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Coronavirus pandemic ups the IT contract negotiation game

IT contract negotiation has always been a difficult dance between customers and vendors, but the coronavirus pandemic means there are new rules to navigate on both sides.

The coronavirus pandemic will have short-, medium- and long-term implications for how IT buyers negotiate contracts and their overall relationships with vendors, according to several experts.

Many companies will add and already have added SaaS tools to support remote workers. Others will cut back on IT projects and investments through layoffs. And most, if not all, may seek financial relief through IT contract negotiations.

"What we're seeing with a lot of clients right now is that there's a lot of uncertainty," said John Belden, project execution advisory services practice leader at UpperEdge, an IT strategy consulting firm in Boston. "Companies should put together a plan for what they're doing with long-term [IT assets and projects]. You basically should talk [with critical vendors] about what it means to be a partner in this time of peril."

IT vendors and customers commonly reference words like "partner " and "partnership" in good times, particularly when the technology in question supports major IT infrastructure components such as ERP systems.

The concept will now be put to a critical test amid coronavirus-related economic distress, especially when once-acceptable, agreed-upon contract terms prove untenable in the current environment. What's a CRM customer to do when it has 10,000 subscription licenses on the books, but suddenly must lay off several thousand sales reps and contact center workers?

Indeed, SaaS subscriptions seem like a potential source for angst as the economic impact from coronavirus deepens.

The coronavirus epidemic will force IT buyers to not only reconsider their 2020 spending priorities, but also contract negotiations and overall relationships with vendors.
The coronavirus epidemic will force IT buyers to not only reconsider their 2020 spending priorities, but also contract negotiations and overall relationships with vendors.

Customers with foresight will have built-in "flex down" clauses in their deals, which allow for reductions in paid licenses based on shifts in a business's actual demand, said R "Ray" Wang, CEO and founder of Constellation Research. But many customers didn't do that during IT contract negotiations in recent years, as they quickly moved to adopt cloud-based software and agreed to stricter terms in exchange for better pricing and other considerations, he added.

Every customer with a looming contract renewal should ensure that flex-down language is part of the deal, according to Wang. That's not to say vendors won't attempt to broker workable arrangements with customers now -- and the smart ones will, according to Wang, who has helped hundreds of clients with IT contract negotiations.

"It's all about loyalty," he said. "You want to be able to show you've been able to work with your customers in good times and bad times."

A growing number of vendors have made public shows of good faith amid the coronavirus pandemic. For example, many software companies with tools for online communication, collaboration and file-sharing are offering free access to services for a limited time.

But skeptical observers will question how much that largesse also serves as a lead-generation tool for vendors keen to land new customers when the free trials are over. And with so much money at stake, the legal concept and contract term known as force majeure will likely come up in discussions between vendors and customers in all industries, as noted in a recent blog post from the large U.S. law firm Akerman.

However, "determining whether a force majeure clause can be invoked is a fact-intensive inquiry, as it depends on the specific language of a contract," Akerman lawyers Lawrence Rochefort and Meghan Boland wrote. It could make things quite difficult if epidemics and pandemics aren't specifically listed as force majeure events.

A vendor could also cite force majeure as a defense against contract fulfillment. "If a vendor is committed to do certain things for you, but they can't travel to your site, you can't sue them for that," said Duncan Jones, an analyst at Forrester who advises sourcing and vendor management professionals. "It's just too bad.

I am more a believer in the soft contract. It's a business relationship between you and the supplier that is at a higher level than the hard contract and the legalese.
Duncan JonesAnalyst, Forrester

"I am more a believer in the soft contract," Jones added. "It's a business relationship between you and the supplier that is at a higher level than the hard contract and the legalese. … It's much better to say this is something that no one's foreseen, and how are we going to react to that."

Many vendors should be sympathetic and willing to work with customers in that regard, Jones added. "If they don't, then now you know what you're dealing with and you can start your exit strategy."

Prior to a divorce from a vendor, however, customers can take other steps. "You get the best service if you're a good customer," Jones said. "Sometimes the problem is that the salesperson is in the way." Now may be the time to call in chits that get you access to executives higher up the vendor's organizational chain, according to Jones: "Get beyond the salesperson and make the case."

Coronavirus costs for IT measured in more than dollars

Many major IT projects will hit the pause button, but there's both a wise and risky way to go about that, said UpperEdge's Belden. "A [customer] has a choice," he said. "They could stop these [projects] and all those vendors go away."

But that could be a mistake in a longer-term context, he added. For one, much of the hands-on knowledge that consultants had built up regarding a customer's project could be lost. A better alternative is to negotiate with the consultancy to find cost savings and "share in the pain," Belden said.

There are several possibilities here. One could be to negotiate lower hourly rates -- perhaps at the consultant's base cost -- and continue work. Another option is an alternative approach to project delivery. "You can tell the vendor, 'We're going to keep the project on a percolate, with not all of the same services you were delivering, but once this [crisis] is over, we can accelerate further,'" Belden said.

The cost of delivering services within the project should drop a meaningful amount as well. Consultants could be forced to work remotely, which reduces travel costs. The lack of travel can lead to greater productivity on the part of consultants as well, since they'll have more time. It's likely that a general drop of 10% to 15% of project costs will occur due to these factors, Belden said.

Coronavirus's aftereffects on IT strategy

The pandemic has had a drastic impact on how companies operate, as employees are compelled to work from home with the help of online collaboration and workflow tools. This has been a radical shift for companies with a previously conservative or skeptical view of telecommuting. If broadly successful, this could prompt many enterprises to ramp up their digital transformation efforts and alter any future IT contract negotiation.

"All of us can't sit here and say this was a one-off event," Belden said. "This will happen again, and how are we going to prepare? People now recognize companies have to operate differently and be open to change."

That change may include shifts in IT procurement habits toward a best-of-breed approach as customers recover from the coronvirus's impact and look to spread out risk, according to Jeff Lazarto, commercial advisory practice leader at UpperEdge. "If a customer really values that balance of powers, they might have SAP for finance and Workday for HCM, knowing that Workday has finance that isn't as mature right now but will get there."

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