In today’s digital world, having an up-to-date IT infrastructure is the backbone of any business. Which is why when negotiating an IT service contract, reaching a legally binding agreement that benefits both parties can be a lengthy, and at times, challenging process.
IT service contracts form a significant portion of most organisations’ spend. Therefore, given the associated risks, costs, and contractual constraints, it is crucial to thoughtfully consider the terms of agreement from the outset.
In the following piece, IT Procurement specialist, Mark Elkington from Barkers Procurement, shares 10 key steps on how to successfully negotiate an IT service contract…
1. Set a clear negotiating strategy
Before the first contract negotiation meeting with the vendor, fix a negotiating strategy internally beforehand to ensure a clear sense of direction. This should cover the negotiation objectives, timescales, internal leads, points of escalation, and governance and decision stages.
2. Prepare carefully for the first meeting
The first meeting will set the tone for the entire negotiation. It is crucial that the vendor perceives you as knowledgeable, authoritative, organised and possessing a clear mandate from your business to negotiate on their behalf. This likely requires senior business stakeholders to personally endorse you in that meeting.
3. Confirm the scope
Throughout both the negotiations and the signing, the breadth and depth of the scope of work is subject to change. For that reason, changes to scope should be carefully tracked. This will enable pricing challenges to be assessed based on the size of overall change. Commercial models in the contract must be flexible and unit priced, so increases and reductions in scope can be accommodated without renegotiating the contract.
4. Separate out the commercial negotiations
Commercial negotiations should be separated from negotiations on service and transition requirements. These types of negotiations are fundamentally different in terms of attendees, objectives of the parties, outcomes, and how the process should be managed.
Conversely, service and transition requirements focus on mutual understanding and documentation of like-for-like requirements, or agreed enhancements managed between the knowledgeable service experts of both parties. Whereas commercial negotiations require give and take, where not every decision will be mutually beneficial.
5. Set the right pace
The cadence of the meetings is important to determining the outcome. Running the process too quickly will result in important details being left unaddressed or only partially resolved. If there are too many ‘TBAs’ left in a signed contract then, in the absence of commercial comfort clauses, the price may vary post-signing by up to 50%. Running the process too slowly will result in a lack of focus, often with too few resources being deployed and issues being debated for too long without resolution.
6. Don’t let the supplier do all the work
It is very tempting to start the negotiation process with a contract that the supplier already has on the shelf. Whilst this gives both parties something to talk about, it often results in the overall process taking longer, because it does not represent what is required by the customer, and because the supplier has a greater propensity to stick to what they first issued. Creating and issuing the first draft of the contract to the supplier bears fruit at almost every stage of the negotiation.
7. Focus on the transition schedule
The key to a successful IT services contract is a properly scoped and negotiated transition schedule. A good business case can easily be ruined by a poorly drafted schedule with insufficient detail and commercial protections. As a rule of thumb, the transition schedule (including appendices) should be the longest running schedule.
8. Communicate with internal stakeholders
If you don’t manage your internal stakeholders, then your supplier will! Regular updates for internal stakeholders, including face-to face time with senior stakeholders, are essential. These should be honest and open discussions where opportunities and blockers are discussed.
Make sure you reach an agreement on how to progress, while determining supplier communication. Hard work is required to guarantee that a supplier is not able to ‘divide and conquer’.
9. Be clear on team roles
The role within the negotiation team should be clearly understood and adhered to throughout all stages. You can do this through internal debates and discussion. Ensuring that these discussions are kept private is key, as if they are brought to the negotiating table, it can often give the other party an advantage through revealing where weaknesses lie.
One team member should be given the role of leader, and the others should follow their lead. It is important that even if they are not the most senior person on the team, their leader role is still respected.
10. Manage risk
Over the course of the negotiation, different risks will be identified so it is important to document these risks as they occur. Some risks will be mitigated through agreement with the supplier during the drafting process, but for the risks where it is not commercially acceptable to the supplier to mitigate these, it is important that they are considered prior to the contract being signed.
If necessary, they may need to be confirmed acceptable through internal governance procedures. Having these risks clearly documented, while working with internal audit and other governance bodies during the negotiation, will make this final stage easier.
