How to divorce your technology vendor

Severing ties with outsourcers and other service providers is a potential minefield. Dan Tynan asks those who have been there how to go about it.

Sure, hooking up with a new service provider is all cigars and handshakes at first. Promises are made and stars glimmer in your eyes as you sign the contract. The future looks bright.

Then things start to go south. The deadlines you carefully negotiated are being ignored, the fancy custom app you paid dearly to be developed suddenly doesn’t work, and that around-the-clock support you were promised turns out to be largely imaginary. The thrill is gone and it isn’t coming back.

So you decide to make a clean break and start fresh with someone new.

However, before you do, consider this cautionary tale of a small biotech firm in the Rocky Mountains that decided to dump its IT consultant. When the consultant heard about it, he installed a script that automatically blind-copied him on all emails to or from the company’s top executives. He quickly discovered that the firm’s lead scientist was having an affair. On the day the consultant was to be fired, he accessed 500 racy emails and, using another executive’s account, forwarded them to the scientist’s wife.

“It was worse than a soap opera, and very tragic for the client,” says Patty Laushman, president of Uptime Group, an IT services provider that was asked to perform computer forensics to prove that the Rocky Mountains firm’s IT vendor was behind the emails. “Had we known how unhappy they were with their current vendor, we would have coached them on how to safely make the switch,” Laushman says.

Of course, not all jilted providers turn into Glenn Close in Fatal Attraction. Most vendors who feel wronged will just sue you. But with easy access to your most confidential information and core business systems, the risks from a bad breakup with IT outsourcers are especially high. The industry is rife with horror stories of companies that terminated relationships only to find that they’re locked out of their own networks or their ERP systems suddenly stopped working. Some even discover that they don’t actually own the code they use to run their business and have to go crawling back to the developer to get it.

Hell hath no fury like a vendor scorned.

Fortunately, you don’t have to suffer through an ugly divorce — provided you go about it the right way.

Before you axe your current vendor, you must secure a replacement. But as one particularly unlucky biotech exec can tell you, you don’t necessarily want the vendor to know too soon — especially if the vendor has people working at your offices.

Uptime’s Laushman advises companies to avoid using internal email or IM to discuss potential changes. She meets prospective customers in coffee shops or other offsite locales, and has her staff audit a potential client’s systems at night and at weekends to avoid suspicion and make sure Uptime has all the info it needs for a smooth transition.

Although sneaking around on your vendor may be necessary (not to mention fun), it’s more important to anticipate breakups from the start, and put provisions into your service contract that protect you if things get ugly. In business arrangements, as in marriage, nothing beats a solid prenuptail agreement.

For example, a key part of any contract is termination rights, such as non-performance. That means both parties must agree on a way to grade the vendor’s performance and schedule periodic reviews, says Jon Piot, co-author of The Executive’s Guide to Information Technology and president of Technisource Solutions Group.

“If the vendor isn’t earning a good grade, it gives you an opportunity to raise issues and work through them,” Piot says. “If they can’t improve and it’s time to fire the vendor, then at least it’s not a surprise. The times I’ve seen it get really ugly is when there’s no measurement in place and issues are not discussed. That can descend into mutual destructiveness.”

Equally important, companies should specify what happens when the contract is terminated. Issues such as how long the vendor should continue to provide service (and get paid) while the transition is underway should be addressed.

“It’s in your best interests to have a transition plan,” says lawyer Richard Neff, who heads the intellectual property and technology practice for the law firm Greenberg Glusker. “If it’s a mission-critical net application, you’d want at least 90 days, and with some types of software up to a year.”

It also helps to pay attention to the fine print. In 2001, a mid-size networking company in the US contracted with a major web host to migrate its site to new servers. Six months later the site hadn’t budged, so the company pulled the plug and did the migration inhouse. It also stopped paying the host’s US$60,000 (NZ$94,000) monthly fee, says the firm’s CIO, who asked that the parties involved not be identified.

But according to the hosting contract, the company had to send a certified letter to the host giving it 30 days to correct the problems — email and phone calls didn’t count.

“It was one of those stupid semantic things,” the CIO says. “They said we needed to keep paying them. We said we’re not paying US$60,000 a month for nothing. They sued us, we countersued them, and we ended up settling out of court.”

These days, he says, his firm insists on the right to terminate contracts for any reason with 30 days’ notice, as well as a 90-day transition period to a new vendor.

Another big mistake is becoming too dependent on a single vendor or outsourcer. Small firms in particular often fail to obtain full-time custody of the applications, content or systems their now ex-vendor has created. They end up with apps that can’t be upgraded or systems that no one else can use.

“In many cases, customers are surprised to find out that the vendor owns the intellectual property for work the customer has paid the vendor to perform,” says Seth Hishmeh, chief operating officer of USAS Technologies, a multinational IT consulting and professional services company. Hishmeh says a small manufacturing firm once asked USAS to take over development of an unfinished back-office application, only to find out the manufacturing firm didn’t own the rights to the app’s source code.

“It would be like trying to finish a house without access to the architectural drawings or floor plans,” Hishmeh says. “There was nothing we could do. They had to work it out with their old vendor.”

Lawyer Neff says he’s seen a few horror stories about website developers who retained rights to their clients’ content long after their relationship was kaput. “It’s your website,” he says. “You need to obtain the rights for all work done for it.”

Besides code and content, organisations must own the knowledge of how their IT systems work, Uptime’s Laushman says. The last thing you want is a situation in which one person has total knowledge of a business-critical system, with no paper trail for anyone else to follow.

“One guy had been our client’s sole custom developer for ten years, with zero documentation,” Laushman says. “We met with the company and said we need to figure out how to get some documentation without arousing his suspicions. Otherwise, it was going to cost them a lot of money while we figured out how everything worked. Most network and system administrators hate doing doc work, but you have to insist they provide it along the way. Every piece of documentation will save you money down the line.”

Before you file the divorce papers, it’s a good idea to pull back from the brink and ask whether your own actions have contributed to the problem, and if it’s not too late to make things right.

“Usually both parties to a conflict contribute something,” says Rick Brenner, principal at consultancy Chaco Canyon Consulting. “Before taking any action, check that you’ve done everything you can to straighten things out on your side of the fence.”

For example, there may be conflicts between your employees and the vendor staff. You may have done a poor job communicating what you want, or have had unrealistic expectations about what the vendor can really deliver.

Problems often arise when dealing with small vendors or solo practitioners, who may possess valuable expertise but might just be overloaded from time to time, Brenner says.

“It’s very similar to having your bathroom redone,” Brenner adds. “I think every project manager should have to have part of his house remodelled. It would teach them a lot.”

The key to relatively painless parting is to avoid making the conflict personal, which is easier said than done.

“We don’t live in an entirely rational world,” Neff says. “People tend to get emotionally involved. It usually happens when one side isn’t getting what they want and refuses to pay. The other side cuts off service, and they end up in court.” He estimates that 95% of disputes settle before they ever get to court, mostly due to the prohibitive costs of litigation.

A better alternative to lawsuits is building a dispute resolution mechanism such as mediation or arbitration into the service agreement, says Ethan Katsh, director of the Centre for Information Technology and Dispute Resolution at the University of Massachusetts.

With mediation, a neutral third party works with the parties to find a mutually satisfactory outcome. In arbitration, a third party decides who’s right, and the disputants are legally bound to honour the decision.

“Mediation has a significant advantage because if any outcome is reached it’s because both parties wanted it,” Katsh says. “At the end of a successful mediation both parties walk away happy.”

The advantage of arbitration is that you know you’ll end up with a resolution, although you may not like the results.

Managed well, the dissolution could enable you and your vendor to work together again in the future — but don’t count on it.

Always try to treat vendors as valued partners, Piot advises, but if things get problematic and heated, “It’s best to cut the ties and get it over with as quickly and cleanly as possible. Usually there’s something fundamentally wrong there that can’t be fixed. Trying to turn around and bring the vendor back in after firing them for good reason is just asking for trouble.”

Five good reasons to divorce your vendor

1. It can’t provide the service you need

When it takes three phone calls to get a response or three repairs to get something working properly, it’s time to get out, says the Uptime Group’s Patty Laushman. “If you’re paying the vendor, they should know what they’re doing. You shouldn’t have to call three times to fix the same problem.

2. It can’t scale

If the vendors you started with can’t keep up with your company’s growth, it’s time to move on. “When you’re a small company, you want to deal with vendors that understand your needs,” says USAS Technologies’ Seth Hishmeh. “Once you’ve grown from, say, 20 to 100 employees, you may need a different kind of company.”

3. It can’t meet your security requirements

Developers don’t always build robust security into their apps, says Bruce Eissner, chief executive of Polar Cove, a consultancy that specialises in information security. “We sometimes find those applications don’t provide the level of assurance our clients need,” he says.

4. It can’t meet compliance standards

If the vendor fails to meet Sarbanes-Oxley, SAS70, HIPAA, or other federally-mandated guidelines, you’ll still be held responsible, Eissner says. “You can’t say, ‘I asked them to do this and trusted what they told me.’ Ignorance is no defence.”

5. It is in financial trouble

The last thing you want is the vendor’s disgruntled employees with their hands on your IT systems, and this can happen if the vendor skips payrolls, says Technisource’s Jon Piot. Ask your service provider about its financial position and listen to what its own employees are saying, Piot advises, as “that will give you a pretty good idea of what’s going on”.

Five bad reasons to divorce your vendor

1. You’re angry

“It’s the ace number one bad reason to fire somebody,” says consultant Rick Brenner. “If you’re talking to the vendor on the phone and you look down and see your fists are clenched, hang up and go for a walk. Nothing good is going to happen if you keep talking.”

2. Your brother-in-law can do it cheaper

“Getting out of an existing contract is difficult enough,” says Polar Cove’s Eissner. “Saying that you might reassign the work to your nephew is indefensible.”

3. You’re new and you want new blood

Newly hired managers often want to axe vendors hired by their predecessors and bring in familiar partners, says Technisource’s Jon Piot. Evaluate vendors honestly — if they’re doing a good job, it’s a bad idea to fire them.

4. You have unrealistic expectations

“In IT, nothing is ever done quickly enough,” says USAS Technologies’ Seth Hishmeh. “Customers need to ask, ‘Am I really providing feedback and information to the vendor to enable them to do a good job?’”

5. You’re in financial trouble

Struggling firms sometimes make up reasons to get out of costly contracts. But if you can’t keep up with the payments, don’t be surprised if the vendor decides to fire you.

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