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« Back Post Date: Friday, March 15, 2013, 3:00 PM
Q&A From Webinar: Pitfalls to Avoid in Software Contracts
If you were unable to attend either one of last week's two "Pitfalls to Avoid in Software Contracts" webinars, be sure to read on to see the questions that were asked during the webinars.

Maneuvering your way through a software contract negotiation should not require you to have a degree in rocket science. Nor should you be forced to butt heads with the very same vendors with whom you're seeking to form long term, mutually beneficial partnerships.

Last week we hosted two webinars, (click here to view an on-demand recording for free) covering some tips to help you avoid common pitfalls that rear their ugly faces within software contracts. During the webinars, we received the below questions, which were answered by Clubessential CEO, Dr. William D. Ivers, Sr. 

What do you do if the vendor does not agree to a one year contract?

You're in a negotiation, and so you have to think about whether you want this deal badly enough. And you need to think about why they might want it to be longer than one year — and ask them that. Search for what the reasons are that they're trying to get longer than a one year term.

Oftentimes what you will find is after you understand what they mean, maybe you can come up with a clause that will give them the protection that they need — and at the same time give you the freedom that you need.

The other thing to say is that if they won't agree to anything less than, let's say a three year contract, I would view that as a reason to ask them for a further discount, or maybe you should avoid doing business with them, because it sounds like maybe they're trying to use the contract to lock you in, unless they have a better reason than that... and that is a truly bad reason for you to have a relationship with a vendor. You've been forced to because the contract says it's longer than one year.

That is just my opinion. You'll have to negotiate your own contract yourself.

Should you insist on having the contract governed by laws in your state?

If you have an attorney on your side, the first thing that she will argue is that the contract ought to be governed by laws in a specific state. Obviously this is a difficult clause to negotiate because it's one of those win-lose clauses. Whichever party wins, the other party loses.

I have two points on this: First of all, if it's a really big company that you're negotiating with, you should just capitulate, because you can't get it any other way. If it's a small company, and you've got a lot of clout over them, maybe you could get it your way.

If you're comparable in size, then I would suggest that you do a clause (you can find these on the internet) that says either party can sue but the law applied will be the state of the party getting sued. The advantage of that is that it makes it more painful for somebody to sue the other party. And believe me, the last thing you want in a contract situation is to be in a lawsuit, because then it's just a question of who loses the most.  

What is a fair way to handle limiting increases in prices?

Most contracts will have say something along the lines of: "We're not allowed to increase prices by more than X% in any given year."

This is a little bit tricky because for most clubs, they want to avoid surprises where suddenly they get a big increase in their IT bill because these prices got increased. I understand that problem.

Sometimes people will try to restrict the price increase to the rate of growth in the consumer price index. I find that particularly difficult to manage, and I don't like that clause.

From the point of view of the vendor, in our case for example, we've never had an across the board price increase in the last 12 years. We've had to increase prices in a few cases where things were under-priced and so on. So, for me, the logistics of doing a price increase are pretty difficult and I don't like to do them. But when I do them, I'd like to get an increase that's more substantial than just a little tiny increase, because the overhead of getting the price increase done is so burdensome. If I am limited to just the consumer price index, then that, at least these days, is almost not worth the trouble.

But I do understand the needs of the club, that they don't want to keep getting hit by ever-increasing prices... so one clause that I like to use is a clause that says I'm allowed to increase it at a certain percentage, but that in any given three year period you can't exceed some more modest value on average. That way, I can get a substantial price increase that is worth all the work involved, but I am restricted from doing that very often, so the long term increase is held down for the club.

Another thing you can do is to say that the price can't increase at all for the entire first term. That is a very common rule. Beyond that, I'd  just try to work it out with your vendor and come up with a number that you both agree to.

Please remember though that most software companies are trying to increase the quality of their products all of the time, so holding them to the consumer price index may not be the best way to ensure the most productive relationship for both of you. You do want all of those enhancements and it would be nice if they threw them in because they were getting a little bit of an increase here and there.

What kind of performance hurdles do you want in software contracts? (Such as up-time requirements.)

If I was General Motors and I was contracting with IBM to do my computing, I would be all over this clause... and try to figure out how to write it in there with big penalties, etc., and I'm sure there are a lot of companies that have to do these types of things.

But in the club industry, for the modest amount of work that's being done, comparatively speaking for the club, trying to organize a performance hurdle and actually measure it, report on it, and so forth, is almost as big as the job of providing whatever software is being provided in the first place. And so, I've got to say that I've never yet seen a contract that had performance hurdles in it that I liked. They always seem onerous to me, and they never seem like they're going to work. They don't really measure the right things that need to be measured, and it would be difficult to measure the right things anyway.

I think it's better to go by the reputation of the vendor, and talk to people who are using their products to figure out whether or not they're going to provide good service for you.

Trying to penalize them... it's never going to be a big enough penalty. And if it was a big enough penalty, one bad problem for them could put them out of business, which you don't want to have happen either.

So I would urge you to just ignore performance hurdles; they don’t work. Instead, have them give you a list of people who are using the products, who will give you a better idea of whether or not you're going to get good performance. Some things just can’t be easily guaranteed in a contract. I’m reminded of the ladder manufacturers who are all required to put stickers on their ladders saying you shouldn’t climb up ane grab a high tension electrical wire - do you suppose there has ever been a case in history where someone actually avoided grabbing a high tension wire because they read such stickers? Performance clauses are the same thing: they won’t affect the actions of your vendor and they won’t cover the costs of a problem if one comes up. So they aren’t worth negotiating.