The Art of the Deal: Negotiating Your Next Tech Contract

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Before you sign on the dotted line for those shiny new servers or a zippy upgrade to your enterprise software, there are those sticky, tricky negotiations with the vendor. Much like when purchasing a new car, you may wonder, "How do I know if I am I getting a good deal?"

ITTechNewsDaily spoke to industry experts who offered these tips on contract negotiations:

Don't succumb to pricing pressure. Like car dealers, technology sales people have monthly, quarterly and annual goals that have to be met. "If they tell you the deal is only good through the end of the month, don't fall for it," said Chris Cain, a partner in the Chicago and Madison, Wis., offices of Foley & Lardner, a Milwaukee-based law firm.

He suggested IT managers should check with their industry peers to find out what they are paying for similar systems and investigate any available databases or other sources that will provide some pricing guidelines.

"Setting the license fee is often the highest hurdle for the parties, especially when there are no objective benchmarks," said Joy Butler, a Washington, D.C.-based attorney who regularly negotiates IT contracts. "The final license fee comes down to bargaining power, negotiation skill and an accurate sense of what the market will bear."

Be cautious about customization. While a software package designed just for your company is ideal, make sure the fees, terms and conditions are fully outlined in the deal you sign. "You have to really spell that out in the contract, as the vendor will most likely just put their standard contract in front of you to sign," Cain said. "Also, it should be included in the contract that consulting and other fees associated with custom development should be within 105 percent of what is estimated or the vendor will have to eat any costs above that threshold. You don't want to get half way through the project and find out that they have already blown the budget for the entire project."

Avoid maintenance mayhem. He said it is also important to clearly define maintenance fees and levels of service. "Technology companies make a whole lot of money in this area," he said. Maintenance and support should be no more than 12 to 18 percent of the licensing fee, he said, and IT managers should lock in fees for the first three years. After that, any increases should be tied to the consumer price index. "It should all in black and white in the contract," he said.

There should be very specific language in terms of service-level expectations and penalties for not meeting expectations, he said.

Know what you can do without. While everyone comes to the table with their wish list, it is just as crucial to know which expensive bells and whistles you can eliminate without having a serious impact on your business. "It is so important to work with other departments to truly understand their needs," said Shane Caniglia, director of technology for Rich Dad Co., a Scottsdale, Ariz., financial education company based on Robert Kiyosaki's best-selling personal finance book, "Rich Dad Poor Dad." "While it is always the goal to get 100 percent of what you want, you need to know, if you're negotiating software that will help run a department, it helps to know what 5 percent they can do without before you go to the table."

Outline an exit strategy. While no one likes to think about divorce before the wedding, there needs to be clearly defined terms when a relationship goes sour. "You have to think about what happens if this software does not work out," says Robert J. Scott, managing partner for Scott & Scott LLC, a law firm based in Southlake, Texas. "Who owns what, and how will you keep your business up and running should the technology company go out of business or not meet your expectations. Technology is so vital to every business."