People
I recently posted an article on tips for negotiating software deals. Given some positive feedback and comments on social networks, and from colleagues and clients, I thought I would share some lessons learned on cutting deals with IT implementation partners. Although each case or situation could be different, here are some tips to take into consideration if you’re about to embark on this type of negotiation:
- Prepare the project. Before starting the negotiation phase, make sure that all the critical elements of a successful implementation are fully in place. Make sure you have:
- secured the right project sponsorship;
- clearly defined project objectives and scope;
- organized clear and consistent deliverables into a timetable;
- defined the project teams’ roles and responsibilities;
- identified both parties’ commitments in terms of resources, logistics, etc.; and
- established project governance (issue escalation, tie breaking and decision making, scope management, risk management).
- Push for a “fixed price” contract. This is a real advantage for the buyer if the scope is clearly defined and well documented otherwise each scope change will become an opportunity to push for a higher price. The higher the clarity of the scope and the work required, the lower the contingency the vendor might apply to their estimate - this could be up to 30%. If your scope is not fully defined, a potential solution could be to establish a separate contract (fixed price or time and material) for the design phase. You could then switch to a fixed price implementation in a second phase once the scope and specifications are fully defined.
- Create a commercial agreement that provides the incentive to “do the right things.” Under a good agreement, the two sides share the project risks and rewards. In the case of overrun, the cost can be shared between parties and in the case of success, the vendor will receive a success fee. The criteria should be based on meeting expectations of both quality and timescales. Success fees and incentives to achieve on-time delivery will encourage an implementation partner to stick the agreed scope.
- Make sure that your switching costs are as low as possible. Switching costs from one implementation partner to another during a project is generally very high. This is extensively used by the implementation partner as a key factor in the negotiations, but there are levers to help you minimize the switching costs from the inception of the contract:
- Make sure that the implementation partner would use standard market tools and methodology for the program management. This reduces the potential switching costs and facilitates comparison and benchmarking among potential implementation partners.
- Include specific deliverables, such as up-to-date documentation or regular knowledge transfer to the internal team, with tangible measures and KPIs throughout the project for each major phase.
- Set milestones. Even if the ultimate result is a successful go-live, slice the project into well-defined deliverables for each phase and link the billing schedule to those deliverables.
- Pay attention to the cash cycle of the project. IT implementation partners are primarily focused on P&L (e.g., sales and profit driven) and less on balance sheet. Monitoring, then leveraging the cash cycle makes it easier to get favorable payment terms.
- Clearly define your terms. This includes:
- Conditions to change the scope of the work and the associated pricing. This is the area that can create the most friction during the project.
- The process to select and if necessary change the implementation partner team members. Carefully consider skills and fit.
- Conditions to cancel or terminate the project. In the current business environment, macro-economic changes could force cancellation, particularly considering the length of time needed for some large implementation projects.
- Intellectual property. Clearly define the rights of usage and transfer of any developed codes in the case of mergers, acquisitions, etc.
- Change of control restrictions. These are often introduced by the IT service vendors and may force the buyer to repay all or a portion of the application cost at the rate effective at the time of the acquisition. Plan ahead, there will be very little negotiation leverage at that point.
- Vendor insolvency. Protect yourself against potential IT service vendor insolvency. If code development is a major area of the project, deposit developed codes in escrow at clearly defined intervals throughout the project.
- Define the warranty period. Arrange for post-delivery support with specific service level agreements after go-live for the stabilization period.
To define your strategy and support your negotiation, the use of independent advisors throughout the process can be critical. It also adds another voice at the negotiating table. One that can draw on previous experience and deep knowledge of the IT software and service market - a potentially useful 'bad cop' during negotiations!
Drawing on this advice can dramatically change the dynamic of the negotiation and improve the outcome in your favor.
