Contract Clauses Decoded, Part 1: Why Reviews Matter

John T. Mason, Founder, OakHorn Solutions (Former CIO, Hill Country Memorial)

I’m not a lawyer. Let me be clear about that right up front.

However, I have looked at my share of IT contracts over the years, and have developed a set of criteria to look for every time one of them comes across my desk. While nothing in this post will substitute for a thorough, legal review, you can save time during the process if you look for a few key items before you get to the signature stage. Reviewing a contract against these criteria will help put you and your organization in a better place, legally and potentially financially.

First, it’s important to know that every contract is different. They are written by the legal counsel for the proposing organization, and without a doubt, are written to benefit the vendor, not you. Now, don’t get me wrong. I don’t think that vendors purposely set out to put the customer at a disadvantage, but they are looking to protect their organization and make sure they reduce their liability as much as possible. I’ll share some examples of how contracts can go horribly wrong.

But first, let me make a suggestion. If you are the CIO and you’re learning about contracts that affect you after they have been signed, changing that must be your first priority. Learn what the contracting process is for your organization and map it out, indicating every person involved in the process. Typically, in larger organizations, there is legal counsel review before anything gets signed.

Find out who is involved in the process, and set up a meeting with them. The goal here is to find out what they look for as absolutes in their review, and see if this is documented anywhere. Also, make sure you get to know them as a person, and work to understand what they think is important to minimize risk for the organization.

Once a contract is reviewed by legal counsel, the final signature will likely come from the CFO, who typically manages the contracting process. However, they typically don’t know as much about the technical aspects of a project/service, and they could likely use some good guidance in this area. Like the legal counsel, they don’t want to engage your organization in a contract that will put you at risk.

Meeting with the CFO, and finding out what they look for in a contact is also critical. While they are likely going to be reliant on the sign off on both legal counsel and the budgeting organization, they may have financial components that they look for as well. Things such as term of the contract, interest rate, and payment terms will tend to get their attention. Just like with legal counsel, find out how you can insert yourself into the contracting and sign off process. Ideally, the CFO won’t sign the contract without your approval of the technical terms and criteria. If you don’t have this relationship, build it.

Once you’ve been able to insert yourself into the contracting process, make sure the contract is beneficial for all parties. And it’s not just about making sure you and your organization are covered. The vendor has to make a profit too, so don’t go into the review with the idea that it should be a one-sided contract. If you do, you are ultimately disadvantaging yourself in the long run.

Let me share a contracting cycle that has stuck with me over the years. It was this process that prompted me to develop a set of criteria that I was going to stick by, no matter what.

One day, I found out about a signed contract from one of my direct reports. The budgeting organization had decided on a product and — thinking they had covered all the necessary bases — signed off on the proposal. Of course, this wasn’t a small contract; it could potentially cost a significant amount of money over time if implemented. I met with the business unit leader to understand why they had signed the contract, and learned that they thought IT had been involved in the selection process. When I explained that we had not, they immediately became concerned, and allowed us to get involved.

Thankfully, in this case we found a loophole. The proper business name wasn’t listed on the contract, which allowed us to stop the process and start over. Once I had a chance to review the contract, I found that there were a number of inconsistencies that had to be addressed before going forward. It was a close call, but it allowed me to dig deep and see what the vendor was proposing. What I found was concerning.

First, the vendor had included the larger organizational name instead of the specific business unit that signed the contract. This effectively signed up the entire organization into the contract, and would have allowed the vendor to move forward with other business units without any further review. The vendor explained that they felt this was prudent so that they could bring their product to the whole organization at a faster pace. After all, they were going to save us a ton of money, and we could only realize all those savings if it was deployed everywhere. However, we had clearly told them this was a trial, and was only to be for the initial business unit. They disregarded this guidance in hopes that they could alleviate a new contracting cycle.

Second, the contract had a 5-year term with very limited ways in which we could get out of it. They would need 5 years to produce savings — something I’m sure the business unit leader didn’t fully understand. And so we were locked into a long-term relationship.

Third, the vendor included a provision that allowed them to increase the price every year. And not just by a small percentage to cover increasing operational costs. The increase was tied to the Consumer Price Index plus 5 percent annually, which added a significant cost to the product’s price tag. If there was a change in economic conditions, we would certainly pay that price.

Finally, the contract allowed the vendor to use our name in press releases and other marketing efforts. We were a ‘big fish’ for them, and being able to use our name (even when we weren’t fully deployed) was a definite sign of credibility that they could use to their advantage.

Thankfully, we were able to rewrite the contract to be more beneficial to us as an organization. We reduced the length of the contract, shortened and bolstered the termination clause, reduced the annual cost, and forced them to get our permission before using our name in marketing efforts. All of this served to make the contract more equitable to both parties.

In part 2 of this blog, we’ll cover the five most important components of any contract, and what leaders must specifically look for before signing them.

[This piece was originally published on John T. Mason’s blog page. To view the original post, click here. Follow him on Twitter at @jtmasoniv.]

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