How to Avoid, or Escape, Unhappy Marriages With Vendors

Legacy technology is a well-known obstacle to moving an enterprise forward. So too are the contracts for this technology, especially if they contain obscure clauses that make them difficult or costly to exit. Many businesses find themselves locked into undesirable contracts that make them unable to make needed changes to their business. Tech contracts can even become a strategic threat when they impede an organization’s ability to sell itself as part of a merger. This is particularly critical for early-stage companies looking to sell and thus provide the desired exit for early investors.

Here are four ways to avoid being trapped in an unhappy marriage with a vendor.

Find the Real Contract End Date

One best practice is, upon signing a new technology contract, to immediately enter the end date in your calendar. Set a reminder far enough in advance of the end date to either renegotiate that contract or issue an RFP to find a replacement vendor.

Such advance notice only works, of course, if you’re sure of the end date. Some vendor contracts have obscure contract language, such as that the contract’s term begins “with the commencement of a service.” Some vendors will interpret that to mean that whenever a customer begins any new service, such as adding a new module to a workflow application or another level of support to a help desk agreement, the clock on their contract resets to zero. In this way, a three-year contract can suddenly become a five-year contract, locked in by heavy early-termination fees. To counter this, insist on contract language that specifies a definitive end date, regardless of any other additional services you procure from the vendor.

A related trap is the auto-renewing contract. Ensure you strictly follow the requirements to opt out of an auto-renewing contract. Don’t assume that telling the sales rep is enough. Some vendor contracts will require an opt-out notice be made in a specific format and sent to a specific address or PO box by a certain deadline.

Know Your Data Transfer Costs

Be aware of potential costs associated with moving data away from a vendor. Negotiate these costs upfront to avoid surprises. Under pressure from customers, at least one major cloud provider recently dropped the data transfer fees that made it expensive for their customers to move to a competitor. But these fees pose a risk in any contract in which a vendor hosts your data. You want to make sure you can get your records back and in a form that’s useable by you or the next vendor you choose.

Data transfer costs should be clearly stated to avoid nasty surprises. Some vendors provide oblique references in their contracts to their “customary service fees” but don’t reveal the exact pricing until a customer requests their data back. Once a vendor knows a customer is going to leave, the vendor’s incentive is to get every penny from the relationship before it ends. Guard against unpleasantly high surprise fees by having the vendor specify them at the beginning of the relationship. 

Confirm the Vendor’s Security Promises

Vendors are often the weakest link in cybersecurity. Ensure that their security promises are not just marketing fluff but are explicitly backed by the contract. Contracts should contain detailed requirements and incentivize proper behavior, which will safeguard your business from the legal and reputational fallout of a vendor-caused data breach.

For example, a vendor might assure you it has a $5 million insurance policy for data breaches in its responses to an RFP. But that doesn’t matter if the contract you signed specifies that if the vendor causes your business to suffer a data breach, your financial recovery is limited to a much smaller sum, like the vendor’s service fee.

Consider Early Termination

Should a vendor fail to meet your business needs, consider ending the contract despite any early termination fees. In some instances, the benefits of switching vendors outweigh the costs. Moreover, legal counsel may be able to advise you on ways to contest those fees.

To safeguard your business from unexpected challenges, a strategic and knowledgeable approach to vendor management is crucial. By carefully understanding and skillfully negotiating vendor contracts, businesses can drive value, limit risks, and support their growth.