Five rules for service providers: Negotiating deals with business technology customers

Service agreements catch integrators and VARs in a tight place between the vendor and customer. But if you negotiate strategically, you can work out deals that please customers without eating into your own margin.

There's no magic bullet or best practice to get you through the tricky process of negotiating service agreements that will be paid for by your customer (who will blame you if it goes wrong), but fulfilled by the vendor supplying the equipment and software (over whom you have little leverage).

There are better practices that can keep you out of trouble and help keep your customer as happy as possible. But they happen at the strategic design phase of the contract negotiation -- long before most integrators focus on specifics.

For strategy on agreement design I went to Phillip Gordon, one of the most successful IT practitioners in the business, who has been a star both on staff for Charles Schwab & Co. and Franklin Resources, for example, and as a consultant with Wells Fargo & Co., among others. This year he was recruited to be a visiting professor at the Mills College Graduate School of Business in Oakland, Calif.

Gordon's rules

1. Pick up someone your own size.

As Gordon says, if the SI or VAR is doing $5 million per year in total business, it's nigh impossible to get serious attention from a vendor the size of Hewlett-Packard Co.

If your client is of significant size, insert them in the process so a bigger vendor takes notice. If the omnipresence of the company's logo is not sufficient to put the fear of Vishnu into the seller, consider arranging service from a smaller organization that sits between you and the vendor, and can act as intermediary or enforcer.

No matter how you arrange the contract if your service to the client is entirely dependent on the service your provider gives to you, remember that size and accountability are inversely related -- the bigger your provider, the less able you'll be to force it to honor agreements.

2. Avoid contractual extremism…on either side.

Most shops give themselves a black eye by insisting on one of the binary extremes. At one end is negotiating to 100% safety, which is expensive and tends to poison a relationship by exhausting the antagonist. At the other is what Gordon calls "the loosy-goosies" — who like to sketch out the agreement Gettysburg Address style: on the back of a used envelope, in pencil, on a moving train, during a shooting war.

Instead of an extreme contract, focus on choosing the right vendor – one that has a history of acting in good faith. A Draconian contract won't protect you from vendors who act in bad faith; and one that's too loose might tempt good-faith providers to cut corners.

Choose the right people and the contract will most likely end up being sensible, as long as you plan for common contingencies, such as how the work gets handled in case of merger or another "liquidity event." That leads us logically to…

3. Sign people or skills, not corporate entities.

You already know a vendor will let you work with great people up front and shift those people to projects that need some luster, leaving you to depend on The C Team.

Try to negotiate up front which individuals will be serving your client and your organization. Under all circumstances and without exception reserve the right to accept or decline individual personnel your service provider might offer.

Again, the right people will make for the right service ethic; no contract can overcome the wrong talent.

4. Don't put yourself in the penalty box.

Gordon stresses that penalty clauses in agreements are a waste of time. "What you get back will never equal your true costs." The vendor knows that from the beginning. And the most costly expense of what you're aiming to penalize, time, is never recovered with cash.

Gordon advises adding reward clauses…small rewards for on time and to spec; larger, more significant bonuses for hitting goals ahead of time or exceeding specifications in productive ways.

Every study of sane people indicates carrots work better than sticks – and if you don't have sane providers, replace those barking mad ones, pronto.

5. Always prepare to negotiate the contract they pitch you, and don't let them start until they've signed the version you approve.

If you have the resources and the courage, present a standard contract. If not be prepared to push back on the vendor's contract no matter what they tell you. Count of hearing some combination of, "This is it, take it or leave it;" "no one has ever wanted to change this before;" or "let's get started, we can work out the details later."

The contract they hand you will most likely be what's known as an F.U. contract, designed by their legal counsel to protect them from all recourse no matter how grievous the offense.

Once you do let them start work for you, your need to stay on schedule will work against your interest in nailing down a fair agreement. They may try to use your client's impatience against you, but in the long term, surrendering fairness for a little temporary pressure release is guaranteed to wipe you out.

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