Changing vendors: Avoiding pitfalls, IT vendor contract negotiations

Changing technology vendors is painful

Most businesses do not change their technology vendors. During a roundtable discussion at Gartner’s ITxpo in Orlando, Fla., Helen Huntley, vice president of research at Gartner Inc., explained that 54% of businesses will simply renew a contract with existing vendors (often negotiating new terms) without putting the contract up for bid. Another 17% will bid the job, but wind up sticking with the existing vendor. That’s a total of 71% that continue with existing technology vendors, and only 20% select new vendors once a contract is put up for bid.

Much of the reason for this overwhelming renewal is due to the expected fear, uncertainty and doubt that plagues corporate chief technology officers and IT administrators. Risk aversion is a major impediment to change, and a company that relies on an established vendor can be disrupted by the transition to another technology provider. The new vendor is an unknown; even the most careful due diligence cannot guarantee a new vendor’s performance under all conditions for your business. Many organizations tolerate some weaknesses in a vendor relationship, because that business already knows where the vendor is weak and has accommodated for that weakness. This means you’ll often enter IT vendor contract negotiations with an existing vendor rather than a new one. No worries, the basic ideas are the same.

Preparing for a IT vendor contract

So it’s time for a contract discussion. It may be a matter of renegotiating and renewing the existing IT vendor contract. In other cases, it might be time to bring on a new vendor to save money with less expensive services or products, or expand your scope of offerings with products that your current vendor just can’t or won’t supply. Either way, you’ll need to deal with contract negotiations between your organization and the vendor. It’s a path laden with pitfalls and traps that, if left unaddressed, can lock you into the vendor or leave your business unexpectedly exposed. Here are just some of the considerations for your next contract review cycle:

Review the prenuptial agreement and divorce terms. Most technology vendor contracts will include a termination clause that allows both sides to sever their contract when certain conditions occur, such as your failure to pay or their failure to deliver goods and services. You’ll want to review the termination clause and make sure to understand your exit options. If you’re feeling locked in here, you want to add some wiggle room to give the business reasonable exit options.

But more important, take an extra step and review the terms that define how this termination will take place. Huntley calls these points “disentanglement terms.” The most disruptive thing that can happen is to terminate a vendor with no guidelines in place for the orderly handoff of current goods, services and knowledge. For example, the vendor may be required to turn over all documentation that you have provided to them. Additional documentation may be needed to smooth the transition to the new vendor, and those should also be provided. Define the timeframe for this to happen--maybe 15 to 30 days after notice to sever.

Remember that after a contract termination or expiration, there will be a period of transition from the old vendor to the new vendor. So additional terms may also include ensuring access to the old technology vendor’s experts or support staff for a period after termination. This kind of access will carry an agreed upon hourly rate since you would no longer be under contract. There may be other terms and conditions that apply to your specific business and needs, so think carefully before renewing an ITvendor contract or starting negotiations with a new technology vendor.

Define what will be left behind or returned to you. Your business must continue to function, so consider the disposition of any outstanding assets or knowledge that is critical to your business. For example, if the vendor stocks your product, make sure you’ll get that stock back after termination. If the vendor makes an investment in that stock (e.g., repackages it or performs upgrades, etc.) you may need to buy back that stock for a fee.

It’s the same with proprietary knowledge and usage rights, such as software licenses. In general terms, consider what your technology vendor knows about your business, users and clients. A vendor may need this kind of insight to function as your vendor. This doesn’t mean documentation or things that you provide and want back; this means intellectual property that the vendor learns or collects about your business. Decide how this type of information should be handled, and (ideally) how it should be transferred to the new vendor. As another example, if a vendor brings software into your business, make sure that you agree on who gets the license(s) for that software if the contract terminates. You and your new vendor may need access to that software to run the business.

Watch hiring and other personnel clauses carefully. Many technology vendors employ technical experts on staff and through their own contracted services. Contracts often include hiring restrictions that severely limit your ability to hire those personnel directly. This protects the vendor so that you don’t hire their talent out from under them. If a new vendor uses the same subcontractors as the old vendor, a right-to-hire clause may leave you hamstrung–see how any hiring restrictions survive termination.

Also consider what happens to the key personnel that handle your account with the technology vendor. Some businesses are adding personnel clauses that guarantee key account and support personnel for some period of time after termination. This is about roles, not specific individuals. By ensuring that key roles remain available to you during a transition period, the old vendor being dismissed cannot easily reassign key personnel to other accounts and leave you with less familiar and less knowledgeable personnel. Again, the goal is to smooth the transition as much as possible.

Weigh the costs of changing technology vendors. Changing vendors is not free, so it’s important to consider the costs and plan the appropriate budget in advance. Huntley cites a variety of direct costs that are easy to understand, including early termination fees, the costs of buying back assets, and any space in your facility that may be needed for vendors to operate in parallel during a transitional period.

But Huntley also notes indirect costs to a vendor transition that can include lost productivity or disruption for the business, the cost of unplanned license purchases, the cost of replacing tools or even processes that may have existed with the old vendor. The things that you don’t think about and agree to during a vendor contract negotiation can unexpectedly cost you money later.

Negotiate in close concert with the legal team. An IT vendor contract is a legal and binding instrument. The problem with this kind of contract negotiation is that IT personnel are not lawyers, and generally, lawyers are not IT savvy. The general recommendation is that contracts should be negotiated and reviewed by personnel versed in contract law and who understand the business’ IT needs. In some cases, the negotiation is handled with careful collaboration between IT and legal departments. In other situations, a business may elect to hire representation with a strong IT background that specializes in this type of negotiation.

Minimizing disruption to your business

You can see that there is an array of important considerations involved in negotiating the end of a vendor contract, and the points covered here are only the tip of the iceberg. The goal is not just to think about ending a relationship with a technology vendor, but to consider and plan how that relationship should end if the day ever comes. Negotiating these terms up front doesn’t mean the vendor is bad, or that you have no confidence in them. It simply means that you’re protecting the continuity of your business and streamlining a future transition process from one vendor to another.