Strategy Clinic: How to stop the acquisition sting in the tail
- Posted:
- 16:21 18 Jun 2004
- Topics:
- Business Continuity | Compliance
My company has acquired a rival
business. We do not intend to change any IT systems as yet, but one
software supplier has written with a demand for payment for
changing the terms of the licence. We are taking legal advice, but
how could we have foreseen this and how do we avoid it in the
future?
Review all suppliers' terms to spot future
surprises
Is your company the victim of sharp practice, or have you genuinely
caused the supplier to incur new costs that it feels justified in
recovering from you?
To avoid any nasty surprises like this in future, explore with each
supplier whether any further mergers or acquisitions could affect
the terms of your agreement with them, and why. You should then be
able to recognise and deal with any potential sharp practice before
it occurs, and make provision for any costs from revising supplier
agreements in the evaluation of a specific merger or
acquisition.
If any supplier appears to be exploiting the situation simply to
increase its income from you, raise this with your executive team
and recommend tactics. The team will know that changing supplier is
not always feasible, and that some suppliers might seek to exploit
your dependency on them. Tackling this ahead of time will give you
the best chance of success.
Chris Potts, Director, Dominic
Barrow
Carry out technology due diligence before buying
firm
You have encountered a very common problem. Many organisations seek
to understand the financial status of a takeover target, but
overlook the need for technology due diligence that focuses on
areas such as fitness for purpose of business-critical systems;
adequacy of IT control and operational environments; IT-related
risks and exposures; and post-transaction IT investment
requirements.
Even when such work is planned, detailed examination of IT-related
contracts and software licences may not occur because of limited
access to management or documentation or poor record-keeping. To
reduce the risk of licensing issues arising in future
transactions:
Agree in advance the access to management and documentation needed
to perform due diligence
Understand the robustness of the process (if any) supplier
management has been through to ascertain risks associated with use
of existing licences
Ensure the scope of work for each workstream is clear
Factor into the deal price some contingency for additional licences
or one-off charges
Seek protection from the supplier via warranties in the sale and
purchase agreement that no additional fees will be payable with
respect to use of existing licences.
The time and effort that may be required to perform technology due
diligence prior to an acquisition may seem an unnecessary overhead.
However this may pale into insignificance when compared with the
deal price and the consequences of failing to do so. In extreme
cases, software that is absolutely critical to business operations
may be rendered unusable, resulting in business disruption, damage
to reputation and significant remedial costs.
Paul Durkin, Partner, Ernst &
Young
Licence fee includes supplier's perceived
risk
This is something that every company involved in a business
transfer or outsourcing deal needs to take into account. Bulk
transfer of licences for commodity software can be handled by an
e-mail to the supplier. For bespoke or specialist systems, it is
often the case that two implementations are rarely the same.
The licence agreement will also have been specifically tailored to
the client. This will take into account the degree of risk the
supplier is exposed to on the customisation of code, the
environment the system will work in and the amount, and type, of
use it will encounter.
When the customer changes, the supplier's perceived risk will
change and it will look to increase the fees accordingly. Licence
agreements normally allow suppliers to do this.
The way to avoid, or minimise, this is to take stock of licences as
part of the due-diligence process before the value of the business
is agreed. Engage the suppliers in negotiations as early as
possible, try to assure them that the use of the system will not
change without their approval and that you will soon become a
valued customer of theirs. As with everything else, your
negotiating position will be affected by the amount of clout your
company has and the value of the deal to the supplier.
In your situation, you need to meet your new supplier and discuss
your future relationship as potential partners.
Paul Bradbury, NCC Group
Call the supplier's bluff on using systems long
term
Your response to this software supplier should be to call its
bluff. It sounds as if its costs are totally unaffected by the
company merger, so there is no reason for it to make additional
charges, even if the terms of the contract allow the supplier to do
so.
Remember that you have the upper hand. Clearly the supplier is
aware that you do not intend to change the systems on merger.
However, you should be making it clear that in the longer term such
a change is inevitable. Its behaviour now will influence your
decisions about what software to use when that happens.
How to avoid this situation in future? Don't let the supplier know
that you have decided to use its software when the merger takes
place, say you are considering options and that the commercial
terms are one of the deciding factors.
Roger Marshall, BCS Elite
Expose the fine print of contractual
liabilities
You should have foreseen this when due diligence was being carried
as part of the acquisition process. Computer Weekly has long
campaigned against unfair conditions of contract. It is the fine
print of contractual liabilities which ought to be exposed by this
process.
Change of name or location can give the supplier the chance to
demand payment, if that is what is written into the contract it had
with the acquired firm. To avoid the problem in the future be very
clear about the terms and conditions of the contractual liabilities
you are acquiring.
Before trying to resolve this issue, determine the effort and cost
you may have to put in as a percentage of your company's total
operating costs. This may be giving in, but compare it to what you
can do with that time, effort and cost elsewhere.
To resolve the present issue:
Meet the supplier at as high a level as you can. Point out the
longer-term implications of its relationship with you and the
knock-on effect as you talk to others, report to user groups
etc
Consider litigation: the outcome may be uncertain, especially if
the problem has not been well tested in the courts
Go to arbitration: both parties have to agree to this route and the
outcome is binding
Try dispute resolution or mediation: where both parties agree to
sit down with an expert mediator to try to reach an agreement.
Either party can walk away at any time and nothing is binding
unless both parties agree.
Most suppliers would wish to continue to do business with you and
dislike adverse publicity. But if the supplier threatens legal
action, any resulting publicity may be seen by your company as
adverse. Finally, read the fine print in any contract.
Robin Laidlaw, President, CW500
Club
E-mail your Strategy Clinic questions, or your own solution to this
question, to computer.weekly@rbi.co.uk
The experts
Computer Weekly has put together a panel of experts. You can draw
on their specialist knowledge to solve a problem. E-mail your
questions (or your own solution to this question) to
computer.weekly@rbi.co.uk
NCC Group: www.nccglobal.com
Ernst & Young: www.ey.com
Cranfield School of Management: www.cranfield.ac.uk/som
Computer Weekly 500 Club: www.cw500.co.uk
Henley Management College: www.henleymc.ac.uk
British Computer Society: www.bcs.org.uk/elite
Impact: www.impact-sharing.com
The Corporate ITForum: www.tif.co.uk
Dominic Barrow: www.dominicbarrow.com
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