Top 10 IT procurement mistakes
IT procurement does not always get the management and legal attention it deserves. It’s often seen as an informal process notwithstanding that the spend is often significant and the consequences of businesses getting it wrong may be dire. Recent – and ongoing – high profile examples in the public and private sectors demonstrate the importance of getting IT procurement right. In many cases the IT being procured is critical for day to day operations, so selecting an appropriate solution, and negotiating favourable terms can result in increased efficiency and profitability, as well as reduced risks. Unfortunately, this lack of attention is the reason that many clients seek advice when things go wrong, rather than before the procurement occurs.
Below are the top 10 IT procurement mistakes we repeatedly see, and tips for how purchasers can avoid them.
1. Signing the supplier’s contract
Issue: If you simply sign the supplier’s contract then you are likely to be accepting an ‘all care and no responsibility’ style arrangement. The solution deliverables and associated timeframes may be unclear, and your ability to sue the supplier will be limited or nonexistent if the solution does not work, or if you get sued for infringing a third party’s intellectual property rights. You may have even provided the supplier with exclusivity over an extended period regardless of their performance and fees charged.
Recommendation: Include your own terms and conditions in your RFP or, if this is not possible, negotiate the supplier’s contract to reflect an acceptable position. State Government and local councils may wish to consider using the Queensland Government Information Technology Contracting (GITC) framework when procuring IT services.
2. Downselect before the contract is negotiated
Issue: IT departments tend to focus on a supplier’s technical ability to deliver a solution that fits their needs. While this is critical, once a supplier knows they have the job, they tend to be unwilling to negotiate.
Recommendation: Do not let a supplier know they have been selected as the preferred tenderer, until the terms under which they are to supply the solution have been agreed. One way to maintain the competitive tension is to start with three or more candidates, downselect to two candidates and negotiate two binding agreements before making a decision. Emphasise to all suppliers at each stage of the process that their supply terms could impact whether or not they progress to the next round of negotiations.
3. Undefined deliverables
Issue: Most supplier contracts are deliberately vague about what is to be delivered. Supplier favourable software licences, for example, tend not to contain a warranty that the software will function in accordance with relevant specifications or provide any functionality warranties or up-time guarantees. Similarly, supplier services agreements tend to be more of a consulting arrangement rather than one based on outcomes.
Recommendation: If software is provided then the functionality of that software would be clearly set out in a schedule. Similarly, services being provided should be clearly described, as failure to do so will invariably result in everything being an ‘additional service’ for additional fees. In the case of ongoing services, specific service levels should be included for aspects of the services that are both important and measurable.
Further, if appropriate, you may wish to include a service credit or rebate concept both to drive supplier behaviour and have (relatively) easy access to compensation if the services are not provided in accordance with the agreement.
4. No timeframe
Issue: Most IT projects are late. Suppliers tend not to like being held accountable for timeframes.
Recommendation: Include a clear project plan with key milestones in your agreement, that the supplier is required to meet. Suppliers are usually reluctant to agree to this, and often give the excuse that timeframes are dependent on the customer doing their part, which results in the supplier seeking an ‘out’ for delays caused by the customer. As this is a frequent occurance, the best response is to have a schedule devoted to the tasks to be performed by you as the customer. The supplier can then be rightfully excused for any delays caused by you, on the basis that they notify you of your failure to perform a particular task and the resulting consequences.
You may also wish to think about liquidated damages being payable if milestones are not met.
5. Suppliers walking away if it does not work
Issue: Suppliers may provide a solution that does not work, or does not comply with the agreed specifications. You may be able to sue for damages if you have managed to negotiate appropriate warranties and obligations, but this can be a lengthy and inefficient process.
Recommendation: Negotiate a right to perform acceptance testing of the solution, and obtain a refund of the fees paid if the solution does not work as you had planned. Suppliers tend to get distressed when you request this, but it provides a practical and efficient remedy, and represents a minimum position for a sophisticated customer. If you are able to specify your requirements up-front then it is difficult to see how a supplier can argue against such a concept.
6. Unclear payment obligations
Issue: Supplier contracts often refer to the supplier’s ‘then current rate’ or allow the supplier to change their rates periodically.
Recommendation: As a customer you should seek certainty as to price, or at least make sure what has been commercially agreed is clearly expressed. Price also drives behaviour, and so you should have your best commercial people thinking about the fee model. Be careful that the limited exceptions contemplated by the fee schedule cannot become the norm e.g. that not everything can become a ‘value add’ consulting service which is charged on a time basis.
Ideally, of course, the fees would be inclusive of all taxes other than GST.
7. Scope of the intellectual property licence
Issue: The licence you are granted to use software may be limited with respect to geography, purpose, time, field and number of users. If you use software outside the scope of your licence you may be infringing someone’s intellectual property rights, and may need to buy additional licences. Alternatively, if you just sign a purchase order and do not negotiate an express licence then the way in which you will be able to use the software may be unclear.
Recommendation: Negotiate an express written licence, paying careful attention to the uses permitted under the licence, including the right to sublicense. It is better to have a broad licence with a fee consequence of increased use, rather than a narrow licence that requires negotiation if your use increases. It is also better to have flexibility upfront when the deal is being struck and people are on their best behaviour.
8. Your IP
Issue: Clients are often astounded to learn that they do not own a product they have spent much time and money developing. In the absence of an agreement to the contrary, there is nothing to prevent a supplier from licensing the work you paid them to develop to your competitor. Some suppliers even attempt to have the customer assign intellectual property rights in the deliverables to the supplier.
Recommendation: Generally, you should not assign away your own IP. Further, if you want to own the intellectual property in software or other supplier deliverables then you will need to obtain an express assignment.
9. Liability for third party IP claims
Issue: You may be held liable for infringing a third party’s intellectual property rights, notwithstanding that you have a licence from your supplier to use particular software.
Recommendation: As a customer you would obtain a warranty from the supplier that they have the authority to grant the licence and relevant services, and that use of the software as permitted under the agreement will not infringe any third party’s intellectual property rights. You should also obtain an indemnity from the supplier against such claims, and confirm that their insurance will be applicable in these circumstances or is substantial enough to pay up should a claim be made.
10. Suppliers limiting or excluding liability for failure to deliver
Issue: Suppliers often attempt to exclude their liability for breaching their obligations under IT procurement contracts, in which case you will not be able to recover damages should the time come.
Recommendation: Have the supplier agree to limit its liability to, say, three times the fees paid or stated as being payable (rather than exclude it completely). Such a limitation would ideally not apply to claims under any indemnity or in relation to personal injury, property damage or third party intellectual property claims.
While it is not unusual for a supplier to exclude all liability for indirect loss, care should be taken in relation to other exclusions such as alleged consequential loss or loss of profit and revenue, as such a loss will not be recoverable should the solution not work as expected.
Take on board these recommendations and avoid the mistakes made by a lot of people. Many seek assistance in either drafting their own contract or negotiating the supplier’s contract. More often than not these clients end up with contracts that better protect their interests should things not proceed as expected.
Remember, do not sign the supplier’s contract without either negotiating the issues above or, more preferably, start with your own contract.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.