Key Points

  • Prudent purchasers of IT products and services will seek to negotiate value for money IT contracts with suppliers.

  • Purchasers of IT products and services which thoroughly prepare for the negotiation of IT contracts with suppliers will give themselves the best possible opportunity to negotiate value for money IT contracts without having suppliers “outswing” them in the negotiations.

  • Before negotiating an IT contract purchasers should have identified their business needs, developed negotiation positions for all non‑preferred provisions proposed by the supplier and made themselves fully aware of the strategies which they may use to negotiate these non‑preferred provisions.

  • Purchasers which have not thoroughly prepared for the negotiation of an IT contract with a supplier will leave themselves at risk of having no choice but to enter into an IT contract which does not represent value for money as a result of having the supplier "outswing" them in the negotiations.

  • TechComm Legal has developed an IT Contract Negotiation Checklist to assist purchasers of IT products and services to negotiate value for money IT contracts with suppliers.

Introduction

Typical indicators of value for money IT contracts include lower charges, better quality, higher service levels and reduced risks.  Prudent purchasers of IT products and services will seek to negotiate value for money IT contracts with suppliers.  However, not all IT contracts entered into by purchasers represent value for money particularly where the IT contract contains the supplier’s standard terms and conditions.  To give themselves the best possible opportunity to negotiate value for money IT contracts purchasers need to thoroughly prepare for their negotiations with suppliers.
 
Purchasers should take several steps when preparing to negotiate an IT contract with a supplier.  First, it is vital that purchasers fully understand their business needs which the IT product or service is intended to satisfy.  Secondly, it is important that purchasers develop negotiation positions for the non-preferred provisions of an IT contract proposed by a supplier.  Thirdly, it is essential that purchasers are fully aware of the strategies which they may use to negotiate these non-preferred provisions with the supplier.

Determining Business Needs

The business needs of a purchaser may be determined based upon: (i) business requirements; (ii) functional requirements; (iii) non-functional requirements; (iv) product and service specifications; and (v) business risks.
 
(i)  Business requirements – Business requirements describe in business terms what must be delivered to meet the purchaser’s requirements.  For example, business requirements may describe both functional and non-functional requirements that are mandatory or desirable for a new or modified IT system.
 
(ii)  Functional requirements – Functional requirements describe functions that must be performed by an IT product or service.  For example, functional requirements may describe the results to be achieved by a new or modified IT system.
 
(iii)  Non-functional requirements – Non-functional requirements describe the overall characteristics of an IT product or service.  For example, non-functional requirements may describe the performance, security or reliability criteria for a new or modified IT system.
 
(iv)  Product and service specifications – Product specifications describe the functional and non‑functional requirements that must be satisfied by an IT product.  Similarly, service specifications describe the functional and non-functional requirements that must be satisfied by an IT service.
 
(v)  Business risks – The purchaser should undertake a risk analysis to identify the business risks required to be taken into account in respect of the supply of an IT product or service.  The risk analysis should determine the extent to which the supplier of the IT product or service should ideally be responsible for these business risks under the IT contract.

IT Contract Negotiation Positions

The non-preferred provisions of an IT contract which are not consistent with the purchaser’s preferred contracting position should be given a priority ranking based on their level of importance to the purchaser taking into account the purchaser’s business needs.  For example, non‑preferred provisions may be divided into three tiers by being given a priority ranking of high, medium or low depending on their level of importance to the purchaser.
 
It is also important to identify any non-preferred provisions of an IT contract which are ”Show Stoppers” meaning that the inclusion of the provision would prevent the purchaser entering into the IT contract with the supplier.  Any such non-preferred provisions should be given the highest priority ranking being of most importance to the purchaser.  It is advisable to notify the supplier of any such non-preferred provisions at the earliest opportunity during negotiations so that the supplier is fully aware of the purchaser’s position in relation to such provisions.
 
Negotiation positions should then be developed for the non-preferred provisions of an IT contract.  For example, a preferred position, fall-back position and least acceptable position (if applicable) may be developed for each of the non‑preferred provisions.
 
In order to develop negotiation positions for the non-preferred provisions of an IT contract it is important to be aware of the range of negotiation points that may be used when negotiating such provisions.  Below are examples of negotiation points that may be used when negotiating the more contentious provisions of an IT contract which deal with: (i) indemnities and liability; (ii) intellectual property; (iii) payment; (iv) service levels; (v) warranties; and (vi) termination.
 
(i)  Indemnity and liability clauses – Negotiation points for indemnity and liability clauses include indemnified persons, types of loss/damage covered, liability limits and  liability exclusions.
 
(ii)  Intellectual property clauses – Negotiation points for intellectual property clauses include ownership structures, pre-existing and developed materials, licensed persons, scope of licence, licence rights and licensed purposes.
 
(iii) Payment clauses – Negotiation points for payment clauses include payment timing, form of payment, payment amount, payment variation, payment recipient, liquidated damages and the right to refunds.
 
(iv)  Service level clauses – Negotiation points for service level clauses include service levels, service level compliance and remedies for breach.
 
(v)  Warranty clauses – Negotiation points for warranty clauses include scope of warranties, defect definition, warranty period and remedies for breach.
 
(vi) Termination clauses – Negotiation points for termination clauses include termination events, notice periods, reimbursement/retention of payments, compensation for costs incurred, loss mitigation, return of data/materials, licence transfers and transition out assistance.

IT contract negotiation strategies

Strategies which may be used by purchasers when negotiating non-preferred provisions of IT contracts with suppliers include: (i) exploring the supplier’s position in relation to the non‑preferred provisions; (ii) clarifying the application of the non-preferred provisions; (iii) trading negotiation positions in respect of the non-preferred provisions based upon their priority level; (iv) proposing reciprocal provisions; and (v) as a last resort, compromising by agreeing to the non‑preferred provisions.
 
(i)  Exploring the supplier’s position – A purchaser may explore a supplier’s position in relation to the non-preferred provisions of an IT contract by asking the supplier to provide reasons for the inclusion of the provisions in the IT contract.  The reasons given by the supplier may allow the purchaser to propose alternative provisions which meet the needs of both the purchaser and supplier.
 
(ii)  Clarifying the application of provisions – A purchaser may seek to clarify the application of non‑preferred provisions of an IT contract by asking the supplier to explain how the provisions would apply in particular circumstances.  The explanation may show that the application of a non‑preferred provision needs to be clarified to prevent it having unintended consequences which have an adverse impact on the purchaser.
 
(iii) Trading negotiation positions – A purchaser may be able to “trade” negotiation positions in relation to non-preferred provisions of an IT contract.  A supplier may be willing to agree to a negotiation position proposed by the purchaser in relation to a non-preferred provision in exchange for the purchaser agreeing to another non-preferred provision proposed by the supplier.   Ideally a purchaser should seek to have the supplier agree to a negotiation position for a non-preferred provision with a high priority level in exchange for the purchaser agreeing to another non-preferred provision with a lower priority level.
 
(iv)  Proposing reciprocal provisions – A purchaser may gain concessions from a supplier by proposing that non-preferred provisions of an IT contract be made reciprocal so that they apply equally to both the purchaser and supplier.  A supplier may be willing to agree to amend non‑preferred provisions to make them less onerous in their application when they are to apply equally to both the purchaser and supplier.  In many instances it is often difficult for a supplier to object to reciprocal provisions as otherwise the supplier may be seen to be acting unreasonably.
 
(v)  Compromising by agreeing to non-preferred provisions – In order for a purchaser to reach agreement with a supplier in relation to some of the non-preferred provisions of an IT contract it may, as a last resort, be necessary for the purchaser to compromise by agreeing to one or more of the non‑preferred provisions.  A purchaser's decision to compromise by agreeing to one or more non‑preferred provisions of an IT contract should take into account the priority level of these non‑preferred provisions.

Conclusion

Purchasers of IT products and services which thoroughly prepare for the negotiation of IT contracts with suppliers will give themselves the best possible opportunity to negotiate value for money contracts without having suppliers “outswing” them in the negotiations.  Before negotiating an IT contract purchasers should have identified their business needs, developed negotiation positions for all non-preferred provisions proposed by the supplier and made themselves fully aware of the strategies which they may use to negotiate these non-preferred provisions.  Purchasers which have not thoroughly prepared for the negotiation of IT contracts with suppliers will leave themselves at risk of having no choice but to enter into IT contracts which do not represent value for money as a result of having suppliers “outswing” them in the negotiations.
 
If you require any further information in relation to this Client Alert, or any assistance to negotiate or review an IT contract, please do not hesitate to contact us.
Please note that the information contained in this Client Alert is provided for information purposes only and is not intended to be relied upon as legal advice for any particular purpose.  You should seek your own independent legal advice for your specific circumstances.
 
Last Updated: 28 February 2017