Here's a classic example of why you should always make sure service levels are specified before you sign a contract with a vendor. During recent negotiations for a large data center outsourcing agreement, the vendor skillfully avoided tougher service-level guarantees by convincing the customer that service-level agreements (SLA) should be negotiated after a 90-day transition period. The vendor convincingly argued that service levels could be better determined once it understood the customer's operations.
The vendor suggested that the two sides work together to identify service levels during the transition. The customer fell for this, believing that information gathered during the transition period would produce more favorable SLAs. The customer signed a contract with no specific SLAs, no "out" clause if the two parties failed to agree on service levels and no recourse if the vendor failed to perform.
At the end of the transition period, the vendor was willing to sign only a few weak SLAs with no remedies. For example, the supplier agreed to make applications "generally available" and that help desk calls would be answered "as soon as practical." As you might suspect, the vendor escaped accountability with these "commitments" because no one could agree on what those terms really meant. As a result, the customer ended up with a multiyear contract that heavily favored the vendor.
To avoid this kind of mess, start with specific SLAs and remedies in your request for proposals. Let a qualified vendor perform due diligence under a nondisclosure clause as part of its preparation before making its proposal.
A vendor's bid should be based on your required SLAs, which should at least match the service IT is currently providing. In most cases, the SLA should exceed the current levels because you're considering services provided by "experts." The key is to specify desired service levels up front, early in the vendor evaluation process.
The critical error here was signing a long-term contract without agreement on a fundamental issue - service quality. With a signed contract and no SLAs, a vendor won't be motivated to guarantee exemplary service, only a minimal quality commitment that would leave the customer without meaningful recourse for unsatisfactory service.
Mail Bag
In response to my Sept. 4 column about responsibility for negotiations, I received an insightful e-mail from Rick Zuza, an assistant vice president for procurement at Allstate Insurance Co. It's right on:
"The solution is simple, although the execution is much more difficult. Have a well-trained procurement professional do the deal! This ensures consistency across all IT deals. This also saves the motivation problem, for this is their primary metric.
Finally, IT people need to work with the vendors every day on technical issues. This is less than optimal when conflict occurs. Once again, the procurement professional can be the 'bad guy,' getting tough during contract administration. Also, this frees up the IT professional to do, well, IT.
Now, the tough part, the execution. Are CIOs willing to relinquish this control to the procurement department? Is the CEO willing to invest in hiring and training top talent for the procurement department in order to accomplish this objective? Even after the control is transferred to the procurement department, will the CIO and his lieutenants resist undercutting the power of the procurement [department] by doing deals on the side?
"These are tough questions. But if you look around at the companies cutting the best deals and having their vendors live up to them, they have the one-two punch of the IT and procurement departments working together - IT defining the technology and the SLAs, procurement going out and selecting the vendors and enforcing the SLAs."
Thanks, Rick. My only addition is that a cross-functional team, covering procurement, IT, legal, finance, operations, the end user and senior management, is the way to go on large deals.
Joe Auer is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com.