Vendor management is perhaps the most overlooked aspect of the business ICT world. We know that technology has become essential organisational underpinning and often lies at the heart of competitive differentiation, but the knotty part of establishing terms and conditions for working with hardware, software, network and service providers can get lost. The endless complexity that results when technology meets legalese can cause some painful and expensive issues. That has resulted in specialists emerging to decode the contractual confusion.
“One of our guys just finished reviewing an IT outsourcing contract and let’s say it was at the bad end of the spectrum – you see these things and think ‘how do they get away with this stuff?’” says David Brook, founder of Turnstone, a London-based consultancy that helps companies get fairer contractual terms when procuring ICT products and services.
Brook says that where there is no formal procurement division, contracts are often given to legal departments that don’t know enough about IT or IT departments that don’t know enough about legal matters. That, he says, leads to many contracts that are “stacked in favour of the supplier, thanks very much”.
“It’s often the case that they don’t have a procurement function or it’s thinly stretched and where it’s under-resourced they lapse into what we’d call the ‘policeman’ role with lots of transactional PO shuffling. Or if they do have some standards around RFPs then the business views them as pain or tends to avoid them.”
With IT spend often pegged at about five per cent of an organisation’s revenues, are companies just treating this contractual stuff as unnecessary detail?
“It’s five per cent and probably dropping, but the importance of that spend tends to be higher and longer lasting than say facilities management,” Brook says.
IT versus legal
“The problem is that the IT guys are saying ‘we’re doing the buying, it’s too important for procurement’ but they don’t have the commercial experience or background to do the job when there are 80-page contracts with 90-odd configuration points. There’s an assumption IT will beat suppliers up on price and throw the rest to legal to deal with terms and conditions. But only one third of a contract is actually legal, two thirds are commercial or service terms.
“It’s not what the average techie jumps out of bed for, the quarterly performance review. We find stuff that should have been decommissioned, empty tape vaults, project servers that were commissioned and forgotten about, landlines for buildings that were closed down a couple of years ago…”
The consequences of not taking this stuff seriously can be nasty.
“You can be stuck with incumbents because the perception of the pain of change is a blocker. You become dependent on the supplier if you’re not careful and exit terms are one key area. You’ve really got to be on your game with those guys. Asking for 10 per cent off is a common fail-plan.”
Brook has some sage words of advice.
“When you have genuine competition, throw it in [to the conversation]. We just helped a customer to leave an ERP provider. You might think it’s impossible to change ERP but when is an upgrade not an upgrade? If the old system is at death’s door the incumbent is basically installing a new ERP. Some buyers just sleepwalk into staying with the old supplier and keep all the modifications, business and tangles.”
Cloud is not the answer
Some optimists might hope that moving to cloud services will be a panacea but Brook has seen plenty of snakes in those contracts too.
“The move to cloud has made revenue collection easier and there’s no way for techies to switch on an extra 300 users without telling the supplier. Cloud ‘gotchas’ is a mainstay for us: suppliers often forward-plan usage for the next two years for a small discount, for example. The dream of cloud was ‘pay-as-you-go and usage-based’ but it’s actually rare that that happens. Costs add up.”
Brook dreams of a sourcing and vendor management equivalent to Itil in IT service management or project management’s PRINCE2, and says that there’s growing interest in companies like Turnstone that can act as “part-time” sourcing experts, vendor managers and paralegals.
“It cycles back to getting requirements down in plain English – scoping and getting termination right. That section of the contract is often jumped on: time scales, what you get back, when you get it back and who is going to do it. Safe Harbor is a moving feast but it’s just being sensible about it and laying out what your requirements are. Then there’s bribery. If you’re a regulated company there’s an edict that all third-party contracts must be Anti Bribery-complaint, but has anybody checked they are?”
All too often, Brook says, there’s a sense that once a deal is complete, then panic over. But really it’s just the beginning.
“They think once the job is done then breathe in then exhale… but you need to keep vendors sharp.”
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