Have you ever taken the time to read the fine print on your software vendor’s contracts? If so, you’ll find things like early termination fees, indemnification clauses and “escalator” clauses. Some of these terms make sense. Others don’t and, as the cliche goes, the devil is in the details.
Consider the The Fulcrum Group, an outsourced IT solutions provider based in Keller, Texas. Fulcrum had two clients struggling with Internet service providers and their early termination fees. The first client faced an all too common problem these days ― they were worried they would have to go out of business. The Fulcrum Group had set them up with Verizon’s FiOS Internet service, and the client needed to get out from under a contract they could no longer afford. Fortunately, for them, Verizon was reasonable and the fee was an easy-to-swallow $200.
Another client, however, wasn’t so lucky. This customer had a T1 line and was halfway through a 36-month contract. During turbulent economic times, what was an acceptable deal a few months ago can look much less so as times get tougher. The early termination fee was equal to the remainder of the contract and the service provider wouldn’t budge.
“Early termination fees are the bane of my existence,” said David Johnson, principal at the Fulcrum Group. “The service provider wants businesses to sign three-year contracts, in return, most times, for a discounted installation. If all goes well, everyone is happy. But what happens when a business has to close, must downsize or even moves out of the service provider’s coverage area?”
What often happens is that punitive termination fees force you to choose between three choices, all of them bad: stopping payment and violating the contract; sucking it up and sticking to the terms of the contract; or paying the punitive early termination fee.
Perception vs. reality
That’s the perception, at least. It never hurts to ask a vendor rep whether they can waive the fee, or at least make it more reasonable. Better yet, if you take the time, plan ahead and factor in details such as these in your buying decision, you have a much better chance of negotiating better terms. Johnson has seen contracts with provisions that factor in business closings, downsizing and moves out of the service provider’s coverage area.
Clearly, punitive early termination fees can be negotiated. The question, then is why do so many people, regular consumers and business customers alike, blindly accept unfavorable terms?
Odious contract terms are part of daily life. Every time you click on the “I Accept These Terms” button when you buy something online or install an application, you’re potentially agreeing to bad terms. As consumers, we deal with these hassles all the time.
As I was researching this story, I purchased tickets online for the Stanley Cup playoffs. Of course, this meant I had to deal with the almost universally loathed Ticketmaster. I sucked up the annoying $8.25 “convenience charge” per ticket. I wasn’t shocked when there was a separate “order processing fee” of $5.40, but I almost became blind with rage when I encountered a “TicketFast Delivery” charge of $2.50 per ticket.
What is TicketFast Delivery? It lets you print tickets on your own printer. Yes, you can get tickets shipped free via snail mail, but since Ticketmaster tells you it usually takes 10 to 14 days for tickets to arrive, and the game is in a week … well, I’m sure you understand my frustration.
What annoys me so much about the TicketFast fee is that you are essentially paying for the privilege of saving Ticketmaster money. It costs more for them to mail you the tickets. They charge you because they can. Sure, it’s a convenience and, yes, there are infrastructure costs associated with this service. However, those infrastructure costs are already paid for. And shouldn’t the savings of not having to mail tickets be passed on to customers? Isn’t that how business works?
In other words, a reasonable person would consider the fee “unreasonable,” and Ticketmaster’s other shady practices further support that conclusion. (Ticketmaster did not respond to my queries about their practices and policies.)
Are we to blame?
Why do practices like these persist? First, there’s old-school supply and demand. There’s plenty of demand for things like playoff tickets, and Ticketmaster has a choke hold on the supply. As individuals, our power is limited. Moreover, Ticketmaster’s real customer is the event venue and promoters. Everyone complaining about Ticketmaster is complaining to the wrong organization. Thus, Ticketmaster has zero incentive to budge unless challenged by a class-action lawsuit or regulators.
I think an even more compelling reason, though, is that these practices are so common. We’ve been conditioned to expect them and accept them. Ninety 99 times out of 100 the bad terms never affect us. We become complacent and view them as little more than a nuisance.
Shifting back to the enterprise, where longer contracts and higher dollar amounts are at stake, you would think these nuisances were considered more risky. According to Benjamin Wright, Legal Issues Instructor at the SANS Institute, the enterprise is at least partly to blame for accepting bad terms.
“When you have competing RFPs on the table, the best time to negotiate the nitty-gritty details like warranty terms is early in the process,” he said. “However, businesses tend to be lazy about this.”
If you go to your legal department and ask them to draw up alternative terms, they’ll usually tell you they’re busy. “We’ll get to it when you’ve selected a vendor,” they say. That’s exactly the wrong approach. The vendor knows you’re four months into the process. They know you’ve invested too much time, money and effort to start over. Often, they even know they are your preferred choice. Thus, whatever leverage you once had is now gone.
The first way is simply to be proactive. Negotiate early. Keep competing vendors in the mix as long as you can, and be careful not to tip your hand to your preferred vendor.
Next, don’t be afraid to walk away. Anyone who has haggled for anything, from cars to trinkets in foreign markets, knows that the best offer comes when you start to walk away. If you close down that option, you’ve eliminated one of your best negotiating strategies.
Another way to strengthen your position is to zero in on something the vendor values greatly. “A good negotiating plan will include several insignificant items to which the other party likely will ascribe significant value,” said Matt Podowitz, executive director, Business Advisory Services at Grant Thornton LLP.
“While working with a client to select and contract an outsourced IT services vendor, I noted that the vendor included the logos of their more prominent clients in virtually all of their materials ― proposals, marketing brochures and on their website,” he said.
Podowitz advised the company, a very prominent “brand name,” to stipulate that under no circumstances could the vendor use the company’s logo in their marketing materials. “I had to convince the company to do so, as they thought it was silly to withhold that permission,” he said.
The vendor quickly responded with significant price reductions and other concessions. “Though my client was elated with the revised proposal, I counseled them to stand firm and see what happened.” This went on through three more rounds of negotiations. In the end, more price drops and further contract concessions were offered just to obtain permission to use the logo in marketing materials.
“Standing firm on this otherwise insignificant point, even though it seemed unreasonable, created urgency in the mind of the vendor and led to a transaction with value beyond anything my client had envisioned as possible,” Podowitz said.
Jeff Vance is a freelance writer and the founder of Sandstorm Media, a writing and marketing services firm focused on emerging technology trends. If you have ideas for future stories, contact him at [email protected] or visit Sandstorm Media.