Contract negotiations should be forward-looking by nature. As two parties contemplate beginning a business relationship or extending an existing one, they usually spend adequate time anticipating future events and defining the parties’ specific rights and obligations at that time and under present circumstances. But there’s often little thought given to what will happen when the relationship ends. Focusing totally on the honeymoon can lead to unpleasant surprises later when the relationship draws to a close—even if it has been fairly good.
In many agreements, the IT vendor agrees to provide some sort of transition services when the contract expires or is terminated early. The description of these transition services is often vague and full of such phrases as “to be mutually determined.” Such words are obviously drafted under the assumption that all is well and that both parties will have the same objectives at the end of the contract. But one thing you won’t have for sure during the unwinding of the deal is any negotiating power.
Lest we forget, customers are especially vulnerable when they agree to place themselves in dependent relationships with vendors that are trying to maximize their profits at customers’ expense.
From the vendor’s perspective, end-game vagueness is an ally because it leaves the vendor committed to very little. If you accept such vagueness, you subject yourself to uncertainty and risk in a dependent relationship at a very critical time—when you could be changing vendors or bringing an outsourced function back in-house.
Don’t forget: When you’re about to become a former customer, vendors seem to lack enthusiasm and an incentive to make you whole and happy.
Of course, the best available approach is to insist on a well-defined exit strategy as part of the contract. The best time to negotiate how a relationship will end is before it begins, when you still have negotiating power and vendors are still trying to accommodate your wishes. Obviously, your vendor is most likely to agree to a favorable exit plan for you when it’s trying to win your business – not when it’s losing it. Always insist on an exit plan in any negotiations with your potential suppliers. Regardless of the exit circumstances, such as normal contract termination, termination for cause or termination for convenience, a smooth transition plan should be a negotiation priority.
A well-scripted transition should describe the conditions under which the exit plan is to be implemented, along with each party’s duties, roles and responsibilities. All costs that are to be shouldered by either party should be clearly identified and quantified in as much detail as possible. Ownership of everything should be clearly delineated. Some of the ownership issues are obvious, but some, like data, system modifications and improvements, subcontractor relationships and magnetic storage media, often get overlooked.
In deals that require a substantial vendor investment at the outset, such as leasing and outsourcing transactions, it’s fair and reasonable for the vendor to expect some compensation with early termination. Many vendors try to require customers to make remaining payments when they want out of deals early. But you don’t have to do that. Negotiate a descending termination charge clause that states that the amount you must pay to get out of the deal declines with each passing month. Negotiate aggressively on these charges before signing the contract – that’s your only chance.
You may never need to exercise this option, but if you do, it could save you millions of dollars.
The exit plan should also identify how any changes can be made since business conditions may change over time. Periodic reviews of the exit plan should be part of the relationship manager’s responsibilities—for the customer and the vendor.
While the exit plan doesn’t need to be overly complex, it must address the key issues of who will do what and when, plus the costs involved.
Without an exit plan, the euphoria of establishing a new relationship can turn into chaos when it comes time to part company.
JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com.
Copyright by Computerworld, Inc., 500 Old Connecticut Path, Framingham, MA 01701. Reprinted by permission of Computerworld.