8 IT Contract Mistakes to Avoid

Over the years I’ve spent a fair sum of money on IT products and services, and to be perfectly honest, I’ve always wanted to spend more. But poorly written IT contracts– whether new or inherited– have imposed limits on my buying power.

Like a wet blanket sapping a once brightly-lit candle, unfavorable contract terms can stifle budget aspirations by hiking up prices or requiring one to keep services longer than needed. Hence I compiled a list of eight areas to keep top-of-mind when signing IT contracts.

1. Forgetting to Monitor Auto Renewal

Topping the list is the auto-renewal clause. Many contracts, particularly those of the service and maintenance variety, automatically renew and require explicit cancellation within a specified window well before the end of the billing cycle. IT managers often forget to notify the vendor of cancellation, or worse, do not notify in a manner consistent with contracts definitions. Either way, the result is having to pay for another billing cycle regardless of whether the services are used or not.

Of course auto-renewal is always evil. You should have mission critical services such as your domain names and email services on auto-renewal to avoid service interruptions due to accounting snafus.

2. Failing to Limit Price Increases

Some services are downright expensive; so much so that they would otherwise be unaffordable. One trick vendors use to “get your foot in the door” is to provide affordable “teaser” prices at first, then radically increase the price later in the contract cycle. Protect yourself by specifying a cap on annual price increases. Usually 1-5% is the norm.

3. Lack of Transparency in Pricing Tiers

Here’s a situation I’ve observed several times: an IT customer buys a service that is priced based on quantity. Let’s say the service is a credit check API, and the customer anticipates about 100,000 web API calls per year. The vendor happily responds with a $100,000 quote (about a dollar per call) to which the customer finds agreeable.

Fast-forward a year, and the IT customer realizes she overshot on her estimate. Readjusting her numbers, she asks the salesman for a renewal quote, but this year only for about half the quantity of last year: 50,000 queries. Expecting a quote for $50,000, the IT manager starts planning what to do with her with $50k savings. Instead, she gets a quote for $85,000. So what gives? Using half the service as before should equate to half the price, right?

Wrong. The vendor states that because her consumption is less, so too is the discount, and she must therefore pay a higher price per query! Understanding pricing tiers beforehand– specifically how more or less consumption affects price– is critical.

4. Failing to Connect the Dots between MSAs and SOWs

A master service agreement (MSA) sets generalities in a business relationship between vendor and customer, while scope of work (SOW) documents define the specifics for each particular engagement.

Bottom line: don’t forget to read all inter-related documents. Singing one “simple” SOW can have implications for other, prior-written contract documents such as extended the overall relationship.

5. No Service Level Agreement

Services, especially those of the cloud computing variety, are like utilities that must remain on in order to be considered dependable. Service level agreements (SLAs) establish parameters for availability, and implications (such as credits) if those thresholds are breached. Quality of service can always dip, and without an SLA, there’s nothing you as a consumer can do about it.

6. No Security Standards

Ever wonder where “the cloud” actually is? You may imagine your application and data residing within a data center that resembles Fort Knox: extreme physical security coupled with a network operations center staffed with with military-types keen to any suspicious anomaly that flashes across their high-tech dashboards.

In reality, your application and data probably reside in a public cloud, managed by a small team of developers with tight deadlines to deliver increasingly more product functionality. You’ll never know for sure unless the cloud provider is audited by a third-party and held to an industry standard such as the SSAE 16.

7. No Warranty or Long-Term Support

A “warranty” may sound like a dated concept in the era of cloud, but here’s a scenario to consider: you stand up a new cloud service such as Workday.com, Salesforce.com, or similar and the out-of-the-box functionality doesn’t quite cut it for whatever reason. Consequently, you hire an integrator to write a few custom modules or integration routines to get your cloud up to snuff.

A few months later trouble arises, and after some initial troubleshooting, you find the issues are related to the custom modules. Unlike software you pay annual maintenance for, the custom code was developed and “signed off” on during user acceptance testing months ago. Now you’ve got urgent bugs to fix and a developer is asking for additional dollars for a “new” engagement.

8. No Contract at All!

I’ve saved the worst-of-the-worst for last: the complete absence of a formal contract. The story typically goes something like this: an IT manager engages a vendor for services, agrees to pricing over email or via an online “shrink-wrap” license agreement, and services are rendered by the vendor. All sorts of things can go awry here, but I’ll outline the top two: payment issues and scope of work discrepancies.

Payment debacles emerge when the vendor submits an invoice, and the customer’s finance (AP) team has no awareness of the vendor. The vendor then panics, because one part of the company is asking for services, whilst another is basically saying there’s no official funding for this service. Sounds like fun, doesn’t it?

Even when the manager has discretionary dollars, complications can still arise without clear definition of scope. Over the lifespan of services, there will be questions about ownership of IP, billing rates, and so on. Basically anything and everything that would normally be outlined in a contract is missing and thus open to interpretation.

While low-dollar, non-mission critical services often fly off the radar here, larger-dollar and critical services rendered without a contract will likely ensue in some type of disagreement, which can lead to spoiled business relationships and worse, expensive legal fiascos.