The Art of Negotiating with Your IT Service Providers – Part 3

In this last part of the post we address the legal side of IT purchases. While no one wants to focus on litigation, legal components can be critically important to the purchasing lifecycle. In addition, we will discuss some “deal closers”.

Legal – Contracted legal terms and conditions rarely avail themselves, but when they do, it is typically problematic to the business environment. Here are some areas that top our list:

1. Force Majeure (beyond the reasonable control) – There are a few items beyond the reasonable control of a party like “acts of god” or war. Items like shipping delays, labor disputes, and telecommunication often get bundled into force majeure language but can be managed in an alternative manner. These items should not be classified as force majeure issues.

2. Governing Law and Venue –Typically, you want the governing law and venue to be based in the state where your business is headquartered. UCITA states (MD, VA) laws tend to be pro-licensor. Other states, like TX, MA, CA, IL, IA, and HI tend to be complex. New York is a reasonable alternative but the ultimate choice should be one that you are comfortable with and does not present a disadvantage to your organization.

3. Intellectual Property (IP) Indemnification – Always be sure to protect against IP infringement. There should be no limit on liability and only 3 acceptable resolutions to IP infringement: repair, replace, or a full refund.

4. Limitations of Liability – Vendors always want to limit their liability and typically is an arbitrary amount that is less than the overall value. Liability caps are acceptable as long as they are mutually (painful). Base liability caps on direct damages only specifically excluding damages from IP infringement and breach of confidentiality or gross negligence/willful misconduct.

5. Statute of Limitations – Keep an eye out for language that artificially limits your legal options and deviates from the governing venue limitation statutes.

6. “Missing Documents” and URLs – Many contracts reference and incorporate external documents. This is not troubling unless the documents can be amended at the sole discretion of the vendor. Allow for notification of changes to the referenced documents and your ability to terminate the contract should a modification be detrimental to your company.

7. Regulatory Compliance – Understand the compliance regulatory implications of your industry and how the vendor manages their own compliance efforts and facilitates yours.

8. Contract Terminations – There are very few reasons for termination of a perpetual license (which is a company asset) other than non-payment of the initial license.

9. Audits – License compliance audits are fine but they should be mutual, narrow in scope, limited to no more than once a year, and the costs borne by the auditing party. To minimize your business disruption, try to limit the audits to attestation of compliance. If you are out of compliance, license “true-up” costs should be based on your discounted volume pricing.

It’s time to finish the deal, but what other items can add value to your organization and minimally impact your vendor?

1. Training – Minimal impact to the vendor’s margin and potential high value to your success

2. Points of Contact – allow for more than the vendor specified maximum

3. Look to the Future – lock in discount percentages for other products in your vendor’s portfolio

4. Add-ons – Don’t neglect software options that can present a significant cost and often get shadowed by the core product negotiations.

5. “Your business to keep” clause – provide ability to migrate away from a vendor without penalties for reduced services during the migration. The vendor’s incentive to accept this language is the prospect of continued income stream.

6. Limit end of term contract extensions – Require the vendor to provide you an end of term notification well before your obligation to renew. Until renegotiated, renewal terms should automatically convert to month to month with the same existing terms and costs.