Attacking 'value leakage' in contract negotiations

IT managers who help negotiate contracts with vendors often end up with less than they had hoped for, largely due to the process by which contracts are agreed to and delivered upon.

During contract negotiations, "customers often come up with great ideas to tie value to performance," said Todd Larson, director of application development at Eaton Vance Management, a mutual fund company in Boston. But by the time a contract is signed, said Larson, "most of those ideas have dissipated."

Larson was one of the attendees who discussed contract management issues at a conference held here by Cutter Consortium, an IT consulting firm in Arlington, Mass.

One reason customer firms and vendors suffer from what Larson called contract "value leakage" is that "there are big gaps between vendor salespeople, contract managers and the people who deliver" on the terms of a contract, said Stuart Kliman, a senior consultant at Cutter Consortium and a partner at Boston-based consulting firm Vantage Partners LLC.

Contract negotiations are beset by other problems, said Kliman. "In practice, most organizations believe there's a trade-off that has to occur between obtaining either a good working relationship (with vendors) or obtaining good business results," he said. When confronted with such a choice, most IT contract negotiators opt for good business results instead of making organizational changes to try to accommodate both.

Another option, Kliman said, would be to present these choices to end users and other stakeholders, let them prioritize the most important goals of a project "and then present their interests at the negotiation table."

IT contracts are often hamstrung by outdated performance measurement metrics, said Michael Mah, another Cutter Consortium consultant. "We're in a knowledge society, but we're using industrial economy metrics," such as output per unit cost, to measure performance, said Mah, who is also a partner at QSM Associates Inc. in Pittsfield, Mass.

"The relationship is the most important thing in an outsourcing deal," said Joseph Imbimbo, vice president of IS technology operations at Tufts Health Plan in Boston. Imbimbo, who helped negotiate a seven-year, US$20 million applications outsourcing deal with Keane Inc. four years ago, said, that "you can't get to know a vendor" sufficiently under a request-for-proposal bidding process. He said he spent a year working with Keane, a business and IT outsourcing firm based in Boston, to craft the applications outsourcing deal for Tufts.

Imbimbo said he spent a lot of time during precontract due diligence considering all of the things that could go wrong under the pact and how or whether Tufts would be able to extricate itself should Keane fail to meet performance targets.

Martha Crow, managing director of the New England region for Keane, said many of the contracts the consulting firm now signs contain an "above-and-beyond clause," where the two companies agree in writing that they will share the benefits of any innovation that Keane delivers.

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