'Relationship is king' in IT contracts

When it comes to negotiating IT contracts, CIOs shouldn't just strive to get the most products and services for the least amount of money. They should try to cultivate a relationship with vendors and treat them as strategic partners. Otherwise, someone could get hurt.

John Pfeiffer, CIO of Corrections Corporation of America Inc. in Nashville, Tenn., has broken up with one of his longtime software vendors -- and there was nothing mutual or amicable about it.

Pfeiffer makes a major purchase every fall from the vendor (which he refused to name), but this year, he was told he didn't buy enough software to earn a price break. "For the volume I've done with this vendor, it shocked me," Pfeiffer said.

Exit the purchase orders. Enter the hard feelings.

Pfeiffer feels like the vendor has a "what have you done for me lately" complex and only cares about the last deal, not the history of deals. He has refused to buy any more of the vendor's product until he gets a price break.

"It left a bad taste in my mouth," Pfeiffer said. "[Vendors] all talk about the relationship and being a partner -- well, partners don't cut each other off because the deal wasn't big enough. [A partner] needs to be there in good and bad times like a marriage. A partner doesn't dump somebody."

When it comes to negotiating IT contracts, CIOs can "dump-proof" themselves by fostering a relationship with vendors. While the terms and conditions of the contract are important, CIOs should realize that simply buying the most for the least is not necessarily the best. Treating a vendor like a strategic partner rather than a provider could be the key to negotiating and sustaining a successful deal. The terms and conditions should fall into place more easily once the relationship is established.

'Relationship is king'

Greg Lenox, president and CEO of Norcross, Ga.-based software firm Entuition Inc., recommends structuring contracts so that both parties make money from the arrangement. The flexibility will inspire partners to go above and beyond the call of duty if needed. "If a customer asks me to get on a plane today -- and it's important enough to me financially and historically -- I will find a way to help," Lenox said.

Conversely, there are customers who put him in a spot with a low margin and don't treat him as a partner. "I'm less likely to jump through hoops because there's nothing in it for me."

Lenox added that a partnership might mean his company makes less than what they want, while their CIO customers pay a little more than they want. Dr. Phil would call something like that a compromise.

Lenox is a firm believer that the contract itself should ensure the relationship doesn't go sour because of confusion over expectations. But he thinks that's where the focus on the contract should end -- the rest should be on the strategic partnership and each side knowing what's important to the other. "The relationship is king," he said.

Contract caveats

But if the relationship is king and the contract is queen, then there are some things a CIO should look out for when hammering out terms and conditions.

Making sure the software is easy to implement and the vendor is stable and has a service support track record with a sizable install base is important, according to Larry Baye, a principal at Grant Thornton LLP in New York. If the vendor is customizing business applications, a CIO should ask if the vendor is covered in maintenance. "It all depends on what you negotiate," Baye said. "The more you customize, the less it looks like what the vendor sold you."

Baye added that CIOs should not renew their contracts if the product is old and they're no longer calling on the vendor for service and support. "The 18% [maintenance costs] adds up -- why toss good money into the pool?"

Scott Nathan, an attorney and consultant for iLinx International LLC, added that CIOs should be aware of areas where there has been a lot of technological changes or competition from new vendors in the market that drive down prices. "You'll want the opportunity to evaluate your contract on a more frequent basis," he said. "An out clause of 60, 90 or 120 days depends on the CIO's needs and the marketplace."

December deals

December might seem like a good time to make a deal with vendors that are trying to meet sales goals for the year. "Traditionally, this has been a fertile time to negotiate," Baye said.

But Nathan doesn't think the time of year should have much bearing on what a CIO should buy. "It's not like charitable giving -- the purchases should be a function of the needs of the party and the terms of the existing contract," he said.

Vendors might end up holding a grudge against a CIO who kicks the tires a little too hard this time of year. Those kicks could bruise the relationship.

"Giving end-of-year deals and incentives might be what we do, but it doesn't mean we like it," Lenox said. "January is important for us, too."

But for now, December will continue to means deals for CIOs.

"I have actually pulled some cap expenditures from 2006 to take advantage of significant discounts," Pfeiffer said. "And that's good!"

Ed Parry is a freelance writer based out of Hixson, Tenn. He can be reached at edsparry@comcast.net.

This was first published in December 2005

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