• Dispute resolution: Consider mediation and arbitration alternatives, which can reduce the cost of disputes and require negotiation prior to legal action.
• Future pricing: The vendor will obtain significant leverage in the future if future pricing for products and services is not detailed in the contract. At a minimum, specify that future product or service pricing will be no more than the then-current list less the current customer discount percentage. Ideally, the prices are specifically fixed.
• Liability: Vendors will attempt to limit liability to the total sum of fees paid. Clients should attempt to achieve higher, but reasonable, liability limits.
• Outsourcing clauses: Provide the right for the customer to transfer license for a product to an outsourcing partner without the licensor ’s consent and without fees. This enables the company to outsource a function without approval from the vendor.
• Payment terms: Payment terms specify the cash payments to be paid.
Net 30 days is typical for service vendors. Allow for suspension of payments if vendor or product is not performing as agreed.
• Warranty: Require the vendor to warrant that the vendor has the right to license the software or provide the services.
• Training: Negotiate free training with software products and specify it in the contract.
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The Back Office: Efficient Firm Operations
• Volume/service-level discounts: Prearrange volume or service-level discounts and specify it in the pricing section of the contract.
• Vendor certifications: For some vendors, special third-party certifications, such as SAS-70, CMM, ISO-9000, or other qualifications may be required.
The number of high-profile lawsuits involving the delivery of products and services to firms of all types confirms that contract negotiation and tight management of the vendor relationship is crucial to avoid business disruption and litigation, which can follow. This has been especially true in the IT field.
In a study of technology vendor litigation, Cutter Consortium found that the top three causes for litigation include missing functionality or performance in the product, missed delivery or promise dates, and defects in the product, yielding it unusable.3 Exhibit 16.3 shows percentage of grounds claimed in the technology lawsuits researched by Cutter. A solid contract will help build a strong relationship by clearly articulating key provisions and avoiding ambiguous statements that lead to future disputes.
80
70
67%
60
50
56%
40
45%
ge of Respondents
30
ercentaP 20
10
0
Functionality and/or
Promised delivery date
Defects in a vendor’s product
performance of
slips several times
yield the product unusable
delivered product not
up to claims of maker
Exhibit 16.3
Primary Causes for Litigation in Technology Lawsuits
Purchasing, Procurement, Vendor, and Asset Management 397
Managing Vendor Performance
A key piece of managing vendor relationships is building a mutual understanding of partnership expectations and ensuring that the vendor fulfills those expectations. Often, the success or failure of the vendor hinges on clearly setting performance metrics to be achieved and following through on those metrics. Ineffective vendor managers rarely get past the first step of setting the metrics, and when they do, they do not follow up with periodic measurement of the vendor ’s performance.
The process is basic. For each vendor, define expected performance,
which may or may not be explicit in the contract; then track and monitor the performance, periodically report performance, take action to improve performance, or remove poor-performing vendors. The vendor manager should manage this process, with input from professional and administrative staff in the firm who have direct experience with the vendor providing the service or product.
Because of the large number of vendors that may be found in even small professional services firms, determining measures and monitoring them can be a resource-intensive and, therefore, cost-prohibitive process. The most effective way to determine how to measure and evaluate vendors when the contract does not have specific deliverables (e.g., vendors selling a specific product on a one-time basis, such as an office supplies provider or a caterer), or when the product or services is sophisticated or complex, is to ask them to provide metrics they believe are the most important determinants of their success with clients. Vendors know the most about their particular services and should be able to quickly articulate the top three to five metrics on which they should be judged. If they cannot identify how they should be evaluated, they are most likely not a vendor that the firm should be working with. The best vendors most often have internal benchmarks by which they measure their own performance, and they are usually happy to share those with customers who ask. In fact, the very best vendors drive the process by voluntarily scoring their performance on a monthly or quarterly basis for the benefit of the client.
By having some vendors design their own performance metrics, incorporating them into contractual guarantees, and then having vendors self-monitor, the bulk of the effort to monitor and measure performance is absorbed by the vendor. This process should not change the pricing materially because a quality vendor will have these reporting disciplines built into its processes to start. To ensure that vendors are behaving honestly, the vendor manager should periodically and randomly audit one or two of the vendor-supplied, vendor-reported measures. If the vendor falls short, the potential of a random audit, coupled with contractual penalties, is generally enough to eliminate or at least minimize any dishonesty or lack of diligence.
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The Back Office: Efficient Firm Operations
For the most mission-critical vendors, in addition to the vendor-driven approach outlined previously, the vendor manager should generate his or her own set of two to three key measures and perform the vendor assessments on a regular schedule. The vendor manager cannot afford to find out that a key vendor is falling short of agreed-on goals too late to mitigate the failure. The vendor manager should combine the key measures provided by the vendor with any other desired performance metrics to create a performance report card. This should be regularly completed and reviewed with the vendor to monitor ongoing performance and adherence to contractually established SLAs. If any SLAs have been violated, the customer can demand remediation in accordance with the contract specifications. Alternatively, in the spirit of partnership, the customer could make concessions in exchange for other benefits that could be provided without a monetary exchange, as illustrated previously. In every case, the client should be rigorous in establishing and adhering to the regular reviews. Without these reviews, vendor relationships can go unmonitored for long periods, and significant problems can often go unnoticed and unresolved.
In addition to vendor performance reviews, the vendor manager should periodically review all vendor contracts. This ensures that all service levels promised in the contract are being enforced or at least that goodwill is being built and acknowledged by not enforcing an agreed-on standard. Further, a review of the contract will ensure that any changes to terms or conditions based on changing business imperatives can be managed early on. We recommend reexamining every vendor contract annually at a minimum. For vendors on which the company relies significantly, these reviews should be done on a quarterly basis.
This periodic contract review is neglected surprisingly often in companies of all types. For example, a Cutter Consortium survey estimates that 7 percent of IT product and service provider contracts are never reviewed, and fewer than half of contracts are reviewed at greater than annual intervals.4
Exhibit 16.4 shows Cutter ’s research results in this area.
In all cases, the client should ensure that it can withhold any fees (maintenance or otherwise) due the vendor in the case of contract breaches on the part of the vendor. One of the most rapid methods for getting the attention of a vendor experiencing performance problems is to withhold approval on accounts payable. We have seen countless client situations with poorly performing vendors who do not return phone calls or repeated appeals to fix problems.
The speed with which vendors respond from the highest levels once a
steady f low of receivables dries up can be remarkable. While this approach should be a last resort, it is generally successful. When it is not successful, the firm has at least avoided continuing to fund a vendor that will not be part of the long-term picture and has saved money to invest in a relationship with a replacement vendor.
Purchasing, Procurement, Vendor, and Asset Management 399
Never
Time between reviews
7%
greater than one year
Every month
20%
7%
Every three months
15%
Once a year
Every six months
34%
17%
Exhibit 16.4
Contract Review Frequency in Surveyed IT Departments
Because typical professional services firms engage a wide variety of vendor types and sizes, vendor managers should be sure to allocate their time and attention according to vendor importance. The most critical vendors or those who receive the largest fees should be the focus of any measurement program. The vendor manager should set spending or criticality thresholds in advance, to be approved by firm senior management, to determine which vendors will be closely managed.