What should you look for before signing an IT contract?
Is your lawyer negotiating the right things for you in your contract? Before you sign an agreement, you need to check these three things to make sure that you’re protected and you have the best deal.
At ITBroker.com we know what’s at stake when you sign an IT contract. So I want to share the three things that you have to negotiate in your contracts that your lawyers might not even be aware of.
#1: The first thing that you want to look for and negotiate is your term length auto-renewal, and notice period. What do I mean by this? Usually in a service order, the service order is going to have a term on it. It’s going to say one year, two year, three or five year, hopefully not 10 year, but it’s going to have a term length on it.
And then, embedded in the MSA or the terms of service, this might even be posted on the suppliers website (you might not even have this document) there is going to be language that talks about what happens at the end of your term. Well, at the end of your term. Does that contract renewal for an additional term of equal length? Or does it renew for month-to-month terms after that? Or does it renew for 12-month terms after that for one year?
Really common in most service providers cases is: you’re going to sign a three-year contract that’s going to have a one-year auto renewal interval. This is not great for you. You probably don’t want this. There’s cases where you can avoid it, but in most cases, just say: “I don’t want to renew for 12 months and I want a month to month agreement after the initial term.” They’ll say OK. You just have to ask!
Well in the scenarios where they can’t say OK: you want to understand what your notice period is. And your notice period is the time that you have to tell the service provider before your contract expires, that you want to cancel your contract. So if you’re in a three-year contract with a one-year auto renewal–let’s say it’s a data center, it’s $50,000 a month–well, if you have 120-day auto renewal period, and you remember, like, 3 months before your contract renewed that you don’t want to be that data center anymore. Guess what? You’re stuck! You just got stuck with another year. $600,000 worth of IT contract that you weren’t anticipating. So make sure you understand your auto-renewal period. And make sure that you negotiate your auto-renewal and your notice period. These are two things that are really really important.
Here’s a little added bonus for you, because we’ve seen these in contracts and this is a little sneaky thing that gets thrown in there: In some cases, you might have an MSA and you’re executing service orders on top of that MSA, and that MSA might say all of your service orders gets, you know, become coterminous with the last service order executed.
So if you go and you make a change order in your service, you want to make sure that that change order for some benign little thing like “I need to add, you know, an email account to my, you know, company’s email hosting service,” doesn’t re-term all of your other business, so that’s another little gotcha. A little bonus tip.
#2: The second thing that you want to be looking for. Number 2 item, this is your ETF or your ETL in the contract. So ETF and ETL is the Early Termination Fee or the Early Termination Liability. Basically, in short, you sign a contract.
If you cancel the contract early, what happens? You’re paying something.
Well, you don’t want to be paying out 100% of the contract. A lot of contracts you are going to see are going to have ETF language in it that says: “If you cancel early, you owe everything.” That’s not a great idea.
What you need to understand with these things is what the service providers underlying cost structure is for their actual service, and based on that what you can do in terms of their ETFs. So there’s cases where you probably can’t negotiate down to zero. Nobody wants to give you a contract and give you a zero penalty for if you cancel early, right? That’s not sane business because they’ve given you a discount for that contract. What’s not good for you is having a 100% ETF.
And so what we do is based on the actual underlying costs, we’re going to negotiate either a tiering: so you know first year is 100%, second year is 80%, third year is 50%. Or, it might just be: “hey look, we know that based on your cost structure, this 36-month or three-year term, it should be a 50%.”
So, again: What is your term? How much is your ETF? What percentage of your contract is in your ETF? You don’t want to be in a situation where month two you realize you have to change your business, you gotta cancel some contract and whoops, you gotta write a really big check to get out of that thing. So check your ETF language, understand what it is and negotiate your penalty.
#3: The third thing that you want to do, and that you want to check for, and this is your SLA. Now the SLA, service level agreement, gets embedded and attached to your master services agreement or your terms of service. So in the MSA is going to have a language and the language is going to say: “Your sole remedy for non-performance or service issues from that service provider are going to be dealt with in the SLA.”
OK, great that sounds great, and the SLA is usually a linked document on a website and it’s attached, and if you read the SLA it’s gonna have all sorts of things, like, if it’s a network service, what the milliseconds of latency are. If it’s a voice service, what’s the mean opinion score or the MOS score needs to be. If it’s a data center, what the humidity in the facility should be, and these are all really good things to understand and negotiate because you want to have a service that you’re contracting for.
BUT: That doesn’t matter, it really doesn’t matter.
What you really want in your SLA and what you really, really, really, really want and care bout in your SLA is: you want the right to terminate the contract for chronic service outages. You will almost never see this language in the SLA by default. You have to add this language into the SLA. You have to ask for it. They’re not going to give it to you, you have to ask for it. You have to tell the service provider that you want the right to cancel your contract due to chronic service outages.
And this takes 2 forms: this is either lots of little outages over a set period of time, so if over a given month, you had a 2-hour outage every day for two weeks. What would that do to your business? It would be horrible to your business! You want the right to cancel. The other side of it is if you have a really prolonged or severe outage, you want the right to cancel. If your service provider goes down for two or three days, you want out right? You want out and you want out without paying the ETF. So you want to insert a chronic service outage exit clause into your SLA.
Again, another bonus tip for you: With the SLAs, the SLAs are going to give you the right to credit based on outage. So if they break the SLA that they’re giving you, you have the right to request a credit.
But that is the keyword: REQUEST. You have to request the credit. It is not automatic, you’re not going to all of a sudden get a credit on your bill from the service provider out of the goodness of their hearts because their system notifies it. What they’re going to do is: you have to open a ticket and you have to say, “hey, you guys violated this SLA. We want our credit,” so that way you get your credit on your next invoice.
At ITBroker.com, we understand how critical these pieces are for you. These are the three things you absolutely should be looking for in every single one of your contracts. I’m not saying that there’s not other things in the contracts are not important, but if you just focus and make sure that you understand and negotiate these three things, you are going to be in such a better position with your contracts and you’re going to be in a much better place. So please check these three things! Make sure your lawyer knows about it.
If you need any help, you can reach out to us at ITBroker.com, we’re happy to jump in!