Planning For The Unforeseen

Author: Steven Zolman

IT contracts: getting them right the first time sounds simple enough. But in a cyclic economy, organizations often realize too late that they do not have correct contract governing dials, and given a fundamental change their business, they are unable to adequately control costs. For example, an organization may realize that because of downsizing, they own more licenses than they actually deploy, and want to reduce the license maintenance. Not so fast.

For example: A client, who three years prior, bought 4,000 licenses of enterprise software and was only using 3,000 may want to cancel support on 1,000 licenses. The client was paying $4 million/year in annual support, and suggested to the supplier that with a 25% reduction in useable quantities, they should reasonably expect to pay $3 million/year – an operational cost reduction of $1 million/year. The supplier argued, however, that when they bought the 4,000 licenses, they received a highly discounted non-standard offer based on that volume, and if they would have only bought 3,000 licenses, they wouldn’t have received the same deal.  So they invoked a little known clause in the contract that allowed the supplier to “re-price” the remaining support to a unilaterally controlled level based on whatever the supplier said was the market value of the remaining 3,000 licenses. The client’s revised maintenance bill came in at a whopping $4.8 million/year in support – a full 20% annual *increase* from last year’s amount — not a decrease at all, and definitely not the 25% decrease the client was expecting. How could this be? The client called us. Sure enough, the contractual rights provided for this unilateral lever of control for the supplier to pull at will if the client terminated support on “a partial license set.” Clearly the supplier was thinking ahead when the contract was negotiated 3 years ago. The client never considered this possibility and/or did not value this contractual provision enough in the original negotiation to have the ability to get ‘pro rata’ relief for the reduction of support.

Due to the heightened sensitivity to operational costs (and their required reductions), the entire focus of the client (and the supplier) was on the operational cost structure. The client was willing to forgo the original capital investment in the technology itself, only to reduce the ongoing operational costs. As spending resumes in 2011, will clients make sure they are developing agreements that offer the sustainability they need for the long term? Will they think through all the issues they may encounter in the future, and develop and negotiate agreements that offer the business protections they need? Will they negotiate terms and conditions that offer maximum flexibility which will enable them to govern these investments in a changing landscape? Will they get the best in class pricing they deserve? We believe that without professional assistance, some clients are bound to repeat the hard lessons learned from years past.

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If clients engage NET(net) when they initially negotiate agreements, they certainly will be much more capable of achieving future savings if and when they need them. They will also prevent a lot of animosity in the client/supplier relationship.

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