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Playing hardball with your vendor

As the economy picks up, vendors are becoming more brazen, changing terms and using contract loopholes to walk away from small deals to land the big fish. An IT attorney gives midmarket CIOs a primer on how to level the playing field at the negotiating table.

"It's the economy, stupid," has never been more relevant to CIOs in the throes of negotiating deals for their companies.

As the economy picks up, the favorable terms CIOs wrung from vendors during the tech recession are fast disappearing. To get the best deals for their companies -- that is, save money, save time and secure favorable terms -- CIOs need to don their reading glasses and sharpen their pencils.

I distrust all vendors equally. Second only to lawyers.

That was the message from Matthew Karlyn, an information technology attorney at Chicago-based Neal, Gerber & Eisenberg LLP. Karlyn spoke to a gathering of 200 midmarket IT executives at the CIO Decisions Conference 2006 here this week.

Negotiating with vendors can be especially treacherous for midmarket CIOs, who may not have the deal-making experience or access to legal expertise their peers at larger companies take for granted. As the economy expands, vendors that came begging for business a few years ago are now brazen, changing terms and even using contract loopholes to walk away from small deals when bigger deals come along, Karlyn said.

"The vendor signs your deal, then lands a big fish, but they don't have the staff to do the job. If the limitation of liability [terms] in your contract are structured poorly, the vendor can repudiate the contract without significant hardship," Karlyn said.

Karlyn, who has practiced IT law for nine years, offered CIOs a 30-minute primer on drafting and negotiating IT contracts that work. One of the most important things in a software contract, for example, are the warranties, or a vendor's assurance as to a particular fact. If the contract is breached, you don't have to prove to the judge that the breach was material," Karlyn said. "If the vendor doesn't do what they said they would do, it is called per se material. It's a blessing."

What kinds of warranties do you want to have in a contract? Given that open source will "be a problem for years," Karlyn advises you make vendors give you a "no open source" warranty. You should consider getting a warranty that the vendor will comply with the Sarbanes-Oxley Act. CIOs should also stipulate that vendors cooperate with the other vendors you use. Another hot-button issue is scalability.

"Vendors will tell you their product is scalable. X years down the line you acquire a company or expand and discover the product isn't scalable. But the contract says nothing about scalability. Get them to commit in writing that it is," Karlyn advised, so you can sue when it turns out not to be.

The limitation of liability, another common contract term, spells out the maximum amount of damages your company can collect in the event of a default. If the lawyers have done a good job, there should be no limitation of liability on issues that include indemnification, breach of confidentiality, bodily injury, Health Insurance Portability and Accountability Act violations and repudiation of contract, Karlyn said.

Another contract term vendors employ to their advantage is the force majeure clause. A force majeure event -- or circumstances beyond a party's reasonable control -- excuses a party's failure to perform. Karlyn advises you look at the clause with a careful eye. Is a shortage of labor a force majuere? In Karlyn's view, it may not be. Nor is a shortage of goods.

Ironically, or shockingly, vendors have been known to use force majeure -- the very disaster -- to avoid delivering disaster recovery services, Karlyn said. Make sure your contract spells out that force majeure does not negate disaster recovery services.

Attention to detail crucial during vendor contract negotiations

Well-written contracts should make sense to you and use precise language. If they don't, Karlyn recommends you find a new lawyer. Vendor contracts will often use the term promptly rather than a date of delivery. "Vendors love it, but what does it mean?" Karlyn suggests you give the vague term a pass, if you follow it with "but in no event later than" and fill in a date.

When sending out a request for proposal, Karlyn suggests you include a form contract and force vendors to respond to every piece of the contract. The tactic will save you the trouble of editing a vendor form contract (or paying a lawyer to edit it). "And they're responding on your terms," Karlyn said.

Negotiate with more than one vendor at the same time and make them compete with each other. "Vendors may knock down their price and the results are frequently dramatic," said Karlyn, adding that you'd be doing the vendors a favor. "Vendors like to compete."

The talk, delivered at lightning speed, found a receptive audience, although some said afterwards that parts of the advice were not always practical. Patrick Wise, vice president of advanced technology at Landstar System Inc., the South Jacksonville, Fla.-based truck carrier, spends a good deal of his time parrying with vendors. He said Karlyn's advice to negotiate with multiple vendors at once is not always possible, for example, when you have a niche or customized solution that the business has decided it needs. Landstar CIO Larry Thomas added that even when you have recourse, "the pain and agony of going to court is so disruptive to the business."

Shelly Barnes, vice president, technology and process at Arizona Tile LLC, is no stranger to hardball vendor tactics, having come to the Tempe, Ariz.-based stone importer from Phelps Dodge Mining Co. She asked Karlyn for suggestions on how to handle an incumbent vendor, in her case a telecommunications contractor. While she has managed to save money on some financial terms, she has little leverage on other terms and conditions.

Karlyn pointed to a current client who was dealing with an incumbent vendor, under a master services agreement that was outdated. "We're throwing away the 2001 contract and starting fresh. The client will spend money to negotiate, but the terms will be more advantageous," he said.

Wise and others said they have a few tricks of their own, like waiting until the end of the quarter to negotiate any deal. The motto that has served Wise best, however, he said is pretty simple: "I distrust all vendors equally," he said. "Second only to lawyers."

Let us know what you think about the story; e-mail: Linda Tucci, Senior News Writer

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