Contracts Are Really Just An Effective Conversation Between Parties
Using contracts to create common ground with technology providers
Don’t worry, subscribers. This newsletter is not going to skid into “lawyer only” content. Today, our focus is on the foundational business concepts where most technology contracts fail and how you can avoid them.
Whether you are a small or large business, or even a nonprofit, everyone needs to purchase technology at some point in the evolution of an organization. When that time comes, the conversation usually starts like this: “I think I need this awesome technology product that is going to turn my business around, but I don’t even know where to start.” Or my personal favorite, “I just clicked ACCEPT, so that’s not really a contract, right?”1 For something that happens so frequently, a challenge for many businesses is that most of the people charged with selecting products, negotiating deals, and leading business-side technology implementations do not have direct experience with technology contracts.
Where do I start?
Maybe you did an RFP (Request for Proposal) with multiple vendors to arrive at your short list for selection, or maybe you selected based on word of mouth, or even uniqueness in the market. Regardless of how you arrived at this destination, view the contract from your targeted vendor or vendors as “premarital counseling” for you and your new “work husband” or “work wife,” aka the software provider.
The first step in preparing for your long and happy union is to determine your expectations for the marriage, as well as what assumptions and baggage you are bringing into the relationship.
Ask yourself and your business colleagues the following:
What is the bare minimum performance by the vendor I can live with and still operate my business?
What are those things that I could live without if I had to, but that I would prefer to have day 1?
What are the specific responsibilities that I expect my “new spouse” to perform?
What are the specific responsibilities that I know I will need to perform myself?
What am I assuming about this other person? For example, am I assuming that they will regularly backup my data? Am I assuming their solution will work for any platform? Am I expecting them to capture customer data when accessed? Am I expecting them to be able to provide me usage data? Am I assuming that they will be open 365 days a year?
What is some of the baggage that I am bringing to the “marriage?” This is not the “hot musician boyfriend that dumped you in high school” type baggage, but it may be things like data that isn’t properly organized (and may be wrong), other systems (accounting, HR, reporting and the like) that need to connect to and be able to communicate with the new solution, limited internal expertise, or peak times in your business that may require some extra hand holding.
Once you have a firm handle on what you really need from the marriage, you are ready to move on to common issues that are not specific to your organization.
SaaS Solution Contracts, One Size May Not Fit All
Since most contracts are for SaaS products these days, we will focus there.
SaaS, which is “software as a service” and still sometimes referred to as “cloud-based,” is a broad category of web-based technology solutions that allow businesses to license a product on a subscription basis, and utilize it for the term of the license. There is typically nothing installed on your computers or network, and access to the product requires the internet. Because the products are delivered to a multitude of customers in a very consistent fashion from a central “host,” contracts for these products are usually universal and delivered in an electronic, non-editable form. When customers see these electronic signature documents, they get the false idea that the document isn’t even worth reading, isn’t a contract, and that it cannot be negotiated. But when you click “accept” to those terms and conditions that seem innocuous, you are signing a contract. While it is true that some vendors will not diverge from the terms presented, that is not always the case. In some instances, users do have the ability to negotiate terms and/or modify the agreement with an addendum.
Whether you are negotiating terms, comparing deals between providers, or just understanding the risks you will have to accept or mitigate, the following are five critical contract areas that ensure you are standing on solid common ground with your vendor.
Requirements: Remember that list you made above? Are those critical needs outlined in the agreement in a way that is not ambiguous and allows you to clearly determine “yes, you did this,” or “no, you did not do this.” Specificity is critical when considering the scope of services that you expect. Does the contract expressly state the delivery and quality of the services you expect? Does it allow for your “baggage” to be carried onto the plane?
Availability: What is the guaranteed “up time” of the service or solution? Often, when I bring up availability requirements, a client will say, “it says 99.5% uptime guaranteed, so I am not worried about that.” But then I point to those pesky “defined terms.” You know, the words with first letters that are capitalized in the middle of a sentence because they mean something specific in the contract. Often, the availability measures include several defined terms that expressly exclude things like planned and even unplanned updates, patches and other software fixes when something stops working, security issues, outages, and more…and these are things that could cause your solution to be unavailable for extended periods of time without recourse. Another way to look think about availability is to ask what sort of redundancy the vendor offers? Do they have a backup environment that you can failover to and keep running, reducing the chance of full outage?
Service levels: Related to availability, if you think you might need help or assistance from the provider (including a general customer service availability, or response from a specific point of contact for your company), make sure you understand what their commitments to respond are (this includes the maximum time it will take them to return a call, and how tiers of service and escalation work), as well as their commitment to how long it will take them to repair or resolve the issue to get you running again, including any associated penalties or refunds for downtime.
Termination, termination assistance, and exit strategy: This is especially important for products and services that have a lot of competitors in the marketplace and for businesses that are starting out and may change a lot in a short time. How many times have you been on a date and realized, nope, this is not the person. It’s the same with technology. What happens if you misjudge your needs and want to terminate the agreement early? What happens if you decide that you would prefer to move your business to someone else? Is everything transferable? Will the vendor move your data to a new provider for you or enable a smooth transition, and what are the added costs and expectations you should have for that? Can you move all of the data to the new provider yourself? Are there any special things that you need to do to migrate to your new provider? Can you test the new solution against the existing one before shutting the original off? Do you own all the intellectual property associated with what you need to take elsewhere? Are there any notice requirements that you need to comply with in order to avoid paying for two providers concurrently for longer than you’d like?
Security: This is a topic in and of itself. However, when you are sharing your data with a third party through a web-based solution, it is imperative to understand:
What are they doing to protect your data?
How do they monitor for potential security issues, and what do they do proactively to avoid issues?
How do they keep their hosting environment current? Said another way, when they get updates and patches, how quickly do they install them and do they have a robust process for doing so? Do they have a strategy for their total environment, or is it like when your mom waited five years to upgrade to Windows 8?
What security issues have they had in the past?
What will they do for you in the event of a breach on their side?
How quickly will they notify you once they suspect there is an issue?
Will they compensate or reimburse you for any notification, credit monitoring or other obligations you have to your own customers due to the breach?
What insurance do they have?
How does that insurance work with your own cyber coverage or what does your cyber coverage require you to do?
In short, when you are buying off the shelf products with “click to sign” contracts, you may not be able to negotiate but that doesn’t mean you shouldn’t carefully evaluate the terms and conditions applicable. By understanding these key differentiators and where things can go wrong, you can ensure that you compare apples to apples between products and select the best product for you. Sometimes you get what you pay for, and the cheaper product may not offer you the stability and foundational service that you need to keep your business running smoothly.
#contracts #negotiation #technology
A Little Cream For Your Coffee: Misclassification and the Unique Challenge of Technology Consulting
So you’ve licensed the product, but now you need help doing some of the related work. A special consideration when implementing technology is who will do it, and what help you might need on a short, medium or long term basis to build, deploy, configure, integrate, manage, or enhance a technology solution. One common risk associated with bringing in technology resources (or any type of consulting resource) on a contract basis is called “misclassification” of employees.
There are a number of legislative “tests” for misclassification, including under the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, and the tax code. Judicial, government, and regulatory agencies are charged with applying these tests to ensure that the “gig economy” doesn’t run amuck, and that individuals that perform the functions of an employee are not adversely affected by working under a contract instead of being hired as a full time employee with benefits. Said another way, “if it looks like a duck, and it quacks like a duck, it’s a duck”…or in this case, the contract resource you engaged may be viewed by the IRS or another regulatory agency as an employee, entitled to all the rights and benefits of your employees.
For our foundational purposes, some key risk indicators that you will want to consider if you engage a contractor for services are things like:
Is the contractor only providing services to you?
Is the contractor required to work during your established hours at your facility and with your equipment?
Is the contractor doing the same kind of work that your own employees are doing?
Is the contractor following your direction on how and when things are to be completed, and
How long will the contract term (and any consecutive terms) be?
For example, the more independent direction and control of the work a contractor has, the less “exclusive” they are with you (so let them “date” around), the less they function in the same fashion or role as an existing employee, and the shorter time of their engagements with your company, the less you will have to worry about misclassification.
For more information on misclassification, visit: Independent Contractor or Employee? IRS Information, Worker Classification 101, and Department of Labor Misclassification Guidance.
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For the record, when you click accept, you are “signing” a contract, just like if someone handed you a pen and a printed contract.