There is nothing like the feeling of satisfaction, coupled with
equal parts of relief, when a technology deal finally closes. From
the congratulatory e-mails to closing dinners, parties that have
just concluded a technology deal are like honeymooners during the
first flush of their romance, eager, hopeful, and expectant of
great things.
Given all the initial warmth, however, why do so many technology
deals seem to end in divorce? For example, CIO Insight has
estimated that currently the failure rate of IT outsourcing
projects is well above 50 per cent while Enterprise Systems
Journal has reported "staggering failure rates" for
cloud projects. Research firm Gartner analyst Tom Bittman recently
reported that 95 per cent of respondents in one of its surveys
found some aspect of their IaaS private cloud has "gone
wrong."
While it's difficult to generalize because of the myriad kinds
of technology deals, I offer the following observations as to why
certain technology deals end in failure (defined by me as any
combination of unhappy customers, terminated contracts, and the
occasional lawsuit):
1. Misalignment
This can be summed up as: know thy vendor. Customers that are
seeking a customized solution with lots of software development,
should not go to a vendor that lacks the resources to do so and
operates on a commoditized one-size-fits-all basis. Even if the
vendor says they can meet your expectations, no customer truly
wants to be the beta test, especially for mission-critical
implementation.
Your vendor has to share your vision regarding the form of business
model, performance levels, staffing requirements, and other
critical elements. Don't expect public cloud providers to
provide you with a private cloud solution unless they can prove
that they have the expertise to do so.
Even if the vendor insists they can meet these requirements, be
mindful of red flags and ascertain, for example, whether they will
be actually doing the work or outsourcing it all to their
third-party, offshore subcontractors, or if the project timelines
for such custom work do not align with industry standards.
2. Inflexibility
Related to the above, some vendors harbour very rigid
perceptions of their marketplace and the way in which they will
conduct business, which may not meet the customer's own
regulatory, legal, or business requirements.
Frustration ensues when the prospective customer endeavours to make
the vendor change its own business practices to meet these demands.
Many such vendors rely on their own boilerplate agreements (often
in pdfs with lots of hyperlinks to ever-changing web site policies)
and are unwilling to make changes.
Again, even if the negotiated contract includes these new
requirements, it is unlikely the vendor will follow through on them
unless they are willing to put in place the internal mechanisms to
do so and make substantial changes to their methods, etc.
In such instance, customers should consider whether these vendors
are the right fit for them in the long run or whether they would be
better off seeking a more responsive/nimble vendor.
3. Misunderstanding of the technology/business needs
It sounds trite but customers really need to research and
understand (i) their own technology requirements; and (ii) what
they are asking from their vendors.
Vendors are not mind-readers and while they will strive to meet
specific requirements, time and effort must be spent to clarify
these in detailed statements of work (longer than three pages),
critical business requirements, functional specifications,
performance requirements, timelines, etc. to avoid any
disappointment in the delivered solution.
This is particularly important in any kind of fixed-price
arrangement as the vendor will want to narrowly scope their
promised deliverables/services and ensure everything else outside
the proverbial box will be on a time-and-materials basis.
The clearer the client can articulate their business and legal
requirements, the better the vendor has a chance of meeting
them.
Sometimes, where the parties avoid having the hard discussions
pre-signing either because of a lack of time or desire to avoid
dissention, and instead pepper their contracts with many
"agreement to agree" clauses (which can be dangerous,
given the parties may never agree to critical contract clauses such
acceptance criteria, etc., post-signature). These key deal elements
should be negotiated prior to contract execution, not
afterwards.
4. Insufficient due diligence
Contracts do not always tell the whole story. Some vendors are
highly reluctant to disclose their use of open source technology;
others do not even acknowledge the vendor is actually a reseller of
a third-party technology that may be subject to additional
terms.
For example, I recently discovered the provider of managed services
in Ontario was merely making available access to another
vendor's cloud solution that had its own set of completely
one-sided terms (including client indemnities) and that contract
was governed by the laws of another province entirely.
Customers must take the time to know the party they are going to
enter a long-term critical business relationship with, including
asking those tough questions about who is actually performing the
services: the vendor or its subcontractors.
And surprisingly, some vendors do not understand certain basic
aspects of their legal agreements — for example, whether a
"perpetual" licence means they can then terminate the
agreement and claw back the software from the customer or whether
that use is truly irrevocable.
5. Insufficient negotiation time
Both prospective customers and vendors can be guilty of this
one. Some vendors make preferred pricing contingent on closing the
tech deal within two weeks of the original deal quote or end of
month or else the contract price goes up exponentially.
While this can be motivational, it also makes for unpleasant
negotiations given the race against the clock and does both parties
a disservice. Sometimes crunching the negotiation time does not
allow for the natural growth of the business relationship, creating
adversity and leaving a bad taste in the mouths of the
negotiators.
More importantly, the shortened deal timeline does not allow
sufficient time for lawyers to negotiate key elements of the
project, such as service levels.
Clients are sometimes locked into terrible contracts with minimal
representations/warranties, etc. because they were seduced by the
pricing alone. While important, pricing cannot be the only
determining factor. This can lead to unpleasant surprises, akin to
"buyers remorse," after contract signing when the
business discovers they actually signed up to higher prices than
they expected (factoring in all those additional services charges)
or failed to incorporate that termination for convenience clause
that they later discovered they needed.
From the client perspective, what can be done to forestall these triggers and improve the chances of tech deal success?
- Be realistic about the amount of time it takes to properly negotiate a tech deal. It is not realistic to try to close a tech deal in the week before Christmas. While it can be done, such deals usually come back to haunt the parties after the fog clears.
- Do your homework and research the vendor community to ensure you choose a vendor with an excellent track record of delivering the services and technology that you have identified. Ask for customer references and follow up with them. Read trade journals and online technology blogs to better understand the vendor's track record. See if there has been any relevant litigation. If you lack the internal expertise to do this yourself, consider hiring a third-party project manager or consultant to help you. The extra expense is worth it in the end.
- Lastly, in my view there is much to be said about the civil law concept of contracts being a "meeting of the minds." If the parties determine that there are business disconnects during the course of the negotiations, these should be dealt with upfront rather than as a post-closing matter. The longevity of the business relationship may depend on this. Of course, every good contract should have a dispute resolution process but don't forget the importance of robust termination assistance/transition provisions — as much as no one likes thinking about the divorce, one has to be prepared for all contingencies.
Originally published by Canadian Lawyer Online - IT Girl Column
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