The Art of Contract Negotiation


When it comes to contract negotiation we often find that only the large clients have in-house legal resource or use external lawyers. This leaves the majority of clients at a disadvantage. Technology and services contracts are often complex where the commercial and legal nuances are not always easy to navigate without significant experience of dealing with these types of agreements and even then it’s a minefield. Not to mention the hourly rates ranging from £300-£400 typically for legal advisors who have experience of commercial contract negotiation. So here at eComp we thought we’d put together some tips for negotiating your technology contracts:

1. Start looking at contracts while you are still shortlisting vendors and most definitely before you start any form of negotiation. Often contractual restrictions are dependent on the levels of service, which are often additionally priced. This way you are more likely to avoid additional costs or limit your terms of service. You may want to include additional services or remove certain restrictions in the contract before down selecting a vendor to the next stage, but often we find contracts are not requested until the vendor has preferred bidder status or a decision to appoint on the basis of a high level proposal has been made.

2. Make sure you are negotiating with the right person on the vendor side otherwise you’ll waste time going back and forth constantly to get approval. Also ensure whoever is responsible your end has the skill, experience and power to make decisions quickly.

3. Request copies of the contracts in word format and make sure they understand you expect changes. In recent times we have seen a move by vendors to only provide PDF versions of their contracts, which don’t allow you to add comments easily, track changes or delete clauses. Not only does this cause a significant admin overhead when negotiating the contract, you can lose references to things you want to change through multiple reviews, meaning you need to read the contract and notes in a different document simultaneously. You have no audit trail on who changed what, when or the context of the change. Trust me this is extremely painful for both parties but these vendors really don’t want any changes and by providing their contracts in this format it’s kind of signalling we don’t allow changes.

4. Identify what is covered in any warranty and in particular what is not covered. Often a whole host of exclusions exist. The most recent example we came across was from a vendor that excluded any warranty or responsibility on third party software, which this vendor relied upon and in fact mandated the use of. The customer had no control over how the third party was provisioned, implemented or maintained. In this case it was a key piece of the stack so clearly unacceptable. On the plus side this is one of the first issues we clashed over, was clearly unreasonable and therefore helped set the precedent over how we negotiated the rest of the contract.

5. More often than not limitation of liability to the vendor is heavily restricted with loss of profits and consequential losses explicitly excluded. If you are procuring SaaS technology this is particularly annoying since the vendor is responsible for pretty much every element of the software and service. Your job here it is maximise the liability to the vendor. It would be useful to request their insurance coverage as this will indicate how well insured they are against contractual breaches and disputes.

6. Check the termination terms carefully; often the smallest misdemeanour can trigger a breach. If you somehow inadvertently breach your contract terms it’s going to be every expensive to negotiate out of the issue or to replace the vendor on very short notice. The business disruption could potentially put you out of business so do not underestimate this one.

7. Watch out for IP, my personal favourite. Make sure you understand what the IP clauses actually mean and the impact they may have in the future. One of the key things we look for when evaluating technology and system integrators is the ability for the solution to be portable. What we mean by portable is the ability to move the software to another hosting provider, take it in-house, switch implementation (SI) firms without penalty. Often there is a cleverly hidden clause which locks you in or prohibits a move through the need to pay additional undefined fees in the future. If you are customising the software also be mindful that implementers do not own IP to software you are paying to customise, that should be your IP or you should get something back in return for allowing them to ever use it.

8. Be reasonable! Most vendors are simply trying to protect their investment but these terms have been drafted by overzealous legal eagles in the past. Worse they have been copied and pasted from other agreements without a proper understanding of the impact of the clauses. If the other side is reasonable then don’t go to war on every single issue. Be fair, horse trade when it makes sense and stand your ground when an issue presents a clear and present danger to your business interests.

9. Often a contract will contain schedules, order forms or other such third party documents which form the actual agreement. In this case read them carefully. Often clauses can be overridden in these documents or the small print completely missed. Ensure it is clearly understood which document takes precedence if there is a conflict.

10. Understand the leverage you have and negotiate accordingly. Create leverage to favour your position, this might be by delaying contract negotiation closer to when the vendor is closing their quarter or year-end or by committing to marketing activities that are important to the vendor. Make sure you understand their key objectives as much as possible so that you can pull the various levers to your advantage. Good luck!

By Mark Adams