysts may help shed light on what is reasonable and possible here.

2. Future costs

  • Avoid "then current" pricing on renewal. Lock in the renewal pricing to avoid bad budget surprises downstream. Or consider placing caps on increases from year to year, or at renewal. For example, base the increase on the Consumer Price Index.
  • Use "not to exceed" wording as a vehicle to cap professional services agreements. One of my learning experiences: a vendor reported to me they had spent 95 percent of the budget but the work was only 50 percent complete. The vendor expected us to pay them more to finish the work; the contract had no caps on spending.
  • Consider also incorporating a cap at the end of the contract term, to control increases as you roll from one contract into another.
  • Think of your future needs, and try to negotiate discounts on future licenses. A colleague once negotiated a great discount, but when the company grew and needed more user licenses, the vendor went back to full pricing on the additional licenses. Why should the vendor forget you as a valued customer (and your discounts) when you need more licenses? Build it in the contract to help everyone remember.

3. Flexibility

  • Incorporate the ability to change technology (e.g., platform, operating system or database) without buying another license. Why buy a new license when upgrading or rolling from one technology to another? A little time upfront can save you from unexpected expenses in future budgets.
  • Negotiate for support of previous releases. Vendors tend to avoid supporting numerous prior releases because it is expensive for them, but think of the impact on you and your budget. Being forced to suddenly upgrade because the release you are on will no longer be supported, takes resources away from your other priority projects. There is a cost to stopping your projects midstream and delaying the benefits of those projects.

4. Protection

  • Check references. Some may argue this has no value, as the vendors select the references to stack the deck in their favor. In my experience, these reference calls highlight areas of opportunity for contract negotiation. For example, a specified implementation person was key to the reference's success. Why not try to negotiate that person's involvement in your implementation?
  • Where possible, leverage a trial period and an "early out" clause if you are not satisfied. The goal here is to avoid surprises in actual use of the product.
  • Hold back a portion of the fees (e.g., 50 percent) until the project is completed to your satisfaction, or until some specific milestone is met. In the news we hear about consumers' bad experiences when they pay for roofing or driveway repairs upfront. The same logic applies to technology purchases.
  • Arrange for support when you need it. If support is provided from 8 a.m. to 5 p.m., but the technology is used 24/7, know that your after-hours calls will be answered and a response forthcoming.
  • Typically contracts will have a "force majeure" clause, stating that in cases of fire, flood, etc., the vendor is not accountable for providing services. The irony is that we in IT have disaster recovery (DR) plans for reaction to such situations. How about having the vendor respond in accordance with their "documented and tested disaster recovery plan"? If they don't have one, that is a red flag. If the DR response is not fast enough, I have negotiated a response in line with the vendor's top-tier customers.
  • Consider extending your privacy and security requirements to the vendor. The vendor is an extension of your company, so why not have the vendor meet these same requirements? In healthcare, we are obligated to do so and have standardized "business associate" wording in contracts.
  • In professional services agreements, add service level agreements (SLAs) to set performance expectations. If the vendor's goal, for example, is 99.6 percent uptime, add penalties as well. These may take the form of credits, damages or termination if SLAs are not met.
  • Include your acceptance of a deliverable, not merely the vendor saying the deliverable is done. The vendor's interpretation of a completed deliverable may differ from your interpretation.
  • The vendor may need to replace staff during the course of an engagement. Do you want the replacement to be a rookie, someone you must pay to bring up to speed? Introduce terms like the approval of the replacement, penalties for retraining time and minimum experience criteria.
  • When a work product is developed by the vendor, who owns the rights to it? Clarify that, as you may not want your competitors using the same product you just paid to develop.

5. Viability

  • Add wording to protect yourself in the event of vendor consolidation through mergers, acquisitions and bankruptcies. Assure the terms of your contract still apply and are still in force.
  • Consider having software in escrow, housed at a third-party site with your rights to the code in case the vendor goes out of business. While not as good as having vendor support, you at least have the source code.

6. Extras

When you have agreement on the basics, ask for reasonable add-ons to be thrown in. Examples of such add-ons include:

  • Training
  • Additional products
  • Additional professional services
  • Waiver of fees to attend vendor conferences
  • ??? (Use your creativity here)

"If you don't ask, you don't get." — Mahatma Gandhi

Leverage

Your negotiating leverage is greatest up until the time you sign the contract. Anything you want to change or add or lock in, do so prior to signing. Your negotiating power is not zero after signing, but it is greatly reduced. You may still have some leverage based on future purchases, for example.