Managing IT Contracts. CIO Guide to Effective Contract Management.
Sunday, September 20th, 2009Managing IT Contracts
As CIO you are certainly awash in contracts of all types, sizes, and terms of contract. By mastering a few basics, you can save thousands to hundreds of thousands of dollars each year. The following suggestions are for managing IT contracts and negotiations:
Avoid the trap of thinking contracts from large vendors are fixed in stone. They follow the laws of buyer and seller and are almost always negotiable.
Review software contracts, even small ones. They are much easier to modify on the front end, because typically subsequent purchases are merely addendums to an original master agreement.
Vendors often provide contracts in unalterable form, such as PDF. Do not let this contrivance deter you from making important changes. (Author’s note: Consider investing in a desktop utility, such as the professional version of Able2Extract, to convert the PDF to Word, then modify and print back to a PDF.)
Set up a contract repository system. Time and again I have seen buyers stymied because they have lost the original contract and do not know specific terms or their rights. You should keep a PDF of the contract with original signatures (the executed contract) as well as a paper copy. Some organizations use a content management system such as Microsoft Share Point to maintain contracts.
Try to centralize software/hardware purchases as much as possible. Although the central purchasing group may have experience in IT contract negotiations, individual business units tend to pay the price asked by the vendor — for both the product and related maintenance.
Consider carefully the entity name(s) to be used for the purchase, as well as “affiliate language” (e.g., XYZ Corp and its affiliates). Software vendors are not typically lax with regard to terms. If you do not use the right name (e.g., XYZ Group versus XYZ Inc.), you could owe the vendor more money if the software is used in more locations/business units than anticipated. For example, you may buy each copy of ABC software for $50 a seat for XYZ Group but the same software will cost $75 a seat for XYZ Inc.
Insert language related to U.S. versus worldwide usage if applicable. Some contracts will say “Usage in United States only” and may charge additional fees or prohibit use outside the United States.
To the extent that you can look into the future (18 to 24 months), consider possible rollout scenarios. Who will be using the software? What about new acquisitions?
Create a price list and insert price holds (called “rate stability” in telecom contracts) for a reasonable period, such as 1 year or more. This will allow you to purchase software or hardware at a discount for a period of time in the future, when you may have a better sense of the quantity of product required.
Carefully manage maintenance charges and ask for caps on increases.
Beware of autorenewals. Telecom contracts, for example, will transition from a negotiated, reasonable rate to an expensive month-to-month rate unless you take decisive action.
Remain skeptical about “quarter-end deals.” Sometimes there is no deal — the salesperson simply wants to make his or her target and is betting that you will assume you are getting a better deal close to a period end.
Push out maintenance so that it is billed upon deployment. So if you start out with 1,000 devices and then deploy 1,000 more 6 months later, you want to pay only for maintenance on the first 1,000 for 6 months, not maintenance on 2,000 devices for 6 months.
Pay attention to vendor audit clauses. Of course, the vendor has the right to ensure that you are paying for all the licenses used, but the terms should not be draconian. You should ask for an advance notice of the audit; 30 days is reasonable. Do not allow a “due immediately” term in the contract. If you are found in violation, you should have a reasonable amount of time to get payment to the vendor.
Stridently resist extreme audit measures. One software vendor pressured a customer to install software that opened up a communication link to the vendor’s “mother ship” in order to monitor compliance. This is an extreme and unnecessary security risk. Manual audits are perfectly acceptable and less of a fraud exposure.
Do your own self-audit so that there are no surprises if the vendor performs its own audit. It can be damaging to your career if a large discrepancy is found, resulting in an out-of-budget outlay of cash as well as institutional embarrassment. Count IDs and clean up those associated with departed employees and contractors — no need to pay for someone not using the system.
Focus on data quality that affects the bill from the vendor. For example, you might have Jane Smith and Jane Doe, the same person but on the system twice as a result of a name change. Run scripts to keep the data as good as possible. You really do not want to depend on the vendor’s auditors to sanitize your user lists.
Do not depend on specific individuals, with no backup, to maintain contracts. When they leave the firm, contracts get lost. One firm I know got into trouble at a customs checkpoint because they could not show that their software contract permitted them to use the software outside the United States. Had they used a contracts library/repository, the contract could have been readily located.
Periodically review contracts to ensure that you are taking full advantage of terms and that you are in compliance with the number of licenses specified. Some vendors are amenable to a routine “true up” on licenses, but others may require you to pay top dollar for unanticipated (not previously negotiated) growth. A built-in price hold is a good defense against excessive costs from unanticipated growth.
