IT contract negotiation strategies

Vendor contracts can save SMBs money -- if negotiated properly. Follow these four step to help your contract negotiations go smoothly.

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Regardless of the size of your company or your IT transactions, a well-crafted negotiation strategy for your IT contracts has many advantages, including the potential to save you time and money. Failing to prepare ahead of time and have a well thought-out strategy may result in the contracting process taking more time than necessary and could end up costing your company more money.

Matthew A. Karlyn, an attorney in the information technology practice group at Neal, Gerber and Eisenberg LLP in Chicago, outlined four steps for negotiating IT contracts at the third annual CIO Decisions conference in Carlsbad, Calif., last week.

Step 1. Prepare for the project.

Before you look at a contract, be sure to research, define and collect all of the information you'll need for the transaction. Conduct thorough investigations on your prospective vendors and get references from them. Network with other CIOs to hear their experiences with the vendors you are considering. Also conduct internal diligence to determine what is important to all of the company's stakeholders and what aspects of the transaction are most important to your company.

Next, devise a detailed negotiation strategy and determine who from your company will be on the negotiations team. Does your negotiations team include only the CIO and an attorney, or does it include others such as project managers and the business owners who will be doing the day-to-day work? Be sure your negotiations team includes all the necessary decision makers.

Step 2. Prepare a detailed RFP. If applicable, a request for proposal (RFP) can help set the stage and provide the ground rules for the negotiation process. A detailed RFP also helps to let the vendor know what you want from the beginning. It is important to involve your attorneys and business consultants at this stage -- early in the process. Most RFPs should, at a minimum, include the following:

A description of operations. Outline in detail how you see the process or task working.

Your needs and requirements listed in detail. Don't leave anything out. Details can always be eliminated later, but it's difficult to add more steps once you begin negotiations.

A detailed communication process. How will you discuss any changes or issues both short and long term? Will you have regular meetings? Will they be via email, phone or in person? Who will participate in the communication process?

A model contract. Rather than using the vendor's form contract, draft a contract that works for you and include it in the RFP. As part of the RFP, require that vendors respond to the form contract.

Negotiations procedures and schedule. Decide how you will proceed with negotiations once the RFP is submitted, and devise a schedule to which both you and the vendor must adhere. If you include a schedule, it is critical that you stick to it. This will help you maintain control over the process. You may want to consider including an actual calendar that has each of the specific vendor deadlines and all of the days assigned for negotiations.

Step 3. Evaluate proposals. Evaluate each proposal the same way, so you are comparing apples to apples. Look for the following:

  • Past experience -- Experience goes a long way. Who are some of the vendor's customers, and what types of projects or services has the vendor done?
  • Qualifications, capabilities, personnel -- What can the vendor offer in general? What type of people does the vendor hire? Are they experienced and professional? Do they hold necessary certifications? How are they to work with? If possible, try to meet the staff that will be performing the work. In many transactions it is critical that you maintain a great deal of control over who provides the services for your company. This may include being involved in the hiring process, the right to reject personnel assigned to your account and the right to immediately remove personnel from your account under broadly defined circumstances.
  • Scope and pricing -- Are these realistic? How do they compare with the other proposals? Why does one cost more or less than another?
  • Changes to contract -- Review each vendor's response to the model contract you included in the RFP. Where more than one vendor is involved, create a spreadsheet that includes a side-by-side comparison of each of the vendors' responses. This will help you compare the responses and will be a valuable tool for the negotiation process.

Step 4. Conduct negotiations and select a vendor. After you have completed the steps above, begin negotiations. Remember, if you included a detailed schedule, it is critical that you stick to it. Another key to successful negotiation is presenting a united front. Prepare an issues list and negotiate each item with each of the vendors. Be sure to include decision makers from both sides in the negotiation.

Typically, if you conduct your negotiations in this manner (no matter how large or small the transaction) you can expect to have the whole process go more smoothly. You will focus on key terms, have to-the-point discussions, and resolve open issues. This also helps prevent wasting time on unimportant issues, pointless discussions and the endless tabling of critical issues.

Matthew A. Karlyn is an attorney in the information technology practice group at Neal, Gerber and Eisenberg LLP in Chicago. He can be reached at mkarlyn@ngelaw.com.

Questions or comments about this tip? Send an email to editor@searchsmb.com.

This was first published in June 2007

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