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By Rauer L. Meyer
Thelen Reid Brown Raysman & Steiner LLP
Corporate spending on technology is on the rebound, according to many industry sources. IBM, EMC, Sun and other vendors are reporting strong corporate sales and forecasts. For many companies, this will be their first major technology upgrade in several years, perhaps since the sizable spending prompted by Y2K concerns.
As enterprises embark on large technology investments, they should avoid pitfalls that are all too common. Many corporate buyers have made major IT investments using agreements that are unfairly balanced against them. There are several reasons for this. Vendors are selling a complex core competency, and the deals historically have been controlled by their practices, contracts and views of risk allocation. Because of the subject matter, companies sometimes are inclined to devote less legal attention to IT purchasing than to transactions of similar or even less complexity and financial risk. Frequently, contract negotiation is deferred until the buyer has little leverage to procure fair and balanced terms.
However, major IT projects have a notoriously high failure rate. According to a study by the Standish Group, a market research firm, a large proportion are abandoned or completed over-budget and behind schedule, especially those involving custom or customized software systems. Unbalanced or ill-defined contracts often are at least partly to blame: The customer's specific needs are not well-matched to vendor solutions, legal terms do not sufficiently incent the vendor to perform and the customer is left with inadequate remedies for bad performance.
Corporate customers also have more complex choices in technology purchasing now. More vendors are offering IT through long-term managed services, such as outsourcing (onshore and offshore), instead of sales of perpetual licenses. And in these, especially when they involve highly customized or specialized services, it typically is more difficult - and therefore more important - to protect the customer's expectations.
Accordingly, these best practices for significant technology purchases are recommended:
Include the legal in the selection. Like any seller, technology vendors are most accommodating before they are selected. By including preferred contract terms in your RFP or other selection process, you compel vendor comment when you have the most leverage. Evaluate competing vendors at least in part on their willingness to offer fair contract terms.
Control the contracting process. As a general rule, the vendor's standard form contract never fits a major, customized IT transaction. You should try to control as much of the contract as possible to ensure that your expectations are met.
Know your leverage. You have more leverage than you think, both in and out of the transaction itself. The market for technology is highly competitive, and vendors want successful long-term relationships. The bigger the deal, the more the vendor desires to make you a happy customer, even a showcase for others.
Keep at least two vendors in play. You will get more balanced terms if the vendor knows it may lose the sale to someone else.
Define your requirements. Many IT projects fail because of a disconnect between customer requirements and vendor solutions or at least a failure to articulate them adequately. You minimize this risk if you carefully plan and define your requirements upfront and tie the vendor to them in the contract.
Benchmark your remedies. The traditional vendor service level agreement (SLA) does not adequately protect you. SLAs can and should be written with realistic, objective benchmarks and remedies that effectively motivate the vendor to fix failures fast.
Don't get locked in. Perfect contract rights are not helpful if you cannot exit a bad vendor relationship for business or technical reasons. Preserve your practical ability - not just your legal right - to transition in-house or to another vendor.
Plan for change. Your needs - and technology solutions - will change. Avoid having to go back to your vendor to ask for new services, terms or prices. A good contract will permit you to add or change volumes, use rights, licensing models, and products and services at pre-agreed pricing and terms.
Plan for renegotiation. Most technology service agreements are renegotiated before expiration. There are best practices, both in making the original contract and in monitoring performance, for maximizing the ability to renegotiate on favorable terms.
In a successful technology investment, the buyer's expectations are met, and the parties have built a partnership for future success. Planning for fair and balanced agreements, from the beginning, will help ensure this.
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For more information about the issues covered in this report, please contact Rauer L. Meyer in our Los Angeles office at 213-576-8005 or at rlmeyer@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction Department, click here.
©2004 Thelen Reid Brown Raysman & Steiner LLP
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