Strategy Clinic: How to stop the acquisition sting in the tail

My company has acquired a rival business. We do not intend to change any IT systems as yet, but one software supplier has written...

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 [email protected]

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 [email protected]

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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