Leverage the Competition

Another way to drive costs down is to leverage the vendor's competition in all your negotiations, McIsaac says. Whenever a vendor thinks it has you captive it has absolutely no incentive to give you a break on pricing.

Never let vendors talk you into buying ahead to get a volume discount, lest you fall into the same trap as the City of California's Department of Information Technology (DOIT), which ended up with a contract for 270,000 Oracle database software licences that relatively few state workers needed or wanted.

"There was another customer I spoke to 18 months ago that had already bought $2 million worth of Oracle licences, and a million dollars worth of that was stuff they didn't need right then," McIsaac says. "The problem they were finding was that when they were going to business and saying: Â'Here, we've got the Oracle licence, you've got to use it but I'm charging you for it,' the business said: Â'No way, I can get that much cheaper by going to SQL Server.' The business couldn't actually sell its over-capacity back to its lines of business. This guy was left with a million bucks worth of licences he couldn't shift."

Finally, make sure the contract spells out what happens during testing and acceptance. Curran says most contracts contain a provision for a period of testing, but the CIO needs to know who is going to do exactly what tests, the benchmark criteria for determining the success of the testing and what procedures are to be followed if it fails.

"Is there an arbitration? Is there a mediation? Do you get an expert in? Or do you just terminate the whole thing, which means both sides will have wasted money on putting forward a project that doesn't work. You need to look at the worst case scenario and be prepared to resolve that," she says.

Likewise the contract should spell out how the organisations will deal with contract dispute resolution. "The whole point about the dispute resolution clause, if you choose to go through mediation or arbitration, is that it has to be exactly clear in the agreement what is being done and who it's being done by and when it has to be achieved," Curran says.

"A vague statement, which says the parties will discuss disputes and then they'll escalate it up to some other higher person and maybe it will get it resolved, isn't sufficient. Case law backs that up. If you want that sort of clause to work in the agreement - and there's nothing to say it shouldn't - make it clear. Distinguish between technical disputes, which should be resolved by technical experts, and contract disputes, which probably should be resolved by contract experts, legal or otherwise," she says.

Get all of the above right, the lawyers and McIsaac agree, and you too can have a "licence to kill for".

And 007 will be proud of you.

SIDEBAR: Driving the Deal

A Form for Fairness By Joe Auer*.

It's a good idea to have a user form contract. It's hard to understand why many companies continue using vendor contracts that are masterpieces when it comes to allocating all the risk to customers. Most vendors don't even accept the risk of their own nonperformance in their contracts.

A user form contract can outline the terms and conditions under which the customer is willing to acquire certain equipment, software or services.

The most significant difference between a user contract and a vendor contract is that a user contract can optimise the customer's position or establish fair and equitable terms that protect both parties' interests. (Try finding fairness in a standard vendor contract.) A user form contract, properly prepared and implemented, offers you significant benefits. Both parties' rights and obligations for a specific type of deal can be documented thoughtfully before you sit down to negotiate with a vendor. Busy procurement professionals wouldn't be required to react to an endless barrage of vendor form contracts - each with its own "catch me if you can" tricks, such as automatic renewals and disclaimers on everything you've been told.

In addition, your company's lawyers can work with negotiating teams to prepare, review and periodically revise the form agreement without the sense of urgency of a pending transaction. Senior management and representatives from other areas of the company can do a comprehensive review of the agreement more prudently and systematically.

Preparation of a complete set of eight to 10 deal-specific form contracts generally requires a considerable commitment, but it will more than pay for itself. The contracts prevent the need to custom-draft an agreement for each deal. If the form contract must be tailored to match a particular transaction, your lawyers can implement the necessary changes with less effort than if they started from scratch. What's more, since you already accept your forms 100 per cent, your review and tailoring time for a vendor's proposed changes during negotiations will be drastically reduced, compared with dealing with an almost 100 per cent unacceptable vendor contract.

To press your case for using your own form contract, include it in your requests for proposals. That makes the vendor's willingness to accept or reject each provision part of your evaluation of the vendor. Even if the vendor doesn't fully accept your form, negotiations can still begin at the time when you have the most customer leverage - before vendor selection.

For the customer with a solid form agreement program, the risk that an overeager manager will execute a vendor form contract is substantially reduced. User representatives will soon recognise that the standard user form allows them to proceed more rapidly with the procurement process. Meanwhile, most vendor sales reps will learn that they can close a sale quicker using a standard user form rather than their own.

You may prefer the wording of your own agreement. But, even if you must negotiate away some concessions to the vendor to make the agreement acceptable, you normally receive more protection by starting with the user's form agreement and then including appropriate changes.

A user form agreement can also give your negotiating team an opportunity to use that popular vendor ploy: "I'll have to get any changes approved by corporate." And the vendor is encouraged to disclose its entire shopping list of changes early in the negotiations, when your spokesman says: "I can't go to headquarters too many times; let's make sure we have all your demands - before I stick my neck out."

An added benefit is that placing the vendor in the position of proposing changes to the user's form agreement forces its rep to continually justify its negotiating position.

It's also fun to turn some favourite vendor wording around and say: "It's our standard form contract. It's fair. You can trust us; all our vendors sign it!"

There's no doubt that it's well worth the time and effort for your organisation to have its own set of form contracts. You'll protect your rights, maximise your remedies and get needed flexibility. Ultimately, you'll save lots of time, money and risk.