5 tricks to look for in vendor contracts

We were asked by a panel of in-house technology lawyers to give a presentation on vendor tricks in ICT contracts.

Most CIOs will have their own stories of how they caught a provider trying to get away with a particular negotiating tactic.

The recession has squeezed ICT providers and their margins pretty tight.

As the economy recovers we are seeing some old chestnuts reappearing as ICT providers draft their contracts more tightly and negotiate harder. Among the issues that we’re seeing more frequently are the following:

– More rigid interpretation of the revenue recognition rules. Issues around when vendors can book the revenue from their forward licences have been around for years, but we’ve seen revenue recognition used as the justification for a greater range of negotiating positions – A tougher stance on intellectual property rights and patents. Some Tier 1 ICT vendors have a major patent portfolio which they guard assiduously. They also have teams of lawyers assigned to protect their patent rights, so it’s common to find that the provider’s regular sales account team isn’t authorised to negotiate or discuss IPR issues – Tighter licensing terms, particularly counting ‘users’ to include online users, territorial limits for international licensees, and changing charging mechanisms (from user count to CPU usage). These exploit a gap in customer teams between legal, which covers terms and conditions, and technical, which covers the product requirement – More aggressive use of audits to identify non-compliance. In particular, we have seen a number of apparently innocuous calls on customers to load self-audit software which, if not complied with, automatically triggers the maximum licence charge – Terms which push the cost of change in law back to customers, even where a new law or regulation directly affects all of a provider’s customers

Most of the issues we see where a client has signed a contract containing a provider’s trick could have been prevented by a more thorough pre-contract review.

CIOs should ask the legal team to read the technical schedules and the technical team to read the legal stuff — because usually what a customer retrospectively regards as a trick is probably no more than a clear contractual provision not having been read by someone who’s qualified to understand what it really means.

Alistair Maughan is a partner at Morrison & Foerster, an international law firm