Welcome to the fifth edition of BUSINESSBOOST — the latest in a series of business briefings from Blue Stone Business Solutions, a specialist and independent information technology consultancy business.

The topic covered in this issue is contract negotiation.

In the last issue we looked at system acquisition and the need to specify and select your information systems with as much precision as possible, using a detailed knowledge of the IS marketplace to ensure that you chose from the best candidate solutions available. This issue focuses on how best to ensure that, having specified the solution, you get the best deal. But getting the best deal is not just about buying a system that embodies the functionality you need, for the price you’re prepared to pay; it’s about ensuring that the contract embodies sufficient detail and clarity so that the supplier you choose can deliver what they say, when they say, and in the manner agreed in the contract.

So let’s look at why contract negotiation is of crucial importance when implementing new information systems.

When selecting the ‘right’ information system, the primary focus by purchasers is all too often on the potential functionality offered by the new system. And while the new system may well provide cost savings or other benefits to the business, these can often overshadow the contractual, commercial or licensing aspects of the eventual agreement with the supplier. But let’s just remind ourselves of where contract negotiation fits into information systems in the round:

“Let’s just get on with it…”

Having made the decision on the preferred supplier, any lack of focus on the terms of the agreement can be compounded by a “Can’t we just get on with it?” mentality. This can be dangerous, leading to a less rigorous approach to suppliers, especially when those same suppliers are applying pressure on companies to sign up hastily, often by offering attractive discounts or requiring signed commitments before the supplier is prepared to allocate resources to the project. This can all too easily undo any careful work done during the selection phase.

Without that resource commitment, the customer can be left believing the timescale for delivery is uncertain and the potential benefits of the system to the business will be delayed. Any potential delay is more serious in circumstances where the acquisition of a new system is ‘sold’ to the company’s Board on the cost savings it will produce or the provision of additional functionality providing the business with a competitive advantage.

Unsurprisingly, having to expend time and effort on the agreement is viewed on the client side as not very ‘sexy’ i.e. as a tedious and time-consuming interlude, since they’re understandably keen to make progress on implementation.

Often this leads to buyers simply signing a supplier’s standard agreements, which will therefore not be ‘tailored’ to the particular customer or project, but will be biased towards protecting the supplier. By acquiescing to those supplier standard agreements being used as the basis for negotiation, any negotiation that then takes place begins, to a greater or lesser extent, with a bias against the customer which, in our experience, it is almost impossible subsequently to correct.

This lack of focus on the contractual side of things leads to agreements being signed with many of the following characteristics:

• large upfront payments against no delivery and/or delivery of separate or stand-alone component system parts rather than a complete integrated solution as expected
• no supplier commitment to meet milestones in project plan
• absence of detail as to the functionality and the integration necessary to work with other customer systems
• opportunities for the supplier to charge large additional sums for ‘extras’ originally thought to be included
• payments to be made to third party licensors who are not a party to the agreement
• hidden costs which come to light subsequently
• not all customer group companies are licensed to use the software
• software licences are found to be on an annual basis thus allowing the supplier to charge annual payments which can increase and which may not have been budgeted for
• more obligations on the customer than the supplier
• lack of effective supplier warranties
• consultant day rates at ‘supplier’s then current rates’ with no limit on increases in the future
• prices for additional software licences at ‘list price’
• inadequate liability limits
• complete absence of detail for the practical and operational aspects of the agreement
• remedies which provide for less than a ‘full refund’

With such a contract in place, we find that problems are more likely to be encountered during the implementation. Furthermore, the customer’s ability to put pressure on the supplier will be severely limited. In addition, without sufficient clarity of thought or detail being applied both to the contract and schedules at the appropriate time, it is not unusual for gaps soon to emerge between what the salesmen promised and what can actually be delivered.

In the unfortunate event that customers experience issues or problems during the course of system implementations, Blue Stone stands ready to provide its Project Rescue service or, should matters appear to have broken down irretrievably, its Expert Witness service.

So what are the key issues to be considered when negotiating effective IT contracts?

In order to provide the clarity and detail necessary to have a balanced and effective IT contract, one which clearly records the supplier’s responsibilities and obligations, as well as minimising risk to the project during the implementation phase and subsequently, the following key issues should be considered:

Scope
The overall scope of the project including the essence of the project to be undertaken should be clearly set out either in the contract or in a separate Project Definition document attached as a schedule to the contract

Deliverables
Delivery of a complete system (not merely separate standalone elements), its integration with the customer’s existing systems (where appropriate) and the achievement of the customer’s functional requirements

Project plan
Inclusion of an agreed Project Plan setting out the timescale and reflecting the approach to the implementation

Acceptance tests
Process for acceptance testing and repeat testing where necessary against scripts based on an agreed testing specification

Payment profile
Payments spread evenly across the course of the implementation and only to be made on the supplier successfully meeting milestones e.g. delivery of software after passing acceptance tests

Pricing & costs
Full details of all prices for all deliverables (and deliverables which may be required in the future), including supplier consultant day rates, with provisions limiting future price increases as well as an expense policy

Specific supplier warranties

functionality — the system will meet the customer’s functional requirements

timeliness — the supplier will perform obligations in accordance with and meet the milestones in the Project plan

performance — the system will meet the expected performance criteria agreed

compatibility — all deliverables will be compatible and interoperable with all other elements including existing systems of the customer

Licensing terms (which might need to be negotiated separately with third party software authors)

Perpetual and appropriate licensing provisions for all group companies and other ‘users’ intending to use the new system with adequate user definitions

Licence terms to reflect how the system is actually used

Not server or location-specific licence terms

Ability to run and test back ups of the software

Licence not conditional on support being taken up

Licence provisions for all subsequent versions and updates

Support and maintenance
Practical and effective provisions for the support of the new system whether or not all elements are provided by the supplier with a service level agreement covering timescales for supplier responses and resolutions

Supplier resources
Sufficient key ‘qualified’ personnel assigned to the project to meet the timescale with continuity of that resource

Roles and responsibilities
This should include both the supplier and customer’s roles and responsibilities during the implementation

Intellectual property rights indemnity
This is very important and should provide a full indemnity against any deliverable breaching a third party’s intellectual property rights

Termination provisions
These should include consideration of terms dealing with the consequences of termination

Liability & insurance
Limits on liability which reflect the overall value of the entire contract and the importance of the success of the project to the customer with adequate and appropriate back-up insurance

Escrow agreement
Where source code is not provided, the provision of an acceptable escrow agreement

Dispute resolution process & remedies
Appropriate mechanisms including an escalation procedure for dealing with disputes

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Ensuring not just an effective contract — but a great deal (more)

Blue Stone has undertaken a range of contract negotiation projects, most of which have had common elements, but if we had to single one out as noteworthy, it would be a business support services company, operating across the world. We had been through a specification and selection exercise with them and had identified a solution. For performance and practicality the solution needed to operate on multiple servers worldwide; however the client only wanted to purchase one set of software licences. In this case we negotiated licences where the concurrency limitations counted across numerous servers not operating in the same time zone. This negotiation was with one of the world’s largest software companies and it was seen as an unusual request. Nevertheless we got our way and the client saved considerably on licence fees as a result.

Since our approach in this instance was no different to the majority of such projects, it is perhaps helpful and instructive to consider how we help smooth the process of negotiating effective IT contracts:

We start by identifying and considering all aspects of the commercial, legal and practical relationship with potential suppliers at an early stage in order to avoid ineffective contracts being agreed. This brings clarity into the process.

When our clients think of negotiating contracts, their thinking is often limited to negotiating only the terms and conditions. However, much of the detail required for an effective IT contract is contained within the schedules attached to the contract and equal attention and consideration must be given to the content of the schedules.

In assisting our clients with contractual and licensing negotiations, Blue Stone brings all these aspects into focus as an integral part of the overall system acquisition process i.e. before a decision is made as to the preferred supplier.

At the start of the process and when considering the particular project, we will identify and prioritise the issues that really matter to our client: functionality, price, payment terms, implementation timescale or some other aspect. Of course, only the client can truly determine the priorities to be applied but it is important to consider these upfront and keep them in mind later on in the negotiation process.

Once the priorities are established, consideration is given to the makeup of the supplier bids including whether the bids rely on one or more suppliers. Often this part of the process highlights critical issues not considered or known previously e.g. the supply of third party software or the involvement of another party as yet not involved in the bid process but responsible for a key deliverable. Depending on the circumstances, it may be necessary to engage those third parties in the process.

We identify and agree with our client the contractual and licensing principles and write these up in ‘plain English’. This document is used to negotiate with the supplier. The benefit to our client of this approach is that it focuses on their own requirements. This approach can uncover aspects beneficial to them, as in the example above.

Blue Stone seeks to ‘buy’ suppliers into this process at an early stage by highlighting the importance of the contract in the system acquisition process. In particular, it is made clear that the flexibility of the supplier to meet the client’s contractual requirements will be a key factor considered by the client when deciding overall on a preferred supplier. Raising contractual matters at this early stage strongly encourages the supplier to ‘put its best foot forward’ and can bring other issues out into the open which might be easier to resolve pre-contract.

In our approach the supplier is asked to respond to the document with our client’s contractual and licensing requirements at the tendering stage and subsequent negotiations are based on that response. This approach forces negotiations based on our client’s own requirements and not the supplier’s standard terms. Any commercial negotiations seeking to achieve price reductions should take place quite separately from the contractual negotiations.

The supplier’s attitude to the process of contractual negotiations as well as the actual outcome of those negotiations can quite often influence our client’s overall opinion of a potential supplier, leading in some instances to their exclusion from the selection exercise. Given the potential long term nature of IT contracts, information gained during this process can alter a client’s perceptions of individual suppliers and/or their personnel.

The bottom line is that since we are negotiating contracts all the time we know how far we can push the suppliers. Suppliers will often negotiate with and make concessions to us which they would not have given to one of our clients directly. Our firmly held belief is that if you take the time and effort to get right the key features described above, then the downstream risks are significantly reduced.

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Next month’s newsletter deals with project management. So, having successfully negotiated your contract, your next concern will be to ensure that your subsequent project is managed effectively. We will therefore be looking at the key Dos and Don’ts of project management, including the obvious dangers of failing to define or plan your project properly. We will also look at what happens when you do too much planning, plus the real role of the project manager.

But if you can’t wait until next month, and feel you could benefit from an initial discussion with Blue Stone now, then please let me know, either by phone, e-mail or by clicking here. I look forward to hearing from you.

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Copyright © January 2009 Blue Stone Business Solutions. All rights reserved.