Warning: 5 Prickly Contract Clauses That Can Trap You

I’m not a lawyer. Let me be clear about that right up front.

However, I have looked at my share of IT contracts over the years, and have developed a set of criteria that I look for every time one of them comes across my desk. While nothing in this post will substitute for a thorough, legal review, you can save time during the process if you look for a few key items before you get to the signature stage. If you can look at the contract and review it against these criteria, it will help you, and your organization, be in a better place legally, and potentially financially.

First, it’s important to know that every contract is different. They are written by the legal counsel for the proposing organization, and without a doubt, are written to benefit the vendor, not you. Now, don’t get me wrong. I don’t think that vendors purposely set out to put the customer at a disadvantage, but they are looking to protect their organization and make sure they reduce their liability as much as possible. And, in some cases, I am sure the purchasing organization hasn’t dealt fairly, or equitably, with vendors, and they need to protect themselves. With that understanding, let me share a couple of examples where contracts can go horribly wrong.

But first, Before I give you some examples and the key things to look for, let me make a suggestion. If you are the CIO or any other leader, and you find yourself learning about contracts that affect you after they have been signed, changing that HAS to be your first priority. Learn what the contracting process is or your organization and map it out, indicating every person involved in the process. Typically, in larger organizations, there is legal counsel review before anything gets signed.

Find out who, or what team is involved in that process, and set up a meeting with them. The goal here is to find out what they look for as absolutes in their review, and see if they have this documented anywhere. The more you can make sure you are looking for the same things, the easier it will be. Also, make sure you get to know them as a person, and understand what they think is important to keep the organization from risk. Ensure they know that you have the same goals as they do, and will do whatever you can to minimize the risk.

Likely, once a contract is reviewed by legal counsel, the final signature will take place by the CFO. They typically manage the contracting process, and rightly so. However, they typically don’t know as much about the technical aspects of a project/service, and they could likely use some good guidance in this area. Like the legal counsel, they don’t want to engage your organization in a contract that will put you at risk.

Meeting with the CFO, and finding out what they look for in a contact is also critical. While they are likely going to be reliant on the sign off of both legal counsel and the budgeting organization, they may have financial components that they look for as well. Things such as term of the contract, interest rate, payment terms, etc. will tend to get their attention. Just like with legal counsel, find out how you can insert yourself into the contracting and sign off process. Ideally, the CFO won’t sign the contract without your approval of the technical terms and criteria. If you don’t have this relationship, build it.

Now, once you’ve been able to get yourself inserted into the contracting process, what should you be looking for to make sure it’s a beneficial contract for all. And this isn’t just about making sure you and your organization are covered. Keep in mind, the vendor organization has to make a profit too, so don’t go into the review with the idea that it should be a one-sided contract. If you do, you are ultimately disadvantaging yourself in the long run. If the vendor loses, you lose as well.

Let me share a contracting cycle that has stuck with me over the years. It was from this process that I decided it was time to develop a set of criteria that I was going to stick by, no matter what.

One day, I found out about a signed contract from one of my direct reports. The budgeting organization had decided on a product, and thinking they had covered all the necessary bases, signed off on the proposal. Of course, this wasn’t a small contract, and had the potential to cost a significant amount of money over time if it was implemented. I met with the business unit leader to understand why they had signed the contract, and found that they thought that IT had been involved in the selection process. When I explained that we had not, they immediately became concerned, and allowed us to get involved.

Thankfully, in this case, the contract wasn’t even written with the proper business name on the document. The name they used wasn’t a legal name, and that allowed me to stop the process and start over. Once I had a chance to review the contract, I found that there were a number of inconsistencies that had to be addressed before we would go forward. It was a close call, but this allowed me to dig deep and see what the vendor was proposing. What I found was concerning.

First, the vendor had included the larger organizational name instead of the specific business unit that signed the contract. This effectively signed up the entire organization into the contract, and would have allowed the vendor to move forward with other business units without any further review by me or any of the other key approvers. The vendor explained that they felt this was prudent so that they could bring their product to the whole organization at a faster pace. After all, they were going to save us a ton of money, and we could only realize all those savings if it was deployed everywhere. However, we had clearly told them this was a trial, and was only to be for the initial business unit. They disregarded this guidance in hopes that they could alleviate a new contracting cycle.

Second, the contract had a 5 year term on it. In other words, we were signing up for a 5 year deal, with very limited ways to get out of the contract should things not work out. Again, their financial case to the business unit was based on a 5 year process. To see the savings they anticipated, they needed 5 years, and I’m sure the business unit leader didn’t fully understand that. Effectively, we were locked in to a 5 year relationship.

Third, the vendor included a provision that allowed them to increase the price every year. And not just by a small percentage to cover increasing costs of operations. They had included an increase that was tied to the Consumer Price Index (CPI) + 5% annually. That added a significant cost to the price of the product, and if there was a change in economic conditions, we would certainly pay that price!

Finally, this contract allowed the vendor to use our name in press releases and other marketing efforts. We were a ‘big fish’ for them, and being able to use our name (even when we weren’t fully deployed) was a definite sign of credibility that they could use to their advantage.

Thankfully, we were able to rewrite this contract to be more beneficial to us as an organization. We reduced the length of the contract, shortened and bolstered the termination clause, reduced the annual price increase to something reasonable, and forced them to get our permission before using our name in marketing efforts. All of this served to make the contract more equitable to both parties.

So, if you find yourself in a contract review process, here are 5 key things you need to make sure you understand, and address if they aren’t acceptable, in any contract.

1. Organizational name – If you are a larger organization, it’s likely the contract may be with one of the business units. If so, make sure the contract is actually for them, and not for the larger organization. Getting this wrong could end up making you obligated on a scale larger than you anticipated. I have seen vendors try to slip this by in hopes that if you just “sign for the whole organization”, you can avoid the paperwork if you want to expand later. Enter that path at your own risk!
2. Contract Term – Vendors would ideally like to set up a longer contract with an organization, than a shorter one. The longer they can have the contract go, the more they can accrue in sales, and the harder it is to break from them if things aren’t going well. If this is an untested product and an unproven relationship, always opt for shorter contracts. If you can get a one year contract to start, it allows you to really get to know the organization and product before you commit for more time. Of course, the vendor will bring lower prices based on the length of the contract, that this typically doesn’t pay off unless it’s an absolutely core service/application. You will want to minimize the ‘churn’ if it’s critical, so you might consider a longer contract, but never more than three years.
3. Termination Conditions – Every contract needs an out. This is to protect both you and the vendor. It can turn out that a product just isn’t for you, or that the vendor isn’t going to be able to meet your requirements. In that case, walking away amicably is the best for both sides. However, this is where I tend to see things become more one-sided. A vendor will want to have as long as possible of a timeframe for you to cancel should things not go as planned. Of course, sometimes this makes sense since they will have to invest costs up front to implement their service or product. However, my experience has shown me that that longer the ‘out’ is, the more likely they aren’t confident in their ability to deliver, or have had issues in the past. I have actually seen contracts that had a six month termination clause, which only indicated to me as a CIO that they were more concerned with locking me in than delivering great service. I typically never sign a contract that has more than a 90 day termination, and prefer 30 days if at all possible.
4. Liability – In the IT world, especially in healthcare IT, liability is everything. When you are dealing with confidential patient information (called Personal Health Information or PHI), losing control of this data is a tragedy, not only for the patient, but for the organization that lost it. But, in many cases, the contracts are written in such a way that the vendor isn’t liable for a breach or loss of the data. With the expansion of HIPAA Privacy Rules legislation in 2013, if you are sharing sensitive patient information with a vendor, they can be held just as liable as you. Unless, of course, you sign that liability away. Never approve a contract where the liability is completely, or mostly, one-sided, and the vendor can excuse their liability in the case of a loss. This is one area, if you aren’t clear on what wording means, you need to lean on your legal counsel to help make sure you understand the liability. (Lean on those relationships you’ve already developed as suggested above!)
5. Deliverables – This is where you will really earn your keep in the contracting process. While not typically intentional, vendors have the tendency to move fast, and end up forgetting some key deliverables, interfaces, hardware or other important items. Spend the majority of your time here, and make sure you understand what they are, and are not, delivering with this contract. If in doubt, talk with the vendor and hammer out the details. Nothing hurts worse than having to go back and ask for more money when key items weren’t included in the first contract. It’s easy to let this slide, especially when the business unit is breathing down your back to approve the contract, but move fast at your own peril.

I know there are likely some of you from the vendor side reading this thinking that it’s all one-sided, and gives the impression that vendors aren’t honest, only wanting to make a sale. Please don’t read that in this post. However, any time two people, or organizations, come together, there are opportunities to have misunderstandings, missed expectations, and disagreements. This is only made worse when money is changing hands. As a CIO, or any leader who has to be involved in the contracting process, it’s critical you take your time and do what you can to make sure your organization is protected.

What other key items have you found to be important to review when entering the contracting process?