Saturday, November 30, 2013

Vendor Management Tips


This post is for technical operations folks managing vendor contracts. For technical people dealing with vendors and legal paperwork can be a bit complicated, and I hope that the information from the post will be very handy.

The vendor management process can be roughly outlined in the following steps (described in details later in this post):
  1. Research
  2. Price negotiations and service testing
  3. Contract negotiation
  4. Management of vendor contracts

In this article I’ll primarily concentrate on vendors demanding long term commitment (6+ months) on small and medium volume contracts (from $1000/month to $20,000/month), but some tips are also relevant to month-to-month agreements and large volume deals.


The knowledge is the power. The more you research the market the more advantage you have in the negotiation process.

Before or during the research you need to formulate a list of requirements you expect from your new vendor (specific services, volume, geographic coverage, commitment terms). Without a formulated list of requirements it might not be easy to properly shortlist potential candidates; you also need the list to properly “apple to apple” compare the vendors. Many times you start with a draft of the requirements, and as you research the market and know more about available services/features you will adjust the list to make it more specific and realistic.

Tools to use during the research:
  1. Internet
  2. Personal professional network
  3. Existing customers of targeted vendors (existing customers most likely already performed a similar market research and might be willing to share the information)
  4. Direct communication with potential vendors

Price negotiations and service testing

Once you have a list of vendors potentially suiting your requirements you need to approach the vendors to get more details about offered services and pricing.

Recommended ways to approach a vendor (starting from the most effective method):
  • Find the most senior sales or non-sales contact (CEO, VP of Sales, Director of Sales, any VP or senior manager) inside the target vendor using your professional network (LinkedIn) and personal contacts. The inside contact will eventually assign you to a regular sales rep, but you may receive a special treatment just because your entry point to the vendor is a senior manager. A variation of the negotiation technique is to get the best possible discount on your own, and after that involve a higher authority to get even deeper discount.
  • Make them reach out to you - leave your contact details on their website or send an email to sales@ alias asking to call you with more information.
  • Call the vendor’s sales team using the contact details on their website.

Once you are in touch with the target vendor it is important to properly identify your organization in terms of office location and business vertical so you will be assigned with a sales rep dealing with prospects in your geographical area and business vertical.

If you plan to share with a potential vendor any confidential information about your company it is very acceptable to ask the vendor to sign an NDA document protecting your commercial/technological secrets. Many vendors will ask you to sign an NDA before sharing the pricing details.

After receiving budgetary pricing quotes it is good time to start testing the vendors. For cloud based services (like DNS, GLB, CDN, performance monitoring, etc) it is quite acceptable to ask (and get) a few weeks or even a month of trial period (paid or free with limited usage allotment).

If the vendor asks you to sign any paperwork to run a trial test then be very careful about what you are signing:
  • Make sure that the temporary contract will not automatically (or on condition) become permanent with long commitment at the end of the test period.
  • Make sure that you clearly understand which services you are testing and what you pay or don’t pay for. I had a potential vendor who at the end of a trial period claimed that I used services which are not documented in the trial agreement, and asked to pay ~$6000 for a month of testing; only the fact that the contract had a language saying that the agreement is completely free of change if terminated before the specified date helped to cancel the invoice (after several months of ping-pong with the vendor’s billing department).

It is also normal to ask a vendor for several customer references. Don’t hesitate the call the references, and ask questions regarding service level, recent outages, customer support, handling of crisis situations, etc.

Ask all your potential colocation/hosting vendors for a site tour, and check how the sites are managed: pay attention to security, cleanness, supporting infrastructure (UPSes, generators, AC units, fire protection, meet-me-rooms, etc).

The contract negotiation stage has two sub-stages:
1) Negotiation of final price
2) Negotiation of contract terms

To negotiate a good price you need two things:
  1. Time. The more time you have on your hands the better deal you will be able to get.
  2. Ability to walk away. The more vendors you have to select from the more favorable your situation is.

Estimate your purchase volume in 6-12 months down the road, and if it is significantly higher than what you plan to buy now then always use the projections while talking with the sales guys. A sales person can be less aggressive on a $1000/month deal but definitely will fight for you while having “$10K/month within 6-12 months deal” in his mind.

The enterprise sales process is built on quarterly and yearly sales goals. At the end of a quarter (last 1-2 weeks) you can ask for crazy discounts, and at the end of year - feel as a king and ask for the most ridiculous discounts you can think about.

Make the sales guys spend enough time and effort on you before asking for the final price.

Always know the market and which comparable competitors can provide you with similar service. While talking to a potential vendor always let him know that you are also talking with and testing other competitors (but don’t violate possible NDAs) - it will create the required pressure in the contract negotiation process.

Contract negotiation

During the price negotiation process it is good time to ask your potential vendors for contract templates (the paperwork) and have a brief look at the documents. If there are any potential deal-breaking clauses (like strong non-compete language or absurd payment terms) they probably should be negotiated as soon as possible. If the vendor will not compromise on the terms there is no reason to waste your time with the vendor; all “small” contract issues can be negotiated later in the process.

Another known negotiations tactic is to leave 1-2 "big stones" to the end. This idea behind it is that if you ask for big changes immediately the other side might reject them off and break the deal. However if you first build some momentum into the negotiations, resolve small issues, do some back-and-forth, and then come to a big issue - then the momentum built can be in your favor and put pressure on the other side to compromise. Often it's used with phrases like "well.... we've progressed so nice and done such a great job, it would be a shame to let such a small issue get in our way...".

The following is a list of items you have to pay attention to in a service vendor contract:
  • Contract terms. Don’t commit for more than 1 year unless you know what you are doing. Many cloud providers may agree on 6-month initial contract term - you just need to ask (you may justify the requirement by the early startup stage of your company, the vendor being a newcomer to the market, etc)
  • Contract renewal notice. The standard notice period is 30 days but many vendors ask for 90 days (and should not get it).
  • Contract commitment after finishing the contract term. Many vendors try to automatically renew the contract for the same period as the original term (like 12 months). Always ask to switch to month-to-month commitment after completing the initial term.
  • Payment terms. Always ask to pay after the service is rendered (and not in advance), and ask for 45 days to settle invoices. It is acceptable to agree to pay in advance within 30 days from the invoice date.
  • Force-major. The force-major clause should cover both sides and not only the vendor.
  • Ability to terminate the contract with a cause in case of serious SLA violations. If the vendor is not providing the expected performance of the service or has serious outages (as covered below in the SLA section) you should be able to terminate the contract immediately (or after a short period giving the vendor a chance to fix the issue) without paying any early termination fees.
  • Handling of late payments. Ask for written notifications (with confirmed delivery) about late payment events, and at least 10-15 days to cure the case. You may have a situation when a vendor invoice has been lost before delivered to you, or your invoice approval/payment request has been lost somewhere in your accounting department - such situations may and will happen, and you need to have enough time to fix this.
  • Non-compete clause. Some vendors may include a non-compete clause prohibiting you from building a technology similar to the one provided by the vendor, and you need to remove the clause from the contract. Even if right now your company does not have any plans to move to the vendor’s business battlefield you never know what will happen in the future, and having a non-compete clause in a vendor contract may potentially limit you down the road or raise a red flag for potential venture investors or acquirers.
  • Non-solicitation clause. If you don’t anticipate that you may need to headhunt any employees of the potential vendor it is wise to include a mutual non-solicitation clause protecting both sides from “stealing” employees from each other.
  • Scheduled maintenances.  Insist that scheduled maintenances which affect the service will be announced at least two weeks in advance - that way you will have enough time to get prepared for possible service outage/degradation.
  • Ability to terminate the contract without a cause. Normally to terminate a contract without a cause before the end of the term you will be obligated to pay a fee equal to the minimal monthly payment multiplied by the number of months left in the current term. You should always ask to limit the early termination fee to one or two monthly payments (but this is not easy to get the term).
  • Free contract assignment in case of change of control. Both sides should ask the other’s side written permission to assign the contract to a third party. The assignment approval should be automatic in case of change of company control (acquisition, merge, consolidation, etc) - otherwise it may be problematic for your company to talk with potential investors and acquirers.
  • Public disclosure of customer/vendor relationship. Besides the situation when your company is in complete “stealth” mode it should be acceptable (and sometimes even preferable) to be able to openly announce your relationship with the vendor (especially of the vendor is widely known as a premium service provider) so it should be okey to add the clause to the contract. All marketing or promotional use of the parties’ names should be performed with express written consent.
  • Confidentiality. Just use the standard confidentiality language. Several possible tweaks: a) all information exchanged by the sides should be treated as confidential (and not only the information marked as confidential); b) at the end of the contract the confidential information should be destroyed (and not returned).
  • Choice of law and location of court place. Demand a location close to your office; if the vendor does not agree try to negotiation a location somewhere in the middle. For example, if you are in San Francisco, CA and the vendor is in Frankfurt, Germany, try to negotiate London, UK as the court location.

If you are committing for a period more than one month always get an SLA in place. Two main goals of an SLA:
  1. To define the service standards you expect from your service vendor; sub-goals:
    1. make sure that the vendor is following them
    2. make sure that the vendor will pay in service credits in case of SLA violations
  2. To have an ability to terminate the contract with a cause if the vendor has a serious SLA violation (for example, total or partial service outage for more than 24 hours in a month, chronic serious service degradation for more than four days in a month, etc).

More topics to pay attention to in an SLA document:
  • How the SLA is monitored and whether you have an ability to run your own SLA tests (for example, data center power availability, data center temperature and humidity, network packet loss, responsiveness of DNS service, etc).
  • How possible SLA violations will be recorded - from the moment when a problem/outage started (the method is preferred for you) or from the moment it is reported by a customer.
  • The definition of zone of responsibility or demarcation point (for vendors of non-cloud services).

Sometimes it might be difficult to change the standard service contracts offered by large corporations, but this is not a rule. You should always try and ask for your terms, and in many cases you will get them (but most likely not all of them). I have a very good experience negotiating acceptable terms with large companies  - you just need to know what to ask!

Small print in service orders

Many contracts are structures in the way that terms (small print) specified in signed service orders (SO) take precedence over the text in the main contract. You need to avoid putting any contract customizations in service orders, otherwise it might be wise to put in the service order’s small print also a line saying that all custom terms specified in the SO will be automatically applied to all future service orders signed between the parties; this will prevent you from negotiating from the scratch the terms of all future SOs.

Also, pay highest level of attention to all new service or change orders you want to sign with an existing vendor. The terms in the new orders will automatically take precedence over conditions agreed in previous orders, so carefully read and understand every line in the new document. For example, if your current SO is for 6 months term (a customly agreed commitment period) then the new SO may state default 12 months term, and by signing the change order you will automatically extend your commitment (and this is probably was not your intention while signing the new order).

Trusting a sales guy’s word

During the testing/negotiation process your sales person may ask you to trust his word, and sign up for something different from what he’s promising you on the words, or don’t put something in written but orally promise to deliver it. While the trust may potentially help you to get a better deal or establish better business relationship with the vendor it is also quite dangerous and unpredictable.  

Sales guys have a tendency to frequently switch jobs, and when the time will come you will have to deal with another sales rep which has no ideas and will not support someone’s else promises. A sales guy may be also unaware (sometimes unintentional) about the real way how his company is working, and promise something the company cannot deliver or is working in different way.

I personally have a great experience working with a sales rep which I could trust and benefit from this, and I also been in situation when insisting in putting an oral promise in the contract saved my company a lot of money. My final advice - if you have a long and successful business relationship with a sales guy you should benefit from the trust, and in all other cases please put everything in written and don’t play a roulette.

Maintenance of service contracts

Once a vendor contract is in place and you are happy with the service you still need to spend some effort to maintain the contract:
  • You need to monitor the contract renewal date, and put a reminder in your calendar (on the date before the beginning of the notice period) to decide regarding prolongation or cancellation of the contract.
  • You need to establish a way to properly monitor the contact SLA, and timely notify the vendor about all detected issues.
  • If the contract includes a payment for overuse of the service above some fixed monthly volume you need to regularly monitor the usage, and timely act in case of service misconfiguration, abuse, fraud, etc.
  • You need to build a proper process to timely receive vendor invoices, review/approve them, and make sure that the accounting department is paying them on time. If you are delaying or missing monthly payments it may significantly affect your future negotiation ability with the vendor.

(Special thanks to Ran Liebermann for his feedback on a draft of the article).

1 comment:

  1. Very informative article, which you have shared here . After reading your article I got very much information and it is very useful for us. FedEx Contract Negotiation