The Art of Negotiating with Your IT Service Providers – Part 2

In the first part of this post, we outlined pricing and licensing techniques. In this second part of the three-part series of posts, we will address maintenance and professional services.

Maintenance – Maintenance is not just for repairing defects but primarily for functional and other improvements. Pricing varies widely: 15-22% or more annually of the purchase price. There are situations where maintenance is not warranted. For example, hardware with a 3 years NBD warranty or desktop productivity software that is not upgraded at least once every 3 years. Regardless, there are some basic guidelines when purchasing maintenance. Maintenance costs should be based on the NET cost of the product after all discounts. Future increases in maintenance costs should be limited to a maximum of 2-3% per year and/or costs locked in for several years. It is beneficial to waive the cost of the maintenance for the first year, especially if the maintenance clock starts ticking in parallel to the implementation.

Your company will be impacted if your vendor gets acquired. Protecting against negative affects is critical. Negotiate “end of life” business requirements that include transition to new versions or product lines, locking in sunset support to meet migration requirements, and credits for sunk costs to offset transition costs. New functionality should not trigger an increase in maintenance costs. Ensure that product enhancements are included in the maintenance costs. Most importantly, but often bypassed, is ensuring end of life software functional replacements are provided at no additional cost (primarily seen during an M&A event). A new product (a new potential maintenance stream) that encapsulates the old functionality should be provided free. If the vendor cannot segregate the “added functionality” from the old, then require the additional functionality to be provided at no cost.

Some vendors create maintenance dependencies between components (line items). Beware the all or nothing clause prohibiting the removal of individual maintenance components. Each component should stand on its own unless it is a pre-requisite for another. It is also a good idea to specify maintenance reinstatement fees and business downturn clauses that allow for service level reductions. Establish SLA’s that are not only based upon standard metrics like response and repair time but align with your internal business requirements. Allowing vendors to earn back penalties for exemplary performance can be an incentive. When problems arise, make sure that you have the ability to escalate problem severity.

Implementation Professional Services – It is a good practice to tie payments to implementation milestones, using acceptance testing where possible, and in some cases, a holdback percentage on payments until the project is completed.

Ensure that the work performed is the company’s asset to use as desired. Payment for services does not mean you own the end product. Ensure contracts specify the services are “work for hire” and include intellectual property assignment or at least an unfettered right to use in the ordinary course of your business operations.

Manage your contractors as you would your own employees. You control their “acceptability”, adherence to your company policies, service termination, etc. Preserve a “first right of refusal” for extending the services of key contractor resources. In addition, ensure agreed timelines are maintained even if a service provider needs to replace a contractor. Always pre-approve assigned contractors.

Remember that contracted professional services are outsourced services. Outsource the service but never outsource the management. It is your responsibility to control the services provided as well as their time, travel, expenses, and invoices.

In the third part of the series we will cover important legal concepts and additional opportunities.