Improving Contract Negotiations for Technology Acquisitions

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June 13, 2008
Legal Corner
Lori Pruitt, Esq. - loripruitt@bellsouth.net

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© 2008 Hospitality Upgrade. No reproduction without written permission.

Negotiating agreements for technology acquisitions is a commonplace occurrence for most businesses.   Underlying most agreements is the need to protect the owner’s or licensor’s intellectual property rights, which means that virtually all technology procurements must include some form of license agreement.

Unfortunately, the general perception of the negotiation process is that it is a time-consuming, risk-averse, and frequently, confrontational process that is not the best use of an organization’s limited resources.  The end result is that businesses (both buyers and sellers) see contracting as an ineffective process that does not contribute to a positive business relationship.

For the hospitality industry in particular, the problem is acknowledged by both buyers and sellers.  The International Association for Contract and Commercial Management (IACCM), a non-profit organization recognized as an international authority on the role of contracting and commitment management in the global networked economy, surveyed the hotel industry in the fall of 2007.  The survey found that 92 percent of the members responding indicated that the hotel industry was “more difficult to do business with” than other industries.  It also found that 88 percent identified pricing and contracting practices as “a major source of complexity and dissatisfaction.”  Specific factors identified as problematic by more than half were the lack of meaningful commitments in the agreement, a one-sided approach to risk, and the amount of time required to complete agreements.

How does your organization begin to move the contracting process toward a process that parallels the rich opportunities that technology solutions can offer to set your organization ahead of your competition?  Understanding and preparing for the most commonly negotiated provisions, establishing more proactive contracting processes for your organization, and implementing contract management solutions that facilitate the customer-supplier relationship throughout its entire life cycle, including the licensing negotiations, are positive steps that all organizations can take to improve contract negotiations.

Recognizing the Most Negotiated Terms
To begin the process of improving your organization’s contracting experience, recognize that certain issues arise in virtually every negotiation.  By understanding and expecting these issues and some common negotiation positions that both buyers and sellers use, your organization can prepare for negotiations more effectively.

IACCM conducts an annual survey of over 500 international companies and organizations to compile a list of the Top 10 Most Negotiated Terms.  The 2007 survey has just been released.  Not surprisingly, the list reads very much as it has for the past several years.  The number one item on the list for six years in a row is limitation of liability.  Rounding out the top five items are:
2. Indemnification
3. Price/charges/price changes
4. Intellectual property
5. Termination (for cause or for convenience)
(For more information, visit the IACCM Web site at www.iaccm.com.)   

Interestingly, globally three of the top five (and four of the top five in North America) are primarily legal concepts, rather than business issues.  It is not necessarily a happy commentary that procurement generally, and technology procurement more specifically, is being driven (or slowed, which may be a more accurate description) by a contracting process in which the most negotiated terms are not focused on business success, but instead on who gets or owes what when things fall apart.  Because of the legal nature of the top negotiated terms, you should consider including an attorney in the process of improving your organization’s contracting processes. 

Anticipating common recurring concerns and planning for them rather than reacting to each new negotiation as it occurs, begins to improve the contracting process.

Understanding Common Negotiation Positions
Moving from reactive to proactive contract discussions includes understanding frequently heard negotiation tactics and moving these tactics toward conversations that are more relevant to the relationship at hand.  Negotiators often employ common tactics to ensure that their organization takes on as little risk as possible, regardless of the particular technology solution being discussed.

One common position is, “We are the 500-pound gorilla.”  A company taking this position expects to shift all risk to the other party, seldom varies from its standard positions, and repeatedly explains why it will not change its position, rather than engaging in a negotiation dialogue that more fairly balances business and legal risk between the two parties.  Based on my own 17-plus years of negotiating technology agreements, I have found that in any particular situation any party may give up a standard position. However, getting to that point of movement may be such a lengthy process that one side will frequently accept the standard position in an effort to close a deal.  In any negotiation, both parties can and do bring something of value to the relationship.  An organization’s goal should be to understand what each party offers and seek contract terms that fairly reflect the relationship.

A second common tactic is tit-for-tat negotiation.  For each item that one party agrees to change, that party expects a concession in return.  The concession may be to make a provision mutual, or it could be a change in a totally unrelated area.  The goal is to make sure both sides have to give up an equal number of preferred positions.  Frequently, this approach does little more than slow the negotiation process by focusing on issues that are not critical to concluding a deal.  Ultimately, organizations begin to create agreements that are on one extreme of a continuum of options or acceptable risk levels, in order to allow room to negotiate toward an acceptable compromise. This is, in reality, no less of a position than would have been acceptable in the first place.  Fully understanding all agreement terms allows an organization to determine if mutuality or other changes make sense in a negotiation or are simply ways to concede without making any true concessions.

Another approach that is often misused is the use of the phrase, “industry standard.”  An organization will refuse to negotiate any position that it feels no other company will negotiate.  Thus, with the iron-clad statement that a provision is “industry-standard,” any meaningful dialogue is closed.  Because the technology industry  is still new enough,  industry standards continue to evolve.  Clearly, suppliers prefer to argue that a no-risk position for them is preferred, with customers arguing that suppliers need to take an all-risk position.  While there may be certain contract terms (for example, the entire agreement clause) that do tend to move toward standardization, much more remains open to negotiation depending upon the specific deal at hand.

Moving beyond the typical negotiation posturing toward a more balanced understanding of the risks each party is undertaking is a positive step in improving contract negotiations.  The goal should be a dialogue that understands, analyzes and respectfully discusses the real risks and responsibilities of each party.

Improving Your Organization’s Internal Processes
As you begin to develop a more complete understanding of your organization’s contract requirements, you begin to move from reactive negotiations (where the majority of most contracting still takes place) toward a more proactive approach to negotiating and entering into agreements.  At this point, an organization should consider three key areas as it works to establish processes that might allow it to be more proactive.   

First, begin by creating an internal understanding of acceptable terms in any agreement.  To aid in determining what is acceptable, develop standard forms that help to solidify your organization’s positions.  This concept applies to both suppliers and customers as the analysis will be different for both.  Using the list of most frequently negotiated terms helps your organization to focus on those areas that might need more attention.  Ask a series of questions to better understand your organization and a specific technology solution.  For example, how will the technology be used?  What business units will be using it?  Is it a part of your company’s core business?  Is it an isolated product or part of a larger relationship between the two parties?  Is it a product that is widely used by other companies?  These and other similar questions establish a proactive approach for your organization that will prepare you for a more streamlined approach to negotiations and create a more positive supplier-customer relationship over the long term.

Second, use information that you learn to create a set of guidelines to use in negotiations.  The goal is to create a set of issues that need to be addressed in agreements with your company, an understanding of the degree of risk that your company may fairly and reasonably take, and a list of factors that may trigger a change in any of these areas.  For example, if you look at risk avoidance as a continuum from no risk to all risk, your organization can create reasonable options along that continuum based upon its own relevant factors, like the purchase price of the technology, where it will be used, or the ability of the solution to increase profitability.  Technology negotiations have advanced enough so that key questions, dollar amounts, systems impact and organizational risk can be included in a matrix that can streamline the negotiation process while managing risk.

Third, establish a decision hierarchy for those situations where neither party can seem to reach a reasonable compromise.  It is virtually impossible to create a complete list of acceptable terms or anticipate every possible combination for risk analysis.  You can, however, identify certain situations that repeat themselves often, and establish parameters for the negotiations and a decision hierarchy for those recurring topics.  Determining whom within your organization has the authority to make the decision in these instances and providing that information to all of the appropriate business people can improve the efficiency of your negotiation process.

As your organization begins to proactively establish acceptable terms, guidelines and decision models, the goal should be to create these items fairly and reasonably.  Establishing risk-averse, unreasonable, inflexible expectations may only damage your business relationships, slow the contracting process, and create more obstacles (and perhaps a new top 10 list).

Expanding Contract Management Solutions
As organizations continue to improve the negotiating process, many implement a contract management solution that automates and tracks supplier-customer relationships through an entire life cycle, including the contract itself, and covers other relationship information as well.  Having this information available and accessible allows all of the involved business team members to have a better understanding of who the organization does business with, whether there are existing agreements that can provide insight into current negotiations, how well a customer and supplier work together, and other information.  Contract management implemented across an organization can help identify supplier or customer issues, avoid repeated negotiations, ensure consistency across an organization and refocus resources most effectively.  If a business already has a clear idea of its critical contract terms and risk tolerance and has developed a decision hierarchy for its negotiation process, then contract management solutions can introduce a higher level of effectiveness to the contracting and negotiation process.

Claiming victory in a negotiation by shifting risk fully away from your organization on paper does not necessarily protect the company in the real world.  A focus on legal risk aversion in contract negotiations may not correspond to or fully cover any event’s likelihood of occurrence.  Further, that focus may also ultimately harm business relationships.   By establishing a fairer analysis and negotiation strategy, developing processes that streamline the contracting terms and timelines, and considering technology solutions for the perceived contracting difficulties, your organization can incorporate best practices into its contracting process.


Information provided is general and educational and not legal advice.  Lori Pruitt, Esq., is an attorney and consultant in private practice.  She can be reached at loripruitt@bellsouth.net or by phone at (770) 607-5265.



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