All Posts in Policies and Procedures

|In: Industry Commentary|Last Updated:

IT managers deal with contracts a lot — from technology vendors, systems integrators, outsourcers, and other miscreants who regularly darken the doors of corporate IT. Even many who recognize the importance of strong negotiating skills do their best to ignore the contracts that express a negotiated agreement. Mostly, it’s a matter of time and attention span. They have too little of either.

It should be obvious: What you agreed to doesn’t matter. It’s what the contract says you agreed to that matters. Even if the contract is an End User License Agreement (EULA) or some other “shrink-wrap” contract that wasn’t preceded by a formal negotiation, it’s still an agreement, and it’s up to you to negotiate a fair version of it.

So if you negotiated the deal, you need to read the contract provisions to make sure they accurately reflect the deal you negotiated, and if you didn’t negotiate the deal, you need to read the contract provisions to find out which terms need to be negotiated.

Here are a few rules of the road to keep in mind as you do so:

1. If you weren’t party to it, you aren’t bound by it. For example, it’s increasingly popular for EULAs to make the transfer of software licenses to another party, even an acquiring corporation, a contract violation. If you’re on the wrong end of this provision — perhaps you have to integrate the information technology of an acquired company — are you stuck buying new licenses, just because the company you acquired agreed to the EULA and that’s what it says?

No, you aren’t. Yes, you acquired the signed EULA as part of the corporate acquisition. One of two conditions is true: Either you own the license as part of the acquisition and are bound by its terms and conditions, or you don’t. If you do, you can use the license, if you don’t you aren’t bound by it. Even if, for some reason, you’re stuck with the worst of both worlds, so what? Call the offending vendor and make it clear: Either it sells you new licenses for a dollar and continues to collect revenue from annual maintenance, or you’ll convert to a different vendor that’s interested in your business.

2. What isn’t in the contract is more important than what is in the contract. Not really, but there’s more risk there. Spotting circumstances that might arise and prove disadvantageous to you that aren’t described in a contract is much more difficult than analyzing what’s there. If it’s a negotiated contract, shame on both of you for not thinking of the circumstance and negotiating it in advance. If it’s a non-negotiated contract, spotting the missing items takes more work. Before you sign, make sure you can live with its terms and conditions; negotiate those you can’t live with.

3. Contracts only matter when things go wrong. Probably the single biggest mistake managers make in reviewing contracts is focusing their attention on whether the contract accurately reflects the intent of the agreement. That is, of course, necessary, but it’s pretty much irrelevant, because so long as everything is going well, neither party will ever pull the contract out of the file drawer. Companies review contracts when something goes awry. When you analyze a contract draft, do so from the same perspective.

4. After non-delivery, the second-biggest problem that can arise in a contract is excessive success. Take a step back. Does the contract assume failure, or at best mediocre results? Joint ventures are especially susceptible to the danger of success, with one side often giving away far too much on the premise that, “We have nothing right now, so there’s no downside risk.” Sure there is — whatever you’re trying to accomplish might work out far beyond your current estimates, which are, after all, predicated on worst-case analysis.

5. Involve the lawyers, but don’t make it their problem. It’s your deal. Their job is to help you make sure it’s the right deal, not to make sure it’s the right deal themselves. Which means, by the way, that it’s up to you to make sure you’ve established a strong working relationship with your corporate attorneys.

Speaking of lawyers, a common negotiating ploy is for a vendor to say to you, “Do you really want to let the lawyers become involved?” It’s an implied threat: The lawyers will kill the deal, or at best cause unaffordable delay. Your best response is to answer with a question: “Why — is there something in the contract our lawyers might object to?”

If nothing else, their response will have some amusement value.

Comments

|In: Industry Commentary|Last Updated:

Once upon a time I helped review a vendor’s Master Services Agreement (MSA). (if you’re unfamiliar with the concept, an MSA defines the relationship between a service provider and a client. Specific pieces of work are spelled out in what are alternately called Task Orders or Statements of Work.) Among the provisions in this gem: Should the relationship go awry, the vendor had the right to terminate with 60 days notice. The client received no right to terminate.

  • A prospective client once asked me to use its standard MSA to govern some consulting work. Had I signed it, any intellectual capital my company used in the engagement would have become their property. Not satisfied with asking for the unrestricted right to use it themselves, they figured I shouldn’t get to use it anymore myself. After roughly seven hours of my life I’ll never get back, we came to the same agreement we should have started with.
  • More recently we were asked to sign an MSA with a provision requiring us to continue our work in the event of a dispute over terms, schedule, effort, definition of deliverables, or what have you. It had another provision, on a different page, asserting the client’s right to withhold payment in the event of the same kind of dispute. Either of these terms is reasonable. Together, they gave our client the right to compel us to continue working without ever getting paid. I don’t think so.
  • Getting back to vendor-driven unilaterality, I once saw a contract that gave an outsourcer the right to increase its hourly rates more than three times the rate of inflation each year. I saw another that included a non-solicitation clause preventing the client from recruiting vendor staff while leaving the vendor free to solicit as it liked.

I’ve been on both sides of this issue enough times to recognize a time-wasting trend: These documents increasingly are written to be one-sided. Really, what’s the point? Does anyone want to do business with a company careless enough to fall for this kind of thing?

I blame the dot-com era. No, really … the dot-com era, and especially the so-called experts who promoted “digital marketplaces” and focused the business world on obtaining the lowest-cost goods in every purchase. Prior to that, the business world had, for the most part, figured out that strong supplier/customer relationships provide more value at lower total cost than when each party views every interaction as a negotiation in which it tries to gain maximum advantage.

Awhile back, KJR introduced the idea of ROT — Relationships Outlive Transactions. You should remember ROT when dealing with suppliers and clients just as much as when dealing with managers and peers within your organization. This isn’t about being a mensch (although aspiring to mensch-hood isn’t a bad personal goal). It’s about personal and organizational effectiveness.

Compare the reputation of two vendors. Of the first, clients say, admiringly, “What a sharp company. It doesn’t miss an opportunity — its people always try to find an angle. They’re shrewd — if our attorneys hadn’t been on the ball they’d have taken us to the cleaners.” Of the second, clients say, “What a great company. You can always trust its employees to be fair. We just do business, and haven’t once had to pull out the contract — we’re always able to work things out.”

You have to choose one. If you choose the first, you know before you start that you’ll have to invest quite a bit of extra time looking for loopholes. You’d have to have a very good reason to go through the trouble.

It works the other way as well: When service providers look at you, are they more likely to say they have to negotiate hard for every point, or that you do your best to establish a working relationship that’s reasonable? And before you say you don’t care, consider that the best service providers can afford to turn down bad business, and are generally smart enough to do so.

Writing fair contracts isn’t all that difficult. The social philosopher John Rawls provided the key concept in his definition of a fair society — it’s one you’d design without knowing in advance where you’d be born in it. To apply his approach to the world of business relationships, when you ask your attorney to draft a contract, don’t reveal whether you’re planning to be the buyer or seller.

The only possible outcome is a contract both can accept.

Comments