The Ultimate Guide to Contract Negotiations in IT!
Hi. I'm Max Clark. We help companies buy and optimize IT services. If you work with us, in addition to helping you through the selection process of what technology addresses a problem pain or objective that you have with your business, we're also gonna help you go through the contract negotiation of what terms you should and should not have. And I'm gonna tell you our secret right now because you should just know these things.
Speaker 1:What are the things that we always negotiate? Always look at in contracts. And by the way, when I say always negotiate, always is not an absolute. It's not a 100%. There's cases that we don't sometimes, like, you just know that you can't get things out of this.
Speaker 1:For instance, if you are signing a contract for a $400 a month Internet circuit at your office, you don't have a lot of negotiation capacity with that service provider. They're not gonna spend 30 hours with your lawyers negotiating that contract. There's stuff that you can get and there's stuff that they have a standard language that doesn't appear in their contracts that you can ask to have added because it's addendums. And by the way, that's the other secret. Most service providers have standard addendum language that you can just ask for if you know what you're asking for.
Speaker 1:And if you know the secret password, you could just say, hey. You know, I need blah blah blah blah. And those, like, hey. No problem. And they'll just give it to you.
Speaker 1:First thing we look for, we wanna understand and negotiate. Right? What is your notice period on that agreement? A contract will be structured. It'll have an initial term.
Speaker 1:Let's call it 36 months, 3 years. We'll have an initial term. And at the end of the initial term, it's going to have a renewal term. Right? So there's 2 things that run-in in tandem.
Speaker 1:There's 2 things. Right? There's the renewal term, renewal language, and the notice period. Right? So these become the first things that we really talk about.
Speaker 1:So is your agreement going renewing? And you're gonna see 3 variations of this language. You're gonna see language that's gonna say it renews for a subsequent term of equal length of initial term. 3 year contract renews for 3 year terms. Don't sign that.
Speaker 1:You have one that says it renews and auto renews for 1 year terms. So a 3 year contract then ends up becoming 1 year term renewals. So your 3rd option, a lot of people want into the initial term. It's gonna go month to month. Also with this is what is your notice period?
Speaker 1:So in order to terminate the agreement and not go into the auto renewal, you have to tell the provider in a certain mechanism again, this also is important. Is it an email? Is it a ticket? Is it a certified letter? Is it a FedEx?
Speaker 1:What is the mechanism before this timeline? Right? Default language is gonna say 90 days. It's important. If you've got a 36 month contract that then renews for annual terms and you wanna get out of it, you have to make sure that they receive your notice 91 plus days out.
Speaker 1:Common technique for this, and this little crazy or it sounds a little crazy. It's actually kind of genius. Sign the contract, establish service, and then the next week, send them the the termination. Right? Like, you don't have an auto renewal threat now.
Speaker 1:Right? Because you've already terminated the agreement of the initial to end of the initial term. Right? It's also great. There's other stuff with that.
Speaker 1:I'll talk this later. Now depending on what that provider is providing is is selling you and how they're buying it, are they reselling or aggregating another service that's gonna influence also the the, notice period that they have. Because maybe they can't give you 30 days because they have a 30 day notice with their underlying provider, and so there's no way to get to that mechanism. So part of this is understanding what you're dealing with on the other side to understand how far you can push. So maybe they've got a 30 day notice.
Speaker 1:So that way you could push your notice down to 45 days, you know, from the 90 days. That way you've got, you know, they've got 15 days to react and provide, you know, terminate whatever underlying infrastructure they're providing to you. Okay. By the way, byproduct going month to month with a lot of providers, the language will include the ability for them to rerate you to current term or to current month to month rates. So just be aware of that.
Speaker 1:It might be worth it for you to not be in a any sort of term and pay a higher rate or maybe the renewal rate the month to month rate is so much higher that it makes sense for you to return. So this is something that we actually go through and we'll provide some guidance on as part of our our renew our renewal processes. Okay. So renewals notice ETFs. By the way, you'll see ETF, ETL, early termination fee, early termination liability.
Speaker 1:Every single agreement will say this is not a penalty. It's a blah blah blah. You know, there's, like, all sort of legal mumbo jumbo. It goes into this actual section. What you wanna understand here is what the language is from that service provider.
Speaker 1:If you terminate early, what happens? Default language from a lot of providers are gonna say that you owe them a 100%. You terminate them on 2. It's a 36 month contract. You owe them 34 months worth of service out the door.
Speaker 1:Now as a side note, I will tell you I've litigated an agreement like this beforehand, and the judge in that case actually came back and said that having a 100% ETF is is an invalid, you know, provision and immediately, like, whack that down from a 100% to a lower percentage threshold. Just understand if you're getting all the way to, like, that point with something, a 100% actually isn't a 100%. It's gonna be something under a 100%. So at one end, you have a 100%. Like, the high level, it's gonna say a 100%.
Speaker 1:One of the nice things about dealing with phone companies, an ILEC, incumbent local exchange carrier, regional bill operating company, the phone company is the phone companies and their regulatory oversight will have a default of 50%. So you sign a contract with the phone company, redefined print on that agreement. That fine print says that the ETF is going to be 50% of the remaining term. It's actually a phenomenal ETF in the grand scheme of things. 50 percent exit, you know, early is a great ETF.
Speaker 1:The third version of this that you're gonna see is somewhere in between. It could say a 100% of year 1, 80% of year 2, 50% of year 3 plus, you know, and some sort of tearing up and down. You're gonna want to first understand what situation you're in, then you're gonna wanna understand what situation can you be in. You know? Again, if that service provider is reselling somebody else, what are they reselling to you?
Speaker 1:If that service provider is reselling something to you and they have a 50% ETF on their contract with their underlying infrastructure provider, they're not gonna give you less than 50%. There, you can get away. You don't need to negotiate a 100%. By the way, there's margin on that. So, you know, you can infer what you want.
Speaker 1:And I think we see this a lot, especially with more sophisticated service providers is you can go and you could push back and say, hey. You know, we're not gonna accept a 100% ETF on this agreement. And that service provider might come back to you and say, hey. That's no problem. We can fully understand.
Speaker 1:Here's options for a shorter term. You know, we price this at 36 months. Here's pricing for 24 12 months. If you wanna negotiate this language, we don't negotiate this language. Just select a different term.
Speaker 1:You don't wanna say 36 months, pay a higher fee for 12. Completely on you. That's also on the table. So, like, you should understand, like, is that on the table? Is that not on the table?
Speaker 1:Like, what are you actually dealing with? Okay. Something that you're gonna wanna know and document and keep track of is something we keep track of is what is your actual service start date? It's not when you sign the contract. It is when the service actually starts, when the service goes into place.
Speaker 1:So your service order might say your service start date is when the service actually goes active. It could say when it goes active or it's this other date. It could active or it's this other date. It could be fixed to a specific date. It could say, we're gonna do installation for you, and then you have to do acceptance.
Speaker 1:And if you haven't accepted by this date, it goes active on this date unless you accept it early, you know, beforehand. Right? There's gonna be some trigger that actually defines what your service start date is. And by the way, that trigger for your service start date is really important because that's the actual date that then is your end of service date, which then also details when your notice date is. I've only seen this once, but pay attention to this calendar days versus business days.
Speaker 1:No. Like, 90 business day is a very different from a 90 calendar day, you know, situation. So pay attention to that one as well. SLAs. What's an example?
Speaker 1:If, you got a data center. You know, doing a data center deal. You're gonna see SLA is not data center deal. It's gonna define, like, humidity thresholds, temperature thresholds, air circulation threshold. And those are all good things to have.
Speaker 1:Like, it's good to have a threshold that says, you know, the data center is going to give you conditioned cool air, and the temperature in the cool aisle is not going to exceed this number right so that way you can be planning against it same thing with a network a network provider is going to give you an SLA that's gonna say by the way the SLA is gonna be very limited it's gonna say that some threshold within their network is gonna have a certain jitter or certain latency target and that could be the c p installed at your location to their pop or it could be pop to pop there's gonna be different things that you know and depending what what service you're buying is gonna have different targets of these things just to be clear that threshold that you're getting by default in these SLAs is giving that service provider a decent amount of padding. Like, your service should be much better than that. And maybe you wanna negotiate that SLA down. Maybe you don't. You know, it's gonna be very situationally dependent on what you're actually doing and what you're trying to achieve.
Speaker 1:The master service agreement will incorporate by reference the service level agreement. And so you end up with the stacking, right, where it's like you sign a service order. That service order will have a service addendum with service specific terms, that service addendum, you know, and then and the service order and the service addendum, you know, then we'll stack on top of the master services agreement. Master services agreement will then refer to a service level agreement, maybe an acceptable use policy, maybe a facility access policy might be other things built into it as well. But the MSA by default is gonna have language.
Speaker 1:The language is very specific. It's gonna say your sole remedy for interruption, service related issues is the SLA. And then you're gonna read through the SLA, and the SLA is gonna find all this stuff. And some SLAs are huge. I mean, I've seen SLAs are, you know, pages and pages and pages and pages and documents, like, all all sorts of stuff.
Speaker 1:And then the SLA is gonna define things that are gonna say, you know, if we exceed this threshold for this amount of time, you get a credit of this much money. And, you know, if we violate our blank, you get a credit of this much money. And if we have an outage for blank, you get, you know, credit. You know, based on this duration, you get a credit for this much money. And those are all great.
Speaker 1:You know? By the way, the SLA is also gonna say that in order to get the credit, you have to notify them. You have to open a ticket during the event that has to be validated by them, and then you have to request the SLA. And if you don't open the ticket and then request the a credit for the SLA, you don't get credit for the SLA it's proactive thing that you have to do as a customer now this is probably the area that we spend the most amount of time on for our customers not negotiating the SLA and the SLA targets not what the credit amounts are not changing the credit definition that says your maximum credit for a given month can be one day's worth of service is typically what you'll see it's adding the right to terminate the contract without penalty for violation of the SLA under either a chronic outage event or a long duration event if you have a service provider that has an outage for over a certain duration of time, depends on what it actually is, I believe that you should have the right to cancel that contract.
Speaker 1:If you have a network outage for 5 days, it's pretty reasonable for you to be able to say, hey, we're gonna cancel this contract, and we're not gonna pay the ETF to do it. If you don't have that language in the SLA, you do not have that right. Almost more knowingly annoying than a really long duration outage is a chronic outage. You have a service provider that every 3rd day of the week has an outage for 45 minutes. That maybe wouldn't trigger your initial threshold of a credit with them because it was only 45 minutes.
Speaker 1:But now they've had 45 minutes, 45 minutes, 45 minutes. Maybe it's even less than that. Maybe it's 15 minutes, 15 minutes, 15 minutes, but it's consistent. And by the way, massively disruptive. Take any part of your IT infrastructure and just say it's gonna be unavailable for you randomly for 15 minutes every 10th day for 2 months.
Speaker 1:Like, what does that do for your operations? Like, your cell phone just go down, your email goes down, your net goes down, your application goes down, your CRM goes down, your I mean, pick pick a thing and just turn it off. Getting language added to the SLA specifically to give you the right to terminate the agreement without penalty in the event of a chronic outage or a long duration outage is the single best protection that you can get added to this agreement when you're engaging with a service provider. It is the only thing that's gonna really hold the service provider to delivering service to you. Because a service credit is a very weak penalty when it really comes down to it.
Speaker 1:Even if your service credit accounts for and gives you a month worth of free service, it's still a relatively weak penalty for them. What else do we put into these things? Installation guarantees. Sometimes you see it. Sometimes you don't.
Speaker 1:Usually, you won't because the service doesn't start billing until it's installed. So there's no guarantee from a service provider to meet any sort of installation window. By the way, if you're dealing with a salesperson from any service provider and they tell you, oh, yeah. You know, it's gonna get instead of you, like, how long it could take to install them. We're like, oh, yeah.
Speaker 1:Yeah. We're gonna do fiber optic construction and trenching, and we're gonna have this thing installed for you. And, like, no promise me, like, 2 and a half, 3 weeks. You know? They're just lying to you.
Speaker 1:And they're lying to you because once they get that contract signed, they know they don't have to deal with you anymore because it goes to a different department within that company. They get their quota. They move on to the next sucker. The only installation guarantee that's worth anything is, again, the right to cancel. By the way, a lot of agreements will give you a default right to cancel if, certain conditions are met within that contract or when I say not met, service provider decides it's gonna be excessively expensive for them to install.
Speaker 1:They can come back and say, you know, we thought we could do this for this rate, but, you know, we have to install a new telephone pole, and it's gonna cost $10,000 and we have to increase your charge. You can just say, hey. No problem. You know that's defined in most cases but having an installation guarantee and a right to cancel if that guarantee is not met is usually valuable and if you've got a salesperson promise you an installation timeline you want a financial guarantee not a credit ask for a financial guarantee you want a penalty added to the agreement, not a credit. You want cash and a check mailed to you.
Speaker 1:You will not see that. And it's a really quick way of sussing out people that actually have guarantees or don't have guarantees. Oh, last thought. Last thing here really quickly. Check your service orders and change orders.
Speaker 1:When you sign new service orders and change orders, understand if you're re terming the service. I have seen and there are people that have great brands, people. There are companies with great brands that seem like wonderful companies and have really crazy language written into change orders and service orders where you'll go and say, hey. I need to change the service. I'm not not like install new service, but make a change to an existing service.
Speaker 1:If you don't read the fine print, when you sign that order and you request and maybe it's just a ticket. When you submit that ticket, you request that change. You are re terming your service, or you'll see variations of this that say, when you, sign a new service order for new service, the existing services coterm with the new service being ordered. So you might think that you've got old services that are out of term or coming out of term, and you and you, like, executed a change order or service order for something else. And then they come back and they're like, oh, by the way, your all of your services returned, and you're like, excuse me?
Speaker 1:Look for that as well. These are things that we do in process. We have a checklist. We go through it. It doesn't take a lot of time.
Speaker 1:You know, you can have your lawyers go through and figure out where the commas and semicolons should be and and work on reps and warrants and, indemnification and everything else that you're gonna wanna, you know, have in or not have in there. But from, like, what you actually are gonna care about in that contract, if something goes wrong, these are the things that you need to cover, and these are the things that we always look for with our customers as we go through our contract review process. If I missed anything, you got any questions or stuff that you've seen, comment below. Let me know. I'd love to read it.
Speaker 1:I'm Max Clark. Hope this helps.
