Introduction, Before Negotiation, Pricing Issues During Negotiations, Service Level Agreements, Contract Management, Conclusion, Footnotes,
Effectively negotiating, developing, and managing information system contracts are essential in developing a good management information system. Many management information systems projects have failed because of poorly negotiated contracts, undefined service levels in contracts, and a lack of follow up on key milestones addressed in the contract. This research paper discusses proper techniques in negotiating, developing, and managing a information system contract.
Before negotiations begin it is important for a company to know what type of relationship it is getting involved in with the supplier. “A vendor relationship is not based on trust, and it is not a partnership it is a legal relationship. All one has to do is to read a vendor contract to see this. Most vendors will say if it is not in the contract it is not part of the deal.”|1| Would one want a partner in business that would say if it not in my defined job description I can’t do it. Knowing what type of relationship you are getting into is important to the strategy and planning an company will have to go through while negotiating a contract. Here are some activities one should do before one begins to negotiate a vendor contract. Take the time to look over the contract with detailed scrutiny.” |2| Never sign off on a contract with out doing you homework first. Make sure everything is organized the way the agency wants it and the details are spelled out.
Be prepared for conflict. “ Most Negotiations are usually forced and do not occur unless they have to occur.” |3| It is human nature to a void conflict. Negotiations are about conflict. Prepare yourself to argue like one would if one was negotiating the price of a new car. Arguing makes the best relationships. Arguing ensures that each party has a clear perception of where the other guy stands. In a business relationship each party knows that the other is out to make a profit so one needs to argue to look after company’s best interest, which is to increase the shareholders value.
“Make sure specifics are spelled out in the contract.”|4| It is imperative that one knows when deliverables are due and how the contract can be terminated if the vendor doesn't fulfill certain deliverables or service levels. A plan should be made before hand to punish the vendor financially if it doesn’t fulfill certain deliverables on time.
“Create a team to work on the contract ahead of time.”I4I This is helpful if a company has a diverse team representing the legal staff, IT staff, development staff, and the financial group. In this situation one has an expert from each department that can address his or her part of the contract. Also, by getting a variety of functional areas involved early, the project will gain support early on through out the organization. Give this team the time and resources and the authority to work closely with the contract negotiations. The more authority and freedom this group has the better it will perform.
Get the top management involved in the negotiation process. Providing details to executives about how the negotiations are going and what you are doing, this helps foster support from top management for the project and the contract.
One should also use the requirements for the system as a road map to define how the company wants to succeed with the vendor. The use of requirements for negotiating the contract gives one a firm ground to negotiate on. It also provides a framework to develop and negotiate service level agreements. Finally, Sign a confidentiality agreement to ensure the association is not put at competitive disadvantage by disclosure of sensitive information.| A confidentiality agreement should be one of the first things singed off on before negations take place.
Pricing Issues During Negotiations
There are several key issues to deal with while negotiating contracts. One of the key issues involves price. Negotiating a detailed price for every development and service cost leads to the best agreements without surprises down the road. “Customers sometime feel that they have a fixed fee agreement, but they are surprised when transactions volume fees or development charges are higher than expected.”|5| Companies need to conduct due diligence to find the transaction levels and negotiate development options. If the company has a large amount of transactions and the vendor is making money off those transactions the agency can negotiate a lower price on development or eliminate the price for development all together. Having a clear link to payment terms provides a foundation for buyer and seller to enjoy system successes. When negotiating price, be prepared to here allot of “No’s“ from the vendor. The following example illustrates an agency getting a bad deal, because it didn’t hear to many No’s. “Here’s an interesting scenario: A vendor makes an offer, $1,000,000. You respond, Not a dime more than $900,000. The Vendor says, done deal. How good is the deal you got.” |6| If this happens to one, one has left a lot of money on the table. Arguing for every last dollar ensures that the agency is going to get the best deal and is looking out for the its best interest. Also, by arguing for every last dollar an agency can determine how far the vendor will bend before the vendor reaches the bottom.
Another way to get a good price is to deal with small vendors instead of large vendors. A majority of large companies will not deal with small vendors, but a small supplier usually works harder for less money than a big supplier .Smaller vendors can save your company big dollars and they’re easier to deal with.
Another Key issue when negotiating a contract is defining the service levels that one wants from the vendor and the system that one is creating. Service level agreements have two primary functions. During early negotiations, a vendor’s detailed service level agreement can be the basis for discussing available services and their relative costs, planned responses to emergencies, and how unexpected problems, such as continued failures, are handled. The service level agreement becomes a reference point to determine if the vendor has lived up to its promises. Poorly defined service level agreement can create a lot of problems. Many enterprises are to their businesses due to poorly defined service level agreements. A recent case of an airline illustrates a classic mistake made by IT directors in framing SLA’s. “The airline negotiated a contract involving implementation of highly complex technologies from eight different vendors, but felt conformable because this was backed up by a punitive SLA involving payment of large sums of money in the event of the total system being unavailable. The worst happened, and the airline entire network went down for six hours. Not a single aircraft took off worldwide, followed by four or five days of disrupted schedules until normality was restored. Critical systems took 12 hours to recover, even after the network was backed up. The punitive damages were scant compensation loss of intermediate business and consequential damage to the airlines reputation. The damage also did little to improve the quality of service delivered by the IT supplier.” |7| This is good example of how a poorly constructed and negotiated service level agreements can damage the whole business. The airline didn’t do enough research into the costs if the systems went down. It missed out on a lot of soft costs involved in calculating total cost on a worst-case scenario. Purchasers need to clearly state the goals of the computer system in the contract. One will have problems if one cannot specifically define the goals that the system has to operate at in the contract. This will cause miscommunication between purchaser and vendor, thus creating a bad relationship.
IT organizations collectively spend billions of dollars a year to compensate for the ineffective quality-control systems put in place by vendors. In agencies service level agreement their needs to be controls in place to punish the vendor financially if they do not meet the agreed upon service levels. “UpShot ESP is a company that sells CRM Software. It offers deployment within 15 days and after that, 99.9 percent, around –the- clock system availability. Most notably UpShot backs its pledge with clearly defined penalties listed in a comprehensive SLA. For example, for companies that have a sales team consisting of up to 50 people, Upshot will deploy the service in 15 business days. During this time, UpShot will assign a project manager to coordinate your implementation; configure the system according to your sales process; migrate your existing Account, Deal, and Contact databases; and provide training for your users and administrators.” If not completed on time, UpShot promises a 5 percent discount on the $5,000 implementation fee for each day late. Also, if they don’t meet their 99.9 percent uptime promise, you get a 10 percent discount for each hour of downtime. Although the financial impact on your company will probably be exceed that discount, it is certainly a laudable level of commitment we hope other vendors will follow.” |8| |This is an example of an Service level agreement that takes risk in to consideration. If certain service levels are not reached UpShot pays a financial penalty.
Vendors will try to limit their risk as much as possible in a contract. One way vendors limit their risk is by getting limits on the remedies they must provide for nonperformance. Organizations need to control their systems if it does not perform properly. Guarantees from the vendor for ongoing support, system updates, and system updates help protect agencies from cost overruns poorly developed systems. “During recent negotiations for a large, multiyear service contract, the astute representation of a potential vendor adeptly tried to give the impression that he was willing to provide substantive service levels and meaningful nonperformance remedies. When the customer took a closer look at what was being offered, it became apparent that, in the final analysis, the clever vendor wasn’t providing much of anything. In fact, the customer was still being asked to assume the majority of the risk.”|9|
“During the remedy phase of the discussion, the vendor agreed to what appeared to be an escalating scale of remedies. This sounded good on the outset. The deal went like this: In the first month a service level was missed, the vendor would issue a percentage of the monthly service fee. In the second and third months, the service fee credit percentage increased each month for the same infraction if it continued to occur. Finally, in the forth month, if the problem remained, the customer had the unilateral right to cancel the contract. By agreeing to this, it appeared that the vendor had complete confidence in its ability to perform. But the deal wasn’t yet a done deal. At this point, the vendor insisted on limiting the total remedies, undermining its supposed complete confidence.
A Financial analysis by the customer revealed that if the vendor failed to meet the contractual service levels in any two consecutive months, its proposed remedy limit would quickly be reached and the vendor would be off the hook for any additional increase in service fee credit, no matter how bad its performance. Basically, the customer was being asked to underwrite the vendor’s risk if non performance by assuming all of the risk of nonperformance by assuming all of the risk above the remedy limit after only a modest level of accountability on the vendors part.”|9| A good way to control remedy limits and poor structure is to provide the vendor with as much relevant information as possible about the service level agreement and remedies that you want. Providing relevant information about the service levels limits the options for vendors to provide bad remedies.
During the time the contract is being negotiated, service levels agreements are being approved and the contract is being signed off companies need to be thinking of a way to monitor the contract. To monitor the contract effectively agencies need to be thinking about the relationship they are building with suppliers and how they are going to manage that relationship. "Assertively monitoring compliance, documenting it and exercising remedies when vendors aren't compliant help enforce the agreement. Remember, defining the deal, documenting the deal and managing the deal are all key components of driving a better deal." |10|.
One way to monitor contracts is to set up a centralized contact management department. “Centralized contract management can help reduce purchasing costs and improve internal efficiencies. In fact, the IT Procurement Working Group of the Society for information Management (SMI) has identified contact management as a best practice for in purchasing IT goods and services.” |11|. Here are some examples of how a good contract management department can provide cost savings to the agency, “At a recent seminar, the asset manager of a major insurance company stated that his contract management group regularly saves more than $300,000 a month. A manager with one of the county’s leading telecommunications suppliers asserted that her department’s contract management team is responsible for savings of more than $1 million dollars. Both attributed their success to the fact that they assertively manage the contracts and vendor payments within their authority. They both find most of the savings by carefully monitoring vendor invoices against contract terms and conditions.” |12| “Claude Marais of Elf Atochem North America Inc. estimates that by proactively managing contracts, IS can save as much as 20% to 50% in acquisitions costs. Marais is the chairman of the Society for information management (SIM) International’s Information Technology procurement working groups.” |13|
Companies have to make the vendors aware of what is spelled out in the contract Agencies have to put as much of the obligation for contract awareness and compliance on the vendors. One can do this by e-mails, setting up a site on the company’s intranet site that allows vendors to view details of the contract. There are contract management systems that operate over the internet that monitor, track, contractual relationships. One example is Cira Technologies Inc. contract management system. "Cira's system provides a centralized, internet-accessible application system that lets IT customers and outsourcing providers track and manage their contractual relationships online. For instance when an outsourcing provider such as Proactive Business solutions receives a contract to move all a company's desktop PC's, severs, and physical network from one place to another, the contractor estimates how much it is going to cost and many workers and hours it will take, then inputs those numbers into Cria's system via the internet. The customer can look at those estimates and track actual costs against them as the project goes on."|14|
An company can create contract specialists whose job is to assist contract negotiators with timely and thorough execution of contracts and contract renewals. The contract negotiators are then free to spend more time understanding the business requirements, doing research, attending educational programs, and negotiating with suppliers. The contract specialist ensures that contract related documents move swiftly form one point to another and that due diligence required is being conducted in a timely manner. Contract specialist ensures that your company saves time and money when managing a contract.
When the company prepares to negotiate develop and manage an information systems contract with a outside vendor it is very important that it follows the proper steps in preparing to negotiate, negotiating the price, drafting and developing service level agreements, and developing processes to manage the contract in detail. If the company does not follow the proper steps, the information system may fail, the relationship with an important vendor will be strained, and most importantly the whole process will be needlessly expensive.
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