Who Gets the Risk? And Who Ducks It?

FRAMINGHAM (06/26/2000) - If you were handed a supplier form contract that discussed - ad nauseam - what the vendor won't do, do you think the hair on the back of your neck might stand up? It did recently for one buyer. He works for a global consumer products company, and he received a proposal from a vendor to support the company's AS/400-based applications.

The deal would allow the vendor to host the applications and provide the hardware, operating systems and operations and technical support personnel. The customer would provide the application software licenses and make arrangements for all required data circuits between the vendor's and customer's locations.

But the vendor's 16-page contract for these services focused on what the vendor wouldn't do, rather than on what it would.

The customer immediately realized there was a problem. After all, when the vendor goes to great length to tell you what it won't do, there's reason to be cautious.

There were many other problems with the agreement, the most important being a lack of definition of what the vendor actually would do. All the vendor was agreeing to provide was "application hosting services" - and that was the total description of the deliverables. The customer was responsible for everything else - including the risk.

The vendor would assume no liability - not even responsibility for its own nonperformance. The contract amounted to one big "get out of jail free" card for the vendor to tuck up its sleeve.

Without a well-defined description of services and appropriate measurable service levels, the customer would be forced to accept whatever service the vendor chose to offer.

There was no methodology to measure and report performance - just whether the system was up or down on a particular day.

The vendor's only performance requirement was to make the application "generally available."

There was no specified remedy if the application wasn't "generally available," even if the parties agreed on just what that meant.

Another glaring omission from the contract was a list of clear and specific warranties. The vendor was only willing to warrant that there were no contractual obligations that would preclude it from entering into the contract.

Again, there was no remedy if the vendor breached this clause.

What about warranties for intellectual property infringements, third-party indemnifications, nonconforming services and data regeneration? They were all absent, with the customer being exposed to huge liabilities for the other party's behavior.

While there were many other deficiencies, the absence of well-defined deliverables, performance guarantees, meaningful remedies and sufficient warranties was enough for the customer to insist on significant contract improvements - or to seek another prospective vendor.

Negotiations and a search for for an alternative vendor are continuing.

Save yourself time and risk in a deal by getting the potential vendor's contracts before you select a vendor, and try to answer these questions about each proposal:

- Does the contract clearly describe the results you need?

- Does the vendor warrant that it will deliver those results?

- What remedies are available to you if the results aren't achieved?

- Does the contract contain all the vendor representatives you relied on?

- Does the contract show that the vendor has confidence in its ability to perform?

- What triggers your obligation to pay the vendor? Proven results? Or something relatively meaningless - like whenever the vendor says you must pay?

- If you later realize that the deal isn't working, will you be able to explain to your senior management why you made this deal - and still be employed?

- Would disinterested third parties (read: jurors) be able to understand every aspect of the deal by looking at the contract?

We need to focus on having our contracts clearly and completely describe both parties' rights and obligations and actually describe the deals we've done.

IT is too critical to have both vague customer expectations and unquantified vendor representations in the same deal.

Joe Auer is president of International Computer Negotiations Inc.

(www.dobetterdeals.com), a Winter Park, Florida, consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com.

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