Negotiating Successful IT Deals

Matthew Peters, National Innovation Leader and Partner at McCarthy Tétrault LLP sets the stage for his presentation at the CIO Peer Forum in April 2018.  Here are some of his thoughts on managing and negotiating successful IT deals:

When entering a new business relationship, there is a tendency to pull out a contract that has worked in the past, dust it off, make a few adjustments, and insert the name of the new project.  However, with the complexity and speed at which projects are run, this may not be to your advantage.  Here are some of the key components to ensure a successful contract.

Establishing early warning indicators that the project or services are off track: Having early warning indicators articulated in advance is far better than waiting until the delivery is missed.  You can go into as much detail as you want but including critical project milestones allows for early remedy to a potential problem.

Proper change management: Death, taxes and change.  The three absolutes in life.  With that said, change is often overlooked in good contracts. This is more than defining a change order. This is designing the contract so, for example, it is clear whether or when can a vendor say no when you ask for certain kinds of change. What is the financial structure for a change? How about volume changes to the services?  The key is to design a holistic approach to change.

Appropriately designed incentives and remedies: It is important to have clarity as to the technology road map for the product, the commitment to changes, and what happens if the vendor doesn’t follow through on those changes. What would be highly motivating to the organization to ensure that they stick to the roadmap?   Often it is something other than money.  By way of example, pre-agreed public statements about delay can be highly motivating as the vendor is looking for their next sale.

Another component is thinking about remedies for sustained poor performance.  Often times if there is legal intervention, the recommendation would be to terminate the contract.  However, this most often is not a realistic remedy.  Thinking through what will actually be effective is important.  For example, instead of an immediate termination right, think about having the termination for convenience fees drop away so that you can terminate whenever you want.  The vendor can then “earn” the right to have those termination fees put back into the agreement.

People have a tendency to jump straight to their standard SLA provisions and don’t think through what will appropriately incent the vendor to actually deliver.   If the vendor has factored in the SLA credits into their pricing model, as some do, they are already planning for failure and your SLA structure won’t change that.

In some cases, a financial remedy works and in others it could be something as simple as a very good reference that will motivate the vendor. Or, in some organizations escalation to their CEO is a sign of massive failure, so an incentive is a very rapid escalation to their CEO.  While there is no monetary amount associated with this, it is a highly effective tool.

That is not to say that money can’t be motivating.  If the work is project based, tying all of the payments to accepted milestones, with a “grind” for late acceptance can work well.  And note the careful use of “acceptance” and not “delivery”.

Items such as score cards that get incorporated into individual bonus incentives on the vendor side can also be effective. If you understand what your vendor’s bonus is based on, you can contribute directly to that individual’s bonus if the targets that are tied to the contact are met.  If your project is a large one, in the one hundred-million-dollar range, adding an extra quarter million dollars as an incentive to a specific individual is not a material amount to the project, but is absolutely is large to the individual.  When this can be done, the lead on the vendor side can be more aligned with the customer than the vendor which is not a bad thing for you.

Establishing a user group: One of the challenges with products that get implemented is this issue of what is the product roadmap.  How do you ensure alignment with what the users are requiring versus the change in direction of the company, whether through a change of control, change in leadership or otherwise?  One way to address that is to create a critical mass of users that have an influence over the product growth.  You, as a single client or customer, typically have very little influence.    If you are part of a group that has 20% of the vendor’s revenue you now have a voice.  It’s almost like unionizing.

With that power, require the vendor to get user group sign off on changes and similarly, approve new functionality being added to the roadmap.

Contract terms: Designing contract terms will depend on the size of the relationship and what is being spent. That said, whether small or large, jumping straight to a template contract without thinking through what you want to achieve can leave you missing out.

Just as you wouldn’t walk into a car dealership and say you simply want a car, you shouldn’t start your contract process by saying you simply want a signed document.  There are a lot of options and features that best address your personal needs and requirements, in both car purchases and contract development.

The starting point should always be what does success look like?  What are the key drivers?  You need to start with identifying the key success criteria, such as implementation achieved on time and on budget. But then how do you design something that addresses that need?

You start from the perspective of designing a project, rather than drafting a document.

All of this is, of course, more relevant in a large contract. The best way to approach smaller contract and run of the mill contracts, is to have a reasonably balanced and fair agreement. When you meet to start contract negotiations with the vendor, being able to produce a fair and balanced contract will tend place you at an advantage from which you can, if needed, point to unrealistic and unreasonable content in the vendor contract.

If you want to hear more about how to negotiate a good contract, join Matthew at the CIO Peer Forum.

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