Contract management for CIOs: Exiting (or untangling) the incumbent

Don’t assume that any early termination charges are set in stone.

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Say your IT team wants to put in a new outsourced solution or unified communications by Christmas. But one or two contracts for the legacy services to be replaced don’t expire until late 2016. What can be done? Do you have to defer the project? And does a major controversy in the courts on early termination charges change things?

This is a common scenario, where many businesses choose to wait for the legacy contracts to end, losing the benefits of an early implementation. But they can often move sooner.

Michael Foley, principal of sourcing consultancy Voco, says his company sees this all too often in large enterprises.

“By and large supplier relationship management is not well executed and focuses more on operational service level management at a pretty granular level rather than viewing ICT sourcing ‘in the round’,” says Foley. “It’s the classic ‘wood for the trees’ scenario playing out in strategic sourcing.”

Don’t assume you can’t negotiate your way out

IT lawyer Michael Wigley

Here are some triggers as to what to consider.

1 What contract documents apply? Yes, it’s an obvious point, but not always a straightforward one. Careful review of the contract is essential. Often in complex ICT situations, the contract, and documents relevant to its interpretation such as emails, will extend beyond the primary contract document such as an MSA. Sometimes the detail will work for you, sometimes it won’t. For example, some services may have slipped between the cracks of the SOWs and other order documents, leaving you with no fixed pricing commitments. Or a termination date may mean nothing if the contract has volume not fixed pricing, with no commitment to buy only from that supplier.

2 Don’t assume you can’t negotiate your way out. It’s too easy to assume that you are in a weak position and that the incumbent would never agree to an early exit. But there’s often an angle to negotiate a result that is not as costly as you may have thought. Don’t assume that the vendor will want to play the short game and treat you like a cash cow.

3 Can early exit be a pre-requisite for participating in the RFP? In some cases you may be able to get existing vendors to grant early termination rights as part of the entry ticket for participating in the RFP. Yes, this is not without its challenges, and there may be some fine print to work through. But at the early stage of the game, with the prospect of future business, the vendor’s appetite to consider these types of options could be at an all-time high.

4 Don’t forget the incoming provider. Maybe the incoming provider will agree to pay some or all of what is owed to the legacy supplier for ending the contract early? It does happen.

5 Don’t assume that any early termination charges (ETCs) are set in stone. ETCs are one of the main ways vendors lock in their customers. This can be for good reason, particularly if fixed costs have been amortised across the term. However, it’s worth looking at the detail in the contract overall to see if the ETCs work in the way the ETC clause indicates.

Suppliers have every reason to set ETCs at high prices, to lock in customers. That’s where the current controversy in the courts comes in. There is an emerging law in Australia that ETCs will be knocked back if the money involved is too high. In the UK, broadly the same issues were heard by their highest court in late July with judgment due out. The legal issues are controversial so we don’t know where the UK will land yet. In turn there will be questions as to how the UK and Australian judgments will apply in other countries such as New Zealand (http://tinyurl.com/p25km43).

Regardless of the outcome of these cases, a close review of the words of the contract, including the ETC clause, may show a great way through. We have one client that saved ETCs totalling over $1.3 million on early termination, as a result of a careful review of the ETC regime and good negotiation (http://tinyurl.com/mtgsaf8).

As Voco’s Foley notes: “In any case, with the current rapid evolution of ICT services to as-a-service constructs, the legitimacy of traditional stances on ETCs driven by sunk cost factors and contracted term and volume commitments is on the wane and enterprises should factor this into the dialogue with suppliers.”

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