by John Edwards

7 tips for getting out of a bad vendor contract

Jun 13, 2019
BudgetingCloud ComputingEnterprise Applications

When a seemingly sweet deal turns sour, it's time to prepare an exit strategy. Here’s how to preserve essential business operations, your vendor relationship and your job.

exit sign expatriation cloud binary leaving the cloud
Credit: bklonowski / Getty Images

Like death, taxes and network downtime, bad contracts are a fact of life for most IT leaders. Deals that once seemed fair and equitable can sour over time for various reasons, such as the availability of a better or lower-cost technology or a vendor’s reluctance to live up to contract requirements.

“Most often, there’s a resolution—if you want to find one,” says P. Tracy Currie, who is CEO of business consulting firm Capto and has successfully negotiated — and renegotiated — contracts for numerous Fortune 500 IT organizations. Currie suggests moving to mitigate the damage as quickly as possible. “As mom always said, ‘Pull the Band-Aid off quickly.'”

Burdened with a bum IT deal? Check out these seven tips that can help you shed a lopsided vendor contract and get back on course to IT and business success.

1. Establish relationships early

Long before a contract problem arises, a clever CIO will have established a solid relationship with his or her business unit counterparts. Building alliances outside of IT can dispel internal opposition while giving the CIO more room to maneuver in future contract negotiations and renegotiations.

“It sets the tone for how aggressive you can be in pushing for changes to the contract,” says attorney Brad Keller, senior vice president of The Santa Fe Group, a business advisory firm. “During the meeting with the business unit, make sure they understand the need for the changes and the risks to the company — and their revenue stream — if corrective action isn’t taken.”

It can also pay to have a strong and congenial relationship with the vendor. “Hopefully, your vendor views you as a critical business partner and is willing to work with you to find a solution acceptable to all parties,” Keller says.

2. Analyze the situation

The biggest mistake IT leaders make, Currie says, is taking action before fully understanding the problem and its possible resolution. He recommends analyzing the situation from both sides. “By putting yourself in the vendor’s shoes, you’re able to consider potential weaknesses in their position,” he notes.

Anger and frustration can lead to hasty and unwise decisions. “Deadlines and superior pressure will make anyone, including the IT leader, rush to a poor conclusion,” advises Adam Wardel, legal counsel at Simplus, a Salesforce partner that offers enterprise digital transformation services. “Slow down, and make sure you find someone to challenge your assumptions on the situation.”

To gain complete insight into the situation, it’s necessary to create a comprehensive assessment of all IT and enterprise processes and resources affected by the problematic vendor contract, says Scott Bickley, principal research advisor for contract review/licensing at research firm Info-Tech Research Group. “It’s critical to assess the situation holistically versus focusing on the less than stellar terms and conditions in isolation,” he stresses.

3. Build your case

There’s always opportunity to renegotiate a contract — you just need to be prepared, observes Rocco Rao, director of Info-Tech’s CIO research and advisory unit. “Most CIOs think that once a contract is signed you have lost your negotiating leverage,” he notes. Actually, vendors can be strongly motivated by the promise of future revenue. “They are keen to expand the scope of work and they are keen to contract extensions,” Rao says. “This is your leverage for renegotiations.”

Wardel recommends immediately scheduling a conference with the enterprise’s legal counsel as soon as it’s decided to confront a key vendor about a contract issue. “The longer you let the problem persist, the harder it will be to find a solution,” he notes.

A good attorney, Wardel explains, is trained to review a contract disagreement dispassionately, gathering facts relevant to all sides of the argument and then preparing a case that’s most favorable to the client. “The legal representative should have various scenarios worked out and authority to pursue multiple channels before even contacting the vendor,” Wardel says.

4. Begin the renegotiation

If the product or service in use is still the right fit, yet the contract’s cost, length and/or support terms are unbearably bad, it’s always possible to renegotiate the troubling issues during the agreement’s lifetime. “It’s not unheard of, if the terms are onerous and out of market, to try working with the vendor to make a course correction,” says Bob Roth, a partner and contracts expert at Cornerstone Advisors, a financial industry consulting firm.

Bickley suggests taking a constructive approach to renegotiation talks. “Bring a plan to the table for go-forward areas of improvement and be open to how you can help the vendor succeed as well,” he says. “Use this time to evaluate your vendor and determine if they are the right fit for your organization, both culturally and contractually.”

The better the vendor relationship, the easier it will be to engage them in a meaningful discussion. “Keep in mind that just because a contract isn’t up for renewal, you can always approach a vendor and seek to make contract modifications,” Keller notes.

On the other hand, if the vendor won’t budge and there’s another product or service that promises a better fit with friendlier terms, it may make sense to terminate the deal and absorb whatever penalties will be imposed. “If the cost of cancelling the agreement early can be offset by the savings generated from moving to another vendor’s product, it could be advantageous to cancel the contract early,” Roth explains. “Gains in productivity, if any, from using a different product should be included in the savings calculation.”

5. Wait it out

For contracts that are at or near their end, the most cost-effective approach may simply be biding your time. Doing nothing is certainly easy, yet it’s a smart tactic in only a couple of situations, says Gordon Wong, a director at IT management consulting firm Pace Harmon.

“Living with poor contract terms is generally acceptable only when the term is set to expire quickly or when the business impact of changing the contract outweighs the benefits of a new contract,” he notes. “In other words, when the risk of business disruption outweighs the financial benefits of a new contract.”

6. Aim for maximum flexibility

It’s important to ensure that the new or revised contract won’t be as terrible as the one it replaces. Eric Dynowski, CTO of IT infrastructure provider ServerCentral Turing Group, notes that IT leaders frequently fall into the trap of seeking long-term contracts designed to maximize their return on investment. Such agreements promise lower total cost of ownership and the best financial footprint for their business.

“However, the likelihood that business needs in 18 to 24 months will be the same as they were when the agreement was signed is increasingly low,” Dynowski suggests. “We’re consistently seeing 12- to 18-month planning windows and the need to structure significant changes resulting from these efforts.”

The smart thing to do, Dynowski says, is to insist on an agreement that includes calendar review points when contract terms can be renegotiated to reflect current technology and market trends. “At each anniversary, you can have the opportunity to open the agreement and assess what needs to change.”

7. Prepare a ‘doomsdeal’ backup plan

Some CIOs believe that terminating an unfair contract will resolve all of their immediate vendor problems. Yet, in many ways, chucking out a bad deal merely marks the beginning of yet another challenging process: filling the technology gap left by the voided deal.

“Be prepared with a plan to address business continuity in the absence of the vendor’s services,” Rao warns. Terminating a contract may have a financial impact on the vendor, but it will even more likely strike a direct blow to the client’s daily operations. “In essence, you need to apply the same thinking as you would with any business continuity planning scenario,” he observes.

Before pulling out of a deal, it’s essential to create a detailed exit strategy — a “techs-it” — designed to minimize IT and business disruption.

“Your termination process should include potential replacements, including the time, cost and complexity of moving to a new vendor and, most importantly, what happens to your data or other assets that are in the vendor’s possession,” Keller states. “You should also have clearly defined processes to validate that the vendor has complied with these requirements.”