Prevention better than cure when it comes to evading a contract's squeeze

20 August 1998: Before outsourcing its IT, Asda managed to persuade its suppliers to renegotiate fairer contracts. Julia Vowler spoke to the store's head of IT John Lister to find out how stiffing is a bit like Aids – it's out there and anyone can get it but only if you don't practise safe IT procurement

20 August 1998: Before outsourcing its IT, Asda managed to persuade its suppliers to renegotiate fairer contracts. Julia Vowler spoke to the store's head of IT John Lister to find out how stiffing is a bit like Aids it's out there and anyone can get it but only if you don't practise safe IT procurement

Asda's John Lister is determined not to be stiffed. Asda's IT is now outsourced to IBM but an essential ingredient in the success of that outsourcing contract was to put its own software portfolio in order well in advance.

This is key. It is after all much easier to start afresh when licensing new products but for most users their problems come with existing third-party software.

"For us the acid test was when we outsourced," said Lister.

"We assigned over 100 software contracts and in all but two cases there was no question of the software suppliers levying an assignment charge because of the preparatory work we'd done."

Serious money was involved. One supplier initially demanded a six-figure sum for assigning its software to the outsourcer.

Asda had spent considerable time methodically working through its software portfolio. "There was quite a long process of renegotiation of contracts," said Lister. "We didn't do it specifically with outsourcing in mind but wherever we felt we had a disadvantageous contract we entered into negotiations to make it fair.

"One of the side effects was that when we outsourced, the contracts had clauses making it clear we had a right to reassign the software to the outsourcer."

But how did Asda get its software suppliers to the renegotiation table? After all if you have your users over a barrel why help them off it? "Any negotiation must result in a win-win for both sides," urged Lister.

"We were happy to pay where appropriate for increased utilisation but we didn't subscribe to the principle of increased usage charges for organic growth – that should be catered for in the contract." Letting a supplier charge more for the same product just because the machine it runs on has been enlarged to carry more applications is not on, argued Lister – and many other IT directors.

One mutually acceptable compromise he suggested might be to levy charges only if the user company grew by a certain percent by acquisition in any one year.

But what did Asda's suppliers get in return? Essentially the trade-off Asda made was in giving a firm commitment to the software, which protected the supplier's future revenue streams.

"We recommitted to using the software and agreed to an extended period of maintenance, increasing it from the standard one year ahead to, say, three years," said Lister. "If you ask a supplier to give something up, it's reasonable that they should have a commercial incentive to do so."

But he added a caveat: for a user to protect the supplier's future revenue streams entails a commitment by the user to that product, which can significantly affect IT strategy.

"You need an IT strategy that is well defined and well understood and choose the software that supports it very carefully," said Lister. "So we were only able to use this approach where our software portfolio was stable."

Elsewhere where the user demand is for fast-changing technology, protection from stiffing has to be built into the contract before procurement. It also means that software must not be selected only by techies, who may not initially understand the financial implications of their choice.

"It can lead to faddy software purchases and getting tied into many pieces of software which it's difficult to exit from," he warned.

The best solution is to educate technical managers to take account of such implications and provide clear guidelines for them to follow when talking to salespeople.

In the final analysis, said Lister, his own experience was that the bottom line for suppliers who may have you over a barrel is that they jeopardise their whole business relationship with you. Happy customers do future business. Unhappy ones don't.

Don't be a stiffing victim
• Understand your risk. A methodical examination of your software contracts should identify your exposure in terms of: just how critical a piece of software is to your business; how expensive to use (licence support and maintenance and in-house support costs); and its life expectancy – is it there for the long term?

• Always think in terms of total life-cycle costs – and that includes any replacement costs covering uninstallation, selecting a replacement product, paying for it, implementing it.

• Take on board that in a good negotiation both sides win. Your software supplier has to make a fair profit or they'll go bust. A typical trade-off is no stiffing stings in exchange for your commitment to the product to protect the supplier's future revenue streams.

• Accept that you will have to pay in management time for ensuring your contracts stay fair and healthy. Asda carries out a formal portfolio review twice yearly.

• Set up anti-stiffing ground rules for initial negotiations with suppliers. Make sure your technical managers know that a supplier who won't meet them can't be considered – ever. But keep the ground rules realistic and distinguish between what is negotiable and what is not.

• Make very sure that you, your lawyers, and the contracts you sign have a clear understanding of the difference between a new release and a new version, which can carry different charges when upgrading. Your definition may not be the same as your supplier's.

• Make use of external benchmarking outfits to ensure your software costs compare well with your peers. Asda uses Compass checks annually.

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