ICT systems form the beating heart of many organisations today. From hospitals to transport companies, and from consultancy firms to financial institutions: a single bug, vulnerability or outage in a critical ICT system can disrupt business processes or cause significant financial damage. Sound contractual arrangements are therefore essential. In this blog series we reflect on common mistakes made when negotiating and concluding an ICT contract, with the aim of protecting both customers and suppliers from excessive risks.
Negotiation is not a competition
In previous blogs in this series, we discussed pitfalls during the vendor selection and contract formation process. Before an agreement with the selected supplier can be signed, it will generally have to be negotiated. Negotiators sometimes tend to cling firmly to established ‘positions’. The example below illustrates what we mean by this:
The supplier has drawn up a draft agreement and has taken the rather extreme ‘position’ that the maximum liability under the agreement should be limited to €10,000. The customer disagrees and comes up with an extreme counter proposal: it must be possible to recover at least €2,500,000 in damages.
From these starting points, the negotiation can quickly turn into a tug of war. In many cases the parties meet somewhere in the middle. If one of the parties really stands its ground, it is also possible that one of the extreme positions will be maintained. That may give the ‘winning’ party a brief moment of satisfaction, but there are good reasons not to approach negotiations in this way. Below we discuss the main drawbacks and then consider an alternative approach.
Drawback 1: positional bargaining puts unnecessary pressure on the relationship
Positional bargaining is generally not very constructive. There is little room to really listen to the other party or engage with their arguments. After all, you have already decided that you will defend your own position at all costs. It is important to remember that the person sitting across the table is not an abstract company but a real individual. That person may feel unheard or misunderstood. This can lead to frustration or other unhelpful emotions. ICT contracts are often long-term arrangements and require close cooperation between the customer and supplier. In that context, it is worth asking whether it makes sense to place the relationship under pressure from the outset.
Drawback 2: positional bargaining rarely produces sustainable outcomes
If negotiations are treated as a competition in which only one party can win, one party will inevitably feel like it has lost when the agreement is signed. If your customer (or supplier) feels they have made a “bad deal”, it is reasonable to ask how long they will want to continue the relationship. As a supplier, you may benefit for a year from the high list prices you defended during negotiations. But will your customer renew the contract when it expires, or will they look elsewhere?
Drawback 3: positional bargaining narrows the discussion
A strong focus on positions usually leads to a very narrow discussion. The conversation revolves around the wording of specific provisions, while it should focus on the ideas behind those provisions. Why was a contract term of one year chosen? Why must the intellectual property rights remain with the supplier? By emphasizing the underlying interests, a much more valuable conversation often ensues. Parties who initially seemed to be in complete disagreement often discover that their interests are partly or even fully compatible.
Drawback 4: positional bargaining takes a long time
When both parties stubbornly try to defend their positions, this rarely contributes to efficient contract formation. Contracts are sent back and forth repeatedly, and parties are often moving toward each other in very small steps. With every iteration, the contract may sit for days in the inbox of a lawyer, project manager or CEO who needs to review the new version. As a result, weeks or even months can pass before the agreement is finally signed.
An alternative approach: principled negotiation
Instead of focusing on previously adopted positions, try to focus on the underlying interests. Ask yourself ‘why’ you have included certain provisions in the agreement, or why you think the other party did so. Also ask why that creates a problem for you. Do not accept superficial answers too quickly. “We always do it this way” is not a sufficient explanation. The aim is to uncover the underlying arguments. There should be a substantive reason for making or rejecting a particular contractual arrangement. If that reason remains unclear, it becomes difficult to find a solution that properly reflects the interests of both parties.
This may still sound somewhat theoretical, so we will use a concrete example to illustrate how principled negotiation can produce better and more creative outcomes. We will use a software license as our starting point. The customer and supplier have taken the following positions on copyright:
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Supplier’s position: Copyright pertaining to the software, including modifications, should remain with the supplier.
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Customer’s position: Copyright pertaining to the standard components of the software belongs to the supplier, but copyright pertaining to modifications must be assigned (overgedragen) to the customer.
If negotiations focus only on these positions, one of the parties will need to compromise in order to accommodate the other party. The question, however, is whether such compromise is actually necessary, or whether the parties’ interests can simply coexist:
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Supplier’s interest: we want to be able to use improvements to the standard software for all customers. This increases our product’s value and strengthens our market position.
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Customer’s interest: we don’t want to pay for development of software that the supplier then sells to other parties (perhaps even competitors). If the supplier wants to increase the value of its product, it should invest in that development by itself.
Now that we know what the interests of the customer and supplier are, many contractual solutions become possible. For example:
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The supplier contributes to the costs of developing the customisations. The product becomes more valuable, which justifies the investment, while the customer’s competitive position remains protected. Copyright can then remain with the supplier.
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A distinction is made between ‘genuine’ customisations that are only relevant for this particular customer and improvement suggestions that benefit multiple customers. The ‘genuine’ customisations are paid for by the customer and the copyrights are assigned to the customer as well. General suggestions for improvement are incorporated into the general roadmap for the further development of the software and copyrights remain with the supplier.
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Non-competition clauses are added to the contract to ensure that the customer’s competitors cannot benefit from the investments made by the customer.
This approach may seem obvious, but in practice we often see that parties do not take the time to properly consider the underlying interests and listen to each other.
Time pressure usually plays a role. It is faster to write “not agreed” in the margin of a draft agreement than to explain the underlying reasoning in detail. In practice, however, that contract will almost certainly return to your inbox several times. Additional meetings and escalations may follow before the agreement can be finally signed. Taking the time to listen to each other therefore often leads to a faster and better deal.
Other blogs in this series
Would you like to learn more about pitfalls in ICT contracts? Part 4 of this blog series will be published soon and will focus on the provision of general terms and conditions. Once the blog is online, a hyperlink will be added here. You can also subscribe to our newsletter if you would like to receive updates automatically.
