Making Vendor Contracts Work for the Customer
Over his more than 35 years in IT and technology procurement, David Whitinger has seen it all. Currently, as director of consulting for International Computer Negotiations Inc., he helps Fortune 500 companies negotiate a wide range of technology and software license agreements. Whitinger's experience has allowed him to form a long list of dos and don'ts. Here are a few of his insights into forming partnerships with vendors.
CIO INSIGHT: Is vendor partnership a legitimate way to cut the cost of custom software development?
WHITINGER: It is, if you craft the deal so that it will hold water. That's why a lot of software vendors are just going to packages today, because you spread the development cost across hundreds or even thousands of customers. But a lot of times there will be further integration workcompanies like Accenture, SAP, Oracle, Capgemini and all those guys make a lot of money on the integration side. So you'll have application programming interfaces developed to hook those things together. But if you read one of the vendor contracts, anything they develop for you on your money, they own.
What do you recommend to clients under these circumstances?
If the vendor comes back and says, 'Hey this is a pretty good idea, and we'd like to turn it into a product,' we think that's fineprovided that you, the customer, get some pretty steep discounts for investing your intellectual capital to help development, and that it not be mission-critical or competitive-advantage type software. If it is, you need to be able to restrict who can use it.
Sounds like you see plenty of potential pitfalls. Do you actively discourage clients from going into business with their vendors?
All we do is caution our clients to make sure you understand what your objectives are in the deal, and you have assigned priorities to them, so that you can negotiate more effectively. And you need to go into these deals with your eyes wide open. Because typical vendor form agreements are very one-sided, and not surprisingly they favor the vendor. Basically their concept is: They get all the money and you get all the risk. We don't say don't do it, or you shouldn't do it, but you just need to be very careful.
So you recommend avoiding vendor form agreements at all costs?
A $100,000 software license can be a multimillion-dollar liability for you if the deal's not structured right, if you don't get certain warranties, for example. We recommend that clients use their own form agreementsit's an evolving industry trend.
Vendors will push back on those, especially the big-name ones, but if you have competition going in, or it's a big enough deal, everybody, except the guys in Redmond, Wash., will negotiate off of client's paper. Vendor form agreements don't give very good, if any, warranties. You don't get third-party indemnification. They own everything [developed]. You get a very narrow license. When you have a vendor form agreement, you have to worry about two things. You have to worry about what's in the agreement. But generally my larger worry is what's not in it, because they're typically short forms. It's the two-page contract that every CIO wants to see, because he thinks it's faster and doesn't have a lot of hidden clauses. But they are very dangerous.