I. “Thou Shalt Know Thy Purchase.” Some things need to be clear, for example:
A. Product specifications and capabilities.
B. What comprises “passing” a test.
C. Quantity purchased, and when extra charges are triggered.
D. When will it be ready, and how will we know.
E. Who do I call for help or decisions.
F. Duration of rights.
G. Who gets to use them.
H. Support expectations.
I. What assurances are there that any intellectual property rights that may be important to the buyer – either a user, reseller, or future merger target – have been lawfully transferred or licensed, especially if there has been international involvement in development?
II. “That Which Is Not Written Hath Never Occurred.” People come and go; memories fade; conversations are understood differently. A handshake may be sincere, but provides an imprecise technology roadmap.
III. “Thou Can’t Have It All.” Focus in negotiations on what is important, and just pursue the rest as well as you can. Is it:
A. Ownership/competitive advantage from custom development and restrictions on vendor reusing its work product?
B. Performance standards (e.g., reliability/downtime, execution speed, specified functionality, expandability, upward compatibility with vendor’s, buyer’s or third party technology)?
C. Timing of rollout?
D. Manageable Cost (price, plus ongoing vendor or third party support, complementary equipment and materials needed, telecommunication or other services needed, buyer’s internal resources)?
E. Indemnification against third party liability?
IV. “Thou Shalt Know That Teflon Is Only Good on Pots.” Insist, as much as negotiating strength allows, on accountability on the part of the vendor.
A. Limit the downpayment, and base progress payments on achievement, under real-world test conditions, of milestones designed to show a probability of ultimate success for the completed project, with a significant retention until completion and final acceptance testing integrated into buyer’s overall system. If you’ve spent the bulk of your budget on downpayments and milestones that don’t assure ultimate success, there’s no turning back when bumps in the road become sinkholes.
- Beware: Every vendor starts out saying “no.”
B. Require limitations of liability based on risk and availability of fallback processes, rather than price or token “credits” against future fees; at least, test the cost associated with getting greater assurances.
- Beware: Every vendor starts out saying “no.”
C. Have warranties continue throughout useful life (or at least the term of maintenance payments to vendor), with termination rights, coupled with pro rata refund and affirmative transition duties on the part of vendor and specific performance remedy, as the consequence of significant or repeated breaches.
- Guess what? Every vendor starts out saying “no.”
V. “Thou Shalt Not Too Quickly Take “No” For an Answer.” If the project is big enough or strategic enough for the vendor, or if the timing is fortuitous from the standpoint of the sales team’s bonuses, “no” can change to “yes,” or at least partial concessions.
VI. “Thou Shalt Not Let Thy Vendor Fence Thee In.” Businesses change. Require transferability and assignability to corporate successors, merger partners, or other equipment/facilities/environments; use for the benefit of joint venture partners and corporate affiliates; use in future, enhanced products, manufacturing processes, etc.
A. At least, if that is a future “revenue opportunity” the vendor is not willing to give up, determine that before the contract is signed, and evaluate the likely future cost/disruption against the buyer’s strategic or growth plans.
B. Some cases define a change of control of buyer as an “assignment” for purposes of nonassignability clauses in license agreements or other contracts.
VII. “Thou Shalt Recognize That Less is Not More.” Know the alternatives, and keep them in mind throughout negotiations.
A. On projects that are mission-critical or involve significant expenditures, conduct parallel negotiations with at least two vendors, on their separate proposals, whenever resources permit. And let the vendors know, since nothing – nothing – focuses a vendor better on the buyer’s concerns.
B. Select top candidates and start negotiations well before rollout is needed or expected by end users.
VIII. “The Bum’s Rush is Called That for a Reason.” Avoid pressure to say “yes” to items on the vendor’s “Issues Chart” before all related matters are fully resolved (and they’re all related by cost). A tentative yes will do.
IX. “Thou Shalt Not Underestimate The Importance – and Risks – of Poor Integration.” Every buyer’s legacy systems are unique in some way, and some products never quite work with the rest of the buyer’s technology and processes. Many lawsuits with vendors, if not most, are born of this malady. Even testimonials from buyers with “similar” environments are no assurance of success. To protect thyself, see Fourth Commandment, above, Verse “A.”
X. “Thou Shalt Not Count on Unrealistic or Ineffective Remedies.” Minor credits for failure of ongoing required performance are ineffective incentive to spend resources on avoiding breakdowns or fixing them quickly. The right to withhold payment for a perceived default will never be exercised if the vendor can shut down a critical function in retaliation. Damages remedies are ineffective against a vendor who becomes insolvent, and are rarely sufficient to make up for the buyer’s marketplace and reputational injury. Better to:
A. Maintain a contractual right to exit the relationship, and pre-arranged escrows or other access to critical technology, in the event of default.
B. Define default liberally.
C. Provide for “specific performance” of contractual right to training and transitional assistance, as well as technology access.
D. Maintain in-house buyer personnel with sufficient familiarity to participate in a transition.
E. Where the contract does provide for damages, recognize that waiving “consequential damages” for certain risks results in waiving all damages for those risks, and that preserving claims only for “gross negligence” may result in waiver for those jurisdictions where the term is not defined by law or
F. Obey the Eleventh Commandment, which is …
XI. “Thou Shalt Always Have a Post-Rollout Backup Plan.” Even a vendor-assisted transition can be time-consuming, costly, and disabling. Especially for mission-critical functions, to the extent resources allow, always have an independent plan for seamless recovery in the event of default, demise, or departure of the vendor.
XII. “Thou Shalt Look for Ways to Make It Someone Else’s Problem.” Harsh but true; if requiring insurance (and monitoring that it remains in effect) is a realistic remedy in the contract, or insurance on the buyer’s part is available and not prohibitively expensive to cover potential losses or liabilities from downtime or other consequences of vendor default, seek it.
XIII. “Thou Shalt Love Thy Vendor Almost Like Thyself.” Ongoing relationships – and even one-time negotiations – work best if you show empathy for the contractual partner’s own needs and try to accommodate. Few issues really pose a zero-sum problem, and trades or favors may be needed.
©2011 Gregg Minkow, Levenfeld Pearlstein, LLC. All Rights Reserved.
