Bart Perkins: Congratulations on your new supplier. Got a good prenup?
- 07 October, 2013 10:05
Enterprises regularly change outsourcers, cloud providers and other suppliers. Such "divorces" usually come about as a result of irreconcilable differences, which might arise from a failure to live up to product specifications, contract metrics or service levels. Or maybe the enterprise merges with or acquires a company that uses a different supplier. For a number of reasons, supplier relationships are rarely "till death do you part" arrangements, so it's good practice to protect corporate interests by creating a solid "prenuptial agreement" before signing a contract.
To do that, your enterprise has to have enough clout to change a supplier's standard contract. If it does, there are certain terms you'll want to specify.
Data retrieval policy. Suppliers make it easy to load data into their systems. Most offer special tools to facilitate data uploads and are particularly helpful when porting data from a rival's system. But getting data back can be another story. You should specify conditions and the format for eventually retrieving your data. (CSV is most common.) One large organization with a legacy ERP system faced a $60 million project to extract its data because no porting tools existed for the newly selected, competing system.
Early termination costs. Many customers want to be able to terminate a contract early with minimal justification. But suppliers must shoulder high setup costs, and they usually plan to recover those costs over the contract's life. If a supplier suspects you may terminate early, it might increase its prices to compensate for the expected loss of revenue. If you need early termination provisions, determine whether the increased cost is worth it.
Fee ceilings. Though early termination fees vary widely, they can nearly equal the payments due for the remaining contract period. Termination costs can also rise if you need migration assistance. And if the supplier continues to provide you with a separate service, it might impose steep rate increases to recoup some lost revenue. A prenup should limit all of those cost opportunities. But be reasonable and seek what's fair to both parties; overly harsh restrictions could bankrupt a small supplier, leaving you with unsupported services.
Ownership of proprietary elements. Occasionally, hosting services keep copies of proprietary data or custom extensions to ERP systems or other software packages. Some suppliers argue they have rights to software developed in their server centers. Avoid costly confusion by clarifying ownership of data and intellectual property upfront.
Service levels. Suppliers are not motivated to assign their best people to help customers migrate to a competing supplier. It is critical to specify the type of help to be provided and the speed with which assistance will be performed.
Data retention rules. Some organizations want all their data deleted immediately after termination. Most organizations with a hosted email service want assurance that emails with personally identifiable information cannot be retrieved by anyone, ever. Conversely, organizations migrating to a completely new financial system may want the supplier to retain records for a while.
Supplier selection, like courtship, is a time of optimism. Both sides focus on the new relationship's benefits, and nobody wants to think about possible dissolution. But be realistic before consummating the new contract. A prenup agreement can help you avoid data custody battles and orphaned services.
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