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Dealing with IT suppliers: negotiating nous
Posted 10th July 2014 by Gavin Wakefield, Director
Do you have the negotiating nous to tie up a deal with an IT supplier?
As corporates outsource ever more specialist IT services - everything from moving data to the cloud to implementing a mobile purchasing platform - how much do financial IT decision-makers need to know about the services they are buying and how to secure the right deal?
When it comes to cloud-based IT services, for example, not everyone is familiar with its terminology and it can be difficult to grasp the difference between Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS).
While understanding the subtleties of IT jargon may not be part of their remit, finance heads do need to be able to interrogate IT purchases to ensure value for money and clarity on the genuine total cost of the deal and to influence contract negotiations appropriately.
They also need to be sure that the IT director or procurement team has gone through the relevant thought processes and completed the necessary checks and balances, before contract negotiations with a specific supplier get underway, to ensure that there is a valid business case for the deal.
Negotiating the end, at the start
The starting point for any contract negotiation is always the end of the contract. What do you need to happen at the end of the contract to enable you to extract yourself easily and without incurring excessive and/or unplanned costs? In the case of cloud services, for example, how will your business data stored in the cloud be transferred to another supplier, in which format and at what cost?
The contract could also come to an end unexpectedly as a result of business failure, for example. This could cause significant problems for the business - financially and operationally, for example loss of access to data or systems.
The situation must be properly planned for both with internal safeguards, such as pre-prepared ‘work-arounds' or back-up alternatives and contractual protections, such as escrow arrangements to ensure that applications and data will still be accessible to users.
Regular monitoring of the on-going financial position of suppliers of critical systems and services must take place, not just made pre-contract. When the UK subsidiaries of cloud service provider, 2e2, went into administration and then collapsed in 2013, some of its customers had to pay out considerable amounts to retrieve their data, probably costing them more than to store it in the first place. If they had to pay for services in advance, they would have found it difficult to recover those advance payments too.
Even when specific clauses are written into contracts to protect the buyer, such as termination rights or step-in rights, in this kind of situation there is no guarantee of enforcement so businesses should make sure they have contingency plans in place that do not involve the failed supplier, especially for critical outsourced functions.
Delivery teams may talk of ‘scope creep' but it is important to beware the dangers of ‘cost creep'. Consider at the outset the ‘total cost of ownership' of the contract and ensure that this is factored into the business case. There may be initial fees for set-up tasks and licences, on-going maintenance and support charges and costs for exit assistance.
But don't forget the hidden costs associated with the set-up of the contract too. One of the most common pitfalls is to ignore the cost of meeting your obligations under the contract. This can include the purchase of software licences so the supplier can run these on the buyer's behalf, procurement of equipment, additional costs from your existing third party suppliers, your own staff costs dedicated to the project and of course, the cost of negotiating the contract in the first place.
Some suppliers are reluctant to alter their terms and service levels as they seek economies by delivering a standardised service, so you should include an assessment of the terms and conditions and the supplier's willingness to negotiate in the selection process for a preferred vendor.
There may also be subsequent fees to consider if the business decides to extend the service by bringing on more users or adding software applications or change the requirements or scope of work post contract. Seek to agree prices for defined, repeatable additional services and include pricing principles for future work in the contract. Limit price increases to suitable indices, where appropriate, and especially if you are likely to be locked in to a supplier, either through the contract terms or because of the type of IT service being procured.
Even with a sensible contract in place, service failures can still occur, causing operational difficulties, incurring costs and bringing reputational damage to the business.
Make sure there are suitable service levels in place with remedies to protect your company from the natural consequences of the failure. Beware suppliers that try to limit recovery of their customers' losses to just a service credit, but be reasonable about what of your business risk you expect to transfer to the supplier. Take steps to reduce any potential liability by ensuring that the company would be in a position to restore operations as quickly as possible and recover the reasonable cost of doing so.
One final point on avoiding wasted costs. It is wise to diarise dates for serving termination notices on supplier contracts, not just a week before but months before, to allow your business to make an informed decision and prepare to procure from another supplier. Frequently contracts roll over for another year because the customer missed the chance to serve notice to end it and so spends a further year paying for a service it doesn't want, or worse still, doesn't use.
Finance chiefs don't have to be IT-savvy to negotiate a contract that will work for the business. The application of good commercial sense, close reading of the contract and a willingness to challenge what is unclear or not understood will more than compensate for not knowing the latest IT jargon and acronyms.